Show-Lin Chen

Are current account deficits sustainable?: Evidence from panel cointegration

Abstract Conventional cointegration tests fail to consider information across countries, which leads to efficiency loss in estimation. In this article we apply panel cointegration tests to examine the cointegration between exports and imports among the G7. Our findings support the sustainability of current accounts among major industrial countries, which lends support to the intertemporal approach to the current account.

Testing for the sustainability of the current account deficit in two industrial countries

TThe objective of this paper is to test for the sustainability of the current account deficits in the U.S. and Canada over the 1973--1994 period. Using various unit root and cointegration tests some of which allow for structural changes, we conclude that the real current account deficits-to-GDP ratios are not sustainable.

A Re-examination of Real Interest Rate Parity

Empirical investigation based on consumer-price-index-based real interest rates is used to conclude that real interest rate parity is not supported. In this paper, the authors employ three panel-based unit-root tests, provided by Andrew Levin and Chien-Fu Lin (1992), Kyung So Im, Hashem M. Pesaran, and Yongcheol Shin (1995), and G. S. Maddala and Shaowen Wu (1996), to examine the stationarity of real interest differentials. Using monthly observations on Euro-market rates, they support the mean-reverting property of real interest differentials and, hence, the real interest rate parity. This finding is consistent with the observation that international integration of financial markets has increased dramatically since 1979.

A Re-Examination of Purchasing Power Parity in Japan and Taiwan

Equilibrium models of real exchange rate determination, in the presence of transaction costs, imply a nonlinear adjustment process toward purchasing power parity (PPP). In this paper we re-examine the hypothesis of PPP allowing for the adjustment to follow a nonlinear process. For the country pairs of U.S.-Japan and U.S.-Taiwan during the period of 1974M1-1997M12 and 1980M1-1997M12, respectively, our results clearly reject the linear framework in favor of an exponential smooth transition autoregressive (ESTAR) process for PPP deviations. The results provide an alternative explanation for the failure of long-run PPP in the existing studies.

Foreign exchange market efficiency revisited

Abstract The cointegration of spot rates is neither a necessary nor a sufficient condition to account for the lack of foreign exchange market efficiency. Instead, Crowder [Crowder, W., 1994, 1996. J. Int. Money Finance 13, 551–564; 15, 661–664] and Engel [Engel, C., 1996. J. Int. Money Finance 15, 557–560] claimed that the stationarity of the forward premium is crucial to the hypothesis of market efficiency. In this paper, we employ the panel unit-root test of Im et al. to examine the stationarity of forward premia and interest differentials among nine OECD countries. We reject the unit-root null for both the time series of the forward premium and interest differential, which in turn supports the hypothesis of foreign exchange market efficiency.

Nominal exchange-rate prediction: evidence from a nonlinear approach

Abstract In this paper we employ a nonlinear error-correction model to explain the dynamics of exchange rates. Starting from a stylized monetary model of exchange rates, we found that the nonlinear error-correction model is superior to a range of alternative forecasts, including random walks and the conventional time-varying parameters model even when forecast horizons are short.

Sources of inflation uncertainty and real economic activity

This paper examines the effects of inflation uncertainties on real GDP. We argue that different sources of inflation uncertainty have different impacts on real GDP. The empirical evidence points out that uncertainty arising from changing regression coefficients has negative impacts on real GDP. However, the effect of uncertainty due to heteroscedasticity in disturbances on real GDP is insignificant. Moreover, we find that the survey-based measure of inflation uncertainty appears to be more associated with the uncertainty that arises from changing regression coefficients.

Can nominal exchange rates be differenced to stationarity

Abstract The objective of this paper is to examine the well known assumption of difference stationarity of nominal exchange rates with the method of Leybourne et al. (1996) . We conclude that the assumption of difference stationarity is innocuous for quarterly exchange rates but not for monthly exchange rates. In fact, a randomized unit-root process is appropriate for monthly exchange rates. These findings are important for exchange rates modeling.