Saten Kumar

Wagner's Law revisited: cointegration and causality tests for New Zealand

Wagners Law states that the share of government expenditure in Gross National Product (GNP) will increase with economic development; many associated empirical studies substitute GNP with Gross Domestic Product (GDP). This article presents an empirical investigation into the validity of Wagners Law for New Zealand over the period 1960 to 2007 and compares the results obtained using these two measures of output. Application of the Autoregressive Distributed Lag (ARDL) bounds test suggests a cointegrating relationship between either output measure and the share of government spending, and further application of General to Specific (GETS), Engle and Granger (EG), Phillip Hansens Fully Modified Ordinary Least Squares (FMOLS) and Johansens time series techniques illustrate statistical robustness and an income elasticity between 0.56 and 0.84. The results suggest that output measures Granger cause the share of government expenditure in the long run, thereby providing support for Wagners Law, and these results are stable irrespective of the chosen output measure.

Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand

ABSTRACT:Using a new survey of firm managers, we investigate whether inflation expectations in New Zealand are anchored or not. In spite of 25 years of inflation targeting by the Reserve Bank of New Zealand, firm managers display little anchoring of such expectations. We document this finding along a number of dimensions. Managers are unaware of the identities of central bankers or of central banks’ objectives, and they are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed, and they are volatile along both short-run and long-run horizons. Similar results can be found for the United States using currently available surveys.

Demand for money in the selected OECD countries: a time series panel data approach and structural breaks

Time series panel data estimation methods are used to estimate the cointegrating equations for the demand for money (M1) for a panel of 11 Organization for Economic Cooperation and Development (OECD) countries for which consistent quarterly data are available. The effects of financial reforms are analysed with structural break tests and estimates for alternative sub-samples. Our results for the post-reform sub-samples show that the income elasticity of the demand for money has decreased and response to interest rate changes has increased.

Real wages, inflation and labour productivity in Australia

This article presents an analysis of real wages, inflation and labour productivity interrelationships using cointegration, Granger causality and, most importantly, structural change tests. Applications of tests to Australian data over the 1965 to 2007 period corroborate the presence of a structural break in 1985 and show that a 1% increase in manufacturing sector real wages led to an increase in manufacturing sector productivity of between 0.5% and 0.8%. Comparable estimates for the effect of inflation on manufacturing sector productivity have limited statistical significance. Granger causality test results suggest that real wages and inflation both Granger cause productivity in the long run.

Is the US Demand for Money Unstable

The demand for money (M1) for the US is estimated with annual data from 1960 to 2008 and its stability is analysed with the extended Gregory and Hansen (1996b) test. In addition to estimating the canonical specification, alternative specifications are estimated which include a trend and additional variables to proxy the cost of holding money. Results with our extended specification showed that there has been a structural change in 1998 and the constraint that income elasticity is unity could not be rejected by subsample estimates. Short run dynamic adjustment equations are estimated with the lagged residuals from the Fully Modified Ordinary Least Squares (FMOLS) estimates of cointegrating equation and also with the General to Specific (GETS) approach.

A Time-Series Approach to the Feldstein-Horioka Puzzle with Panel Data from the OECD Countries

The Pedroni method is used to estimate the Feldstein-Horioka equation from 1960-2007 with a panel of 13 OECD countries. It is found that the Feldstein-Horioka puzzle exists in a weaker form with a much reduced saving retention coefficient. The Bretton Woods agreement in particular has weakened the Feldstein-Horioka puzzle by significantly improving the international capital mobility. In comparison the Maastricht agreement seems to have improved capital mobility only by a small magnitude. The structural break tests of Westerlund are used in this paper.

Testing the validity of the Feldstein--Horioka puzzle for Australia

This article presents the details of an investigation into the relationship between investment and savings in Australia over the period 1960 to 2007. Using five time series techniques our results reveal that the Feldstein–Horioka puzzle exists in a weak form, with a lower saving retention coefficient. Granger causality tests illustrate that savings Granger causes investment, both in the short and long runs. Our results suggest Australia could effectively adopt policies that focus on increasing investment through increasing domestic savings.

Application Of The Alternative Techniques To Estimate Demand For Money In Developing Countries

In this paper, we applied alternative time series techniques and obtained similar summaries of demand for money relations for twelve developing countries. This indicates that adequate attention should be paid to the purpose of research and interpretation of results rather than to econometric techniques. We also find that income elasticities are close to unity for almost all of our sample countries and the interest rate elasticities are well determined and significant. Further, it is shown that demand for money in these countries is temporally stable and therefore the respective monetary authorities may target money supply as opposed to the rate of interest.

Some empirical evidence on the demand for money in the Pacific Island countries

Purpose - The purpose of this paper is to analyze narrow money demand functions for the Pacific Island countries (PICs) and evaluate their stability. The selected PICs are Fiji, Vanuatu, Samoa (SAM), Solomons and the Papua New Guinea. The stability of the demand for money is vital for the formulation of the monetary policy. Design/methodology/approach - The augmented Dicky-Fuller method is employed to test the time series properties of the variables. Alternative time series techniques such as general to specific (GETS) and Johansen maximum likelihood (JML) are used with annual data from 1974 to 2004 (except for SAM with data from 1980 to 2004) to estimate the narrow money demand equations. To draw inferences relative to the stability of the parameters, the study applies the cumulative recursive sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ). Findings - The results from the time series approaches of GETS and JML suggest that real income, nominal rate of interest and real narrow money are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and, therefore, the respective monetary authorities may consider targeting money supply in their conduct of monetary policy. It is argued that the financial sector reforms and liberalization is yet to have any significant effects on the money demand in the PICs. Research limitations/implications - The methods of estimation does not allow for structural breaks in the cointegrating relationship. It is hoped that future research may focus on using the structural break techniques and also investigate the stability of the demand for broad money in the PICs. Further due to limitations in the data, the authors were only able to select five PICs. Originality/value - This is the first paper in the literature that provides long-run estimates and stability results of the narrow money demand using the newest time series techniques for a group of PICs over the period 1974-2004.

Estimating export demand equations in selected Asian countries

Purpose - The purpose of this paper is to utilize the new specification proposed by Rao and Singh to estimate export demand equations for Asian developing countries, Design/methodology/approach - The augmented Dicky-Fuller method is applied to test the time-series properties of the variables. The time-series techniques of Phillip-Hansens fully modified ordinary least squares and Johansens maximum likelihood are used with annual data from 1970 to 2007. The Granger causality test determines the causality direction between income, relative prices and exports. Findings - The paper confirms that there exists a long-run cointegrating relationship between real exports, real income of trading partners and relative prices. The long-run income elasticities range between 1 and 1.3 and the relative price elasticities range between -1 and -1.4. Our Granger causality results imply that in the long-run income and relative prices Granger cause exports in these countries. Research limitations/implications - Structural breaks and trade shock analysis were ignored. Practical implications - The results imply that exports should be treated as an engine of growth in the Asian developing countries and the export promotion policies such as subsidies, special credits and tax concessions should be encouraged. The relative price elasticities imply that exports are competitive in the international market and these countries have the option to devalue their currency to enhance export earnings. Although the real devaluation of the currencies will push import costs high, eventually this motivates the local firms to undertake alternative options, for instance, import substitution. Further, the gains resulting from the export growth policies will be attractive. Originality/value - The paper assesses the magnitudes of export elasticities with a specification that includes exchange rate in relative price variable.