Stephane Dees, Sean Holly, M. Hashem Pesaran, L. Vanessa Smith

Long Run Macroeconomic Relations in the Global Economy

March 01, 2007

Abstract

This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) 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. We find strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

Citation

Assessment

Comments and Questions

Referee Report - anonymous - April 18, 2007 - 10:16

See attached file

[ Download attached file ]

Response to Referee Report - M. Hashem Pesaran - May 24, 2007 - 16:10

see attached file

[ Download attached file ]

Referee Report - anonymous - April 18, 2007 - 10:16

See attached file

[ Download attached file ]

Response to Referee Report - M. Hashem Pesaran - May 24, 2007 - 16:13

see attached file

[ Download attached file ]

Associate Editor´s Report - anonymous - May 08, 2007 - 08:35

see attached file

[ Download attached file ]

M. Hashem Pesaran - Response to Associate Editor - May 24, 2007 - 16:15

see attached file

[ Download attached file ]