Saeid Mahdavi

Purchasing power parity in high-inflation countries: further evidence

Abstract It has been long recognized that a situation in which the purchasing power parity (PPP) calculations may prove insightful is when large movements in the domestic general price level (usually of monetary origin) overshadow the effects of other factors on the exchange rate. In this paper, we attempt to test the empirical validity of PPP as a long-run equilibrium relationship in a sample of thirteen “high-inflation” countries using quarterly data over the “modern floating” period and recently developed techniques of cointegration and error-correction model. We find empirical evidence in favor absolute or relative versions of PPP in Argentina, Brazil, Israel, Mexico, Peru, South Africa, Uruguay, and Yugoslavia. Our results, when analyzed in conjunction with actual inflation rates of these countries, suggest that PPP may hold over a range of inflationary experience; although it is likely to hold more consistently where the inflation rate is very high.

Gold and commodity prices as leading indicators of inflation: Tests of long-run relationship and predictive performance

Abstract We compared the performance of gold and commodity prices as leading indicators of the inflation rate (INFR) and explored the possibility of improving INFR forecast by specifying error-correction models (ECM). We found some evidence of cointegration between commodity prices and the consumer price index (CPI). Comparisons of out-of-sample forecast errors indicate that an ECM of the CPI including commodity prices significantly outperforms a CPI model including the price of gold, but the marginal contribution of an EC term to predictive performance was statistically insignificant. We conclude that the recent emphasis on the price of gold as a guide to monetary policy is perhaps misplaced.

The exchange value of the dollar and the U.S. trade balance: An empirical investigation based on cointegradon and Granger causality tests

Abstract This article performs tests of Granger causality in the relationships between the nominal ad real exchange rates of the dollar and the U.S. trade balance as well as its price and quantity components over the period 1973:IIQ–1989:IIIQ. Our results suggest: (i) weak statistical evidence of unidirectional causality running from the nominal exchange rate to import prices and nominal trade balance (ii) no statistical support for the proposition that the real exchange rate simply “accommodates” changes in the real trade balance, and (iii) strong (no) causal links between the nominal and real exchange rates and export (import) volume. We tentatively conclude that movements in the exchange rate have a rather limited effect on the trade balance and that this effect is more likely to materialize on the export side of the trade balance.

The response of the US export prices to changes in the dollar's effective exchange rate: further evidence from industry level data

The relationship between the dollars effective exchange rate and the export price indexes for 13 two-digit US manufacturing industries is analysed to determine (i) which industry adjusts its dollar export price to dampen or amplify the effect of the exchange rate fluctuations on the foreign-currency price of its exports and (ii) whether the response of the export price index to appreciation and depreciation of the exchange rate is asymmetric. For several industries, evidence consistent with dampening the foreign-currency price of exports in an asymmetric fashion is found. The implications of the results for the price competitiveness of the industries studied is discussed.

Bohn's Test of Fiscal Sustainability of the American State Governments

The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model-based approach proposed by 1998 to test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio (s) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response of s is also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own-revenue” and “no-deficit-carryover” provisions in particular.

Public expenditures and the unemployment rate in the American states: panel evidence

We reexamine the Unemployment Rate (UR) – government expenditure nexus in a panel of 50 State and Local Governments (SLGs) over the period 1977–2006 to provide new pre-recession empirical evidence that helps put the expectations on the effects of the federal relief to SLGs in a broader context. We found that: (1) per capita real public spending (total and capital, assistance and subsidies, wages and salaries, and social insurance categories) was part of a cointegrating relationship with UR and real per capita state personal income. (2) With the exception of social insurance, other spending variables, when statistically significant, actually had a depressing effect on UR. The magnitude of this effect, however, was generally small. UR was most sensitive to increases in wages and salaries. (3) Long-term causality analysis based on panel error-correction coefficients provided consistent evidence of a causal effect from spending to UR, but less consistent evidence of such effect in the opposite direction. Social insurance, however, drove UR. (4) The size of the error-correction coefficients suggested a slow response of UR to deviations from the cointegrating relationship. (5) The marginal effect of spending on UR increased with the amount of the federal grants received. Our results suggest that public spending may not serve as a quick fix in relation to UR. They also seem to favour allocation of the federal funds to wage and salaries and assistance and subsidies, but not to capital and social insurance expenditures to lower UR.

A re‐examination of Wagner's Law using US total state and local expenditure and its sub‐categories

Purpose - This paper seeks to examine the validity of Wagners Law using annual data (1957-2006) for the US state-local government (SLG) real expenditure and eight of its sub-categories. Design/methodology/approach - The co-integration tests of Johansen and the bounds testing approach to co-integration proposed by Pesaran Findings - Most SLG expenditure variables were found to be non-stationary and income-elastic. However, with the exception of total expenditure (te), insurance trust benefits (ins) and social services and income maintenance (ssim), no other non-stationary expenditure variable was co-integrated with pcgdp and error-corrected over time. The ECM results suggested that te, ins and ssim were driven by pcgdp, consistent with a Wagnerian causal ordering. The Toda-Yamamoto approach, however, indicated that in these and a few other cases the causal effect was bidirectional. Originality/value - This paper provides a fairly comprehensive test of Wagners Law at the US sub-national government level with an emphasis on the concepts of co-integration and (long-run) causality in the income-expenditure nexus. Its findings underscore the importance of using disaggregated expenditure measures to test Wagners Law, as they suggest that some, but not all, rapidly growing and non-stationary expenditure sub-categories were decoupled from pcgdp in the long run.

The effects of external trade, foreign resources, and domestic Policies on Domestic Savings in some developing Countries: a regression analysis

SummaryThis paper examines the impacts of some external and domestic factors on two measures of domestic savings (DS) in a sample of developing countries over the period 1980-82. No strong statistical evidence is found to support the hypothesis that external resources (i.e., official aid and borrowed capital) inhibit DS by substituting for them. On the other hand, favorable trade conditions (as represented by the rate of growth of the external terms of trade) are consistently found to be positively and significantly correlated with DS. These results are suggested to support the old slogan ‘trade not aid,’ if it is interpreted to mean that aid should not be considered as an alternative to profitable trade opportunities.