Robert J. Sonora

City relative price convergence in the USA with structural break(s)

As in international tests of purchasing power parity, new more powerful univariate unit root tests have been successful in rejecting a unit root process in US city relative prices over the period 1918–1997. However, convergence rates calculated with these tests are at odds with theories of price convergence. This article addresses structural breaks that may be misinterpreted as nonstationary permanent stochastic process. Using unit root tests with structural breaks, we are able to reject a unit root process in the majority of US city relative prices over the entire sample period. Moreover, convergence rates fall to those more in line with theory.

Real Interest Parity in New Europe

In this paper we investigate the real interest parity condition in ten Eastern European transition countries during 1997-2009. Our sample is interesting because it covers important periods or events: the second stage of economic transition in the aftermath of the collapse of socialism; the establishment of the eurozone at the turn of the century; and the enlargement of the eurozone to include the Eastern European countries of Slovenia and Slovakia. The data enable us to investigate how the introduction of market mechanisms in the early 1990s and the establishment and enlargement of the eurozone acted on real interest rate convergence. We test the real interest parity condition using a unit root test with and without structural breaks. Inflationary expectations are estimated in two ways: (1) under assumption of rational expectations with ex post inflation rates, and (2) with ex ante adaptive inflation expectation modeled using an ARIMA/ARC H model. Results suggest that there is strong evidence of stationarity and relatively weaker evidence of structural breaks, particularly when using adaptive inflation expectations.

All Economic Freedom Is Not Created Equal: Evidence from a Gravity Model

This article analyzes the differential impacts of different types of economic freedom on bilateral trade flows between the United States and 122 countries over 10 years. A gravity model of trade is employed to investigate how various freedom indices assembled by the Fraser Institute impact the volume of trade, exports, and imports. The main findings of the article are that each of the freedom indices impact heterogeneously across the measure of trade flows, with the changes in Regulation having the biggest impact on trade. All combinations of freedom are used to find the mixture of freedom which yields the largest trade gains. The largest gains from trade generally combine Business Regulation in a variety of different configurations. The smallest gains, or losses, to trade arise with augmented monetary independence.

Harrod, Balassa, and Samuelson (re)visit Eastern Europe

Abstract In this paper, we investigate the Harrod–Balassa–Samuelson (HBS) hypothesis in 11 Central and Eastern European transition countries. Unlike previous research, we test the HBS hypothesis with NACE 6 quarterly data which enables us to divide data into tradable and nontradable sectors without requiring unrealistic assumptions on the nature of the data. Contrary to previous results, we are only able to find evidence for univariate HBS effects in Bulgaria, Croatia, Hungary, and Poland. However, using panel cointegration tests, we find strong statistical evidence for the HBS hypothesis within countries and across countries. Our results also demonstrate that cross-country HBS holds under the assumption that the law of one price for tradables does not hold. Finally, we find, contrary to theory, that government consumption negatively impacts relative prices. The policy implications are that failing to acknowledge the peculiarities of the transition process results in suboptimal monetary policy.

International price volatility: Evidence from U.S. and Mexican cities

Abstract We investigate price volatility across cities in the U.S. and Mexico. We find substantial differences in volatility across types of city pairs, with unexplained price volatility exhibiting heteroscedasticity. U.S. city pairs have the lowest variance in unexplained price volatility while international city pairs have the greatest. We test whether the North American Free Tree Agreement (NAFTA) had any statistical impact on intercity price volatility and find that the impact was minor. Finally, following Engel and Rogers (1996) , we find the width of the Mexico–U.S. border equivalent to adding between 3,642 and 44,765 miles of distance. However, since the NAFTA was passed the border has “shrunk” by about 5%.

Public debt and economic growth conundrum: nonlinearity and inter-temporal relationship

Abstract The influential paper by Reinhart and Rogoff (Reinhart, C. M., and K. S. Rogoff. 2010. “Growth in a Time of Debt.” The American Economic Review 100: 573–578.) has triggered a debate about the effects of the public debt on GDP growth. They argue that a debt-to-GDP ratio of over 90 percent has a deleterious effect on long-run economic growth. In this paper, we examine the inter-temporal relationship between public debt and GDP growth rates. We examine debt-to-GDP thresholds in nonlinear panel models, using various econometric strategies, methodologies, and data samples. We also evaluate confidence intervals around the estimated thresholds to determine the accuracy of estimated thresholds. Our results demonstrate that in the majority of estimated models, threshold values are not uniquely defined and the estimated coefficients are insignificant in most model specifications, as in Enders, Falk, and Siklos (Enders, W., B. L. Falk, and P. Siklos. 2007. “A Threshold Model of Real US GDP and the Problem of Constructing Confidence Intervals in TAR Models.” Studies in Nonlinear Dynamics & Econometrics 11: 1322.). Next, we examine the inter-temporal relationship between the public debt and economic growth using structural panel data models as well as reduced form panel VAR models. In contrast to the standard presumption in the literature, we find that the inter-temporal effect of economic growth on the public debt is strong, but the effect of the public debt on economic growth is weak. We find similar results in sub-samples that include countries where the public debt is over 90 percent of GDP.