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Discussion Paper

No. 2007-7 | March 01, 2007
Long Run Macroeconomic Relations in the Global Economy

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.

JEL Classification

C32 E17 F47 R11

Cite As

Stephane Dees, Sean Holly, Hashem Pesaran, and L. Vanessa Smith (2007). Long Run Macroeconomic Relations in the Global Economy. Economics Discussion Papers, No 2007-7, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-7

Assessment



Comments and Questions


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

See attached file


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

see attached file


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

See attached file


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

see attached file


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

see attached file


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

see attached file