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Long Run Macroeconomic Relations in the Global Economy

Long Run Macroeconomic Relations in the Global Economy AbstractThis paper presents tests of long run macroeconomic relations involving interest rates, equity, prices and exchange rates suggested by arbitrage in financial and goods markets. It uses the global vector autoregressive (GVAR) model to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. It finds strong evidence in favour of a long run version of uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but the test results for the purchasing power parity relation are much weaker. Also the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economics de Gruyter

Long Run Macroeconomic Relations in the Global Economy

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Publisher
de Gruyter
Copyright
© 2007 Stephane Dees et al., published by Sciendo
eISSN
1864-6042
DOI
10.5018/economics-ejournal.ja.2007-3
Publisher site
See Article on Publisher Site

Abstract

AbstractThis paper presents tests of long run macroeconomic relations involving interest rates, equity, prices and exchange rates suggested by arbitrage in financial and goods markets. It uses the global vector autoregressive (GVAR) model to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. It finds strong evidence in favour of a long run version of uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but the test results for the purchasing power parity relation are much weaker. Also the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

Journal

Economicsde Gruyter

Published: Dec 1, 2007

Keywords: Global VAR; Fisher relationship; Uncovered Interest Rate Parity; Purchasing Power Parity; persistence profile; C32; E17; F47; R11

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