Robert Amano

OIL PRICES AND THE RISE AND FALL OF THE US REAL EXCHANGE RATE

We examine whether a link exists between oil price shocks and the U.S. real effective exchange rate. The results show that the two variables appear to be cointegrated and that causality runs from oil prices to the exchange rate and not vice versa. The single-equation error-correction model linking these two variables is stable and captures much of the in- and out-of-sample movements in the exchange rate in dynamic simulations. Finally, tests we present show that the error-correction model has signficant post-sample predictive ability for both the size and sign of changes in the real effective exchange rate. The results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks over the post-Bretton Woods periods and that energy prices may have important implications for future work on exchange rate behaviour.

Terms of trade and real exchange rates: the Canadian evidence

Abstract This paper presents empirical evidence linking the Canada-US real exchange rate with the terms of trade. Using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms-of-trade variables, and that causality runs from the terms of trade to the exchange rate. We then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post-sample forecasting experiments. The results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary.

Exchange Rates and Oil Prices

The authors document a robust and interesting relationship between the real domestic price of oil and real effective exchange rates for Germany, Japan and the United States. They explain why they think the real oil price captures exogenous terms-of-trade shocks and why such shocks could be the most important factor determining real exchange rates in the long run.

Intratemporal Substitution and Government Spending

In this paper, we examine the idea that a general model of consumption should allow for the direct effect of government expenditures in a two-good permanent-income model. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first-order condition of the model. This restriction leads to a linear deterministic cointegration relation between government spending, private consumption, and their relative price that is supported by the data. Using this restriction to recover the preference parameters, we estimate the intraperiod elasticity of substitution for both government and private consumption to be about 0.9. Overall, we find consistent empirical evidence in support of our model.

Canadian City Housing Prices and Urban Market Segmentation

The authors provide a detailed empirical analysis of Canadian city housing prices. They examine the long-run relationship between city house prices in Canada from 1981 to 2005 as well as idiosyncratic relations between city prices and city-specific variables. The results suggest that city house prices are only weakly correlated in the long run, and that there is a disconnect between house prices and interest rates. City-specific variables such as union wage levels, new-housing prices, and the issuance of building permits tend to be positively related to city existing-house prices. Surprisingly, there is mixed evidence with respect to standard measures of economic activity, such as labour force and per capita GDP.

A Band-Aid Solution to Inflation Targeting

This paper reviews selectively the literature on exchange rate target zones and corresponding methodologies and examines whether they can be used to analyse the inflation-control problem. Given the close correspondence between the exchange rate and inflation-targeting problems, the target-zone literature may help us better understand inflation dynamics and central-bank credibility in the presence of inflation-control targets or ranges. While we find many common elements across the exchange rate and inflation-control target-zone problems, we also find several important differences that make a direct application of the exchange rate target-zone techniques difficult.

Intertemporal Substitution, Imports and the Permanent Income Model

We examine the importance of intertemporal substitution in U.S. import consumption using a model of permanent income that allows for random preference shocks and additive separability. The latter feature allows us to take two estimation approaches. In the first approach, we show that there is a cointegrating restriction imposed by the first-order conditions of the model which allows us to estimate the intertemporal elasticity of imported and domestic goods consumption. In the second approach, we estimate the Euler equations using generalized method of moments. This approach, however, requires us to place some restrictive assumptions on the model that are not required for the first estimation approach. Thus, the two different approaches allow an assessment of the severity of these restrictive assumptions which are often imposed in the literature.

Unemployment Persistence and Costly Adjustment of Labour: A Canada-US Comparison

Research aimed at explaining the greater persistence of unemployment in European countries relative to the US has found higher employment adjustment costs in Europe to be a significant contributing factor. This paper explores the potential for costly adjustment of labour to explain at least some of the persistence in Canadian unemployment rates relative to US rates. In contrast to what one might expect, our results suggest that relative adjustment costs are very similar in both countries, as are the speeds of adjustment of labour demand. These findings suggest that employment adjustment costs are not a leading candidate to account for the greater persistence of unemployment in Canada relative to the US.

On the optimal seigniorage hypothesis

Traditional theories of inflation have often relied on the Phillips curve to tie inflation to other macroeconomic variables. The optimal seigniorage hypothesis, however, offers an alternative view of inflation behavior. This hypothesis posits that a government will attempt to minimize the sum of social costs arising from inflation and direct taxation resulting in the testable prediction that inflation and tax rates will be positively related. This paper provides empirical evidence on the validity of the optimal seigniorage hypothesis for Canada and the United States over the 1953 to 1993 sample period. The results provide evidence consistent with the hypothesis, but we argue and find evidence to support the idea that there may be important non-neutralities in the tax system that may account for some part of the positive relationship between inflation and tax rates.

An Empirical Study of Dynamic Labor Demand with Integrated Forcing Processes

In this paper, we examine a version of the Sargent (1978) and Kennan (1979) labor demand model under the assumption that the forcing processes are nonstationary. We derive a simple model of dynamic labor demand and highlight the important econometric and time-series implications of the optimization problem. The empirical results are surprisingly favorable and consistent with the underlying dynamic theory. Specifically, we find estimates that imply adjustment costs are about fourfold more important than disequilibrium costs in determining the dynamic demand for labor.