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64
The effect of fixed exchange rates on monetary policy
 QUARTERLY JOURNAL OF ECONOMICS
, 2003
"... To investigate how a fixed exchange rate affects monetary policy, this paper classifies countries as pegged or nonpegged and examines whether a pegged country must follow the interest rate changes in the base country. Despite recent research which hints that all countries, not just pegged countries, ..."
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Cited by 136 (12 self)
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To investigate how a fixed exchange rate affects monetary policy, this paper classifies countries as pegged or nonpegged and examines whether a pegged country must follow the interest rate changes in the base country. Despite recent research which hints that all countries, not just pegged countries, lack monetary freedom, the evidence shows that pegs follow base country interest rates more than nonpegs. This study uses actual behavior, not declared status, for regime classification; expands the sample including base currencies other than the dollar; examines the impact of capital controls, as well as other control variables; considers the time series properties of the data carefully; and uses cointegration and other levelsrelationship analysis to provide additional insights.
Confidence Intervals for HalfLife Deviations from Purchasing Power Parity,” working paper
, 2002
"... AccordingtoRogoff (1995), Purchasing Power Parity (PPP) fits well one empirical feature of the data, namely the high shortrun volatility of real exchange rates, but also implies that shocks should die away in one to two years (the time interval compatible with price and wage stickiness). However, e ..."
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Cited by 47 (3 self)
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AccordingtoRogoff (1995), Purchasing Power Parity (PPP) fits well one empirical feature of the data, namely the high shortrun volatility of real exchange rates, but also implies that shocks should die away in one to two years (the time interval compatible with price and wage stickiness). However, existing point estimates of halflife deviationsfromPPPareintheorderof3to5years. This paper assesses how much uncertainty there is around these point estimates by using local to unity asymptotic theory to construct confidence intervals that are robust to high persistence in the presence of small sample sizes. The empirical evidence suggests that the lower bound of the confidenceintervalisaround4to8quartersformostcurrencies,whichisnotinconsistentwith PPP. However, the upper bounds are infinity for all currencies so we cannot provide conclusive evidence in favor of PPP either.
Financial Structure and Economic Growth
 Journal of Development Economics
, 2008
"... This working paper is produced for discussion purpose only. These working papers are expected to be published in due course, in revised form, and should not be quoted or cited without the author’s written permission. ..."
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Cited by 18 (2 self)
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This working paper is produced for discussion purpose only. These working papers are expected to be published in due course, in revised form, and should not be quoted or cited without the author’s written permission.
A New Look at Panel Testing of Stationarity and the PPP Hypothesis
 Indentification and Inference in Econometric Models: Essays in Honor of Thomas
, 2002
"... This paper uses a decomposition of the data into common and idiosyncratic components to develop procedures that test if these components satisfy the null hypothesis of stationarity. ..."
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Cited by 15 (0 self)
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This paper uses a decomposition of the data into common and idiosyncratic components to develop procedures that test if these components satisfy the null hypothesis of stationarity.
Prewhitening bias in HAC estimation
 Oxford Bulletin of Economics and Statistics
, 2005
"... Heteroskedasticity and autocorrelation consistent (HAC) estimation commonly involves the use of prewhitening filters based on simple autoregressive models. In such applications, small sample bias in the estimation of autoregressive coefficients is transmitted to the recolouring filter, leading to HA ..."
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Cited by 14 (1 self)
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Heteroskedasticity and autocorrelation consistent (HAC) estimation commonly involves the use of prewhitening filters based on simple autoregressive models. In such applications, small sample bias in the estimation of autoregressive coefficients is transmitted to the recolouring filter, leading to HAC variance estimates that can be badly biased. The present paper provides an analysis of these issues using asymptotic expansions and simulations. The approach we recommend involves the use of recursive demeaning procedures that mitigate the effects of smallsample autoregressive bias. Moreover, a commonly used restriction rule on the prewhitening estimates (that firstorder autoregressive coefficient estimates, or largest eigenvalues,>0.97 be replaced by 0.97) adversely interferes with the power of unitroot and [Kwiatkowski, Phillips, Schmidt and Shin (1992) Journal of Econometrics, Vol. 54, pp. 159–178] (KPSS) tests. We provide a new boundary condition rule that improves the size and power properties of these tests. Some illustrations of the effects of these adjustments on the size and power of KPSS testing are given. Using prewhitened HAC estimates and the new boundary condition rule, the KPSS test is consistent, in contrast to KPSS testing that uses conventional prewhitened HAC estimates
Panel data tests of PPP: a critical overview
 APPLIED FINANCIAL ECONOMICS
"... This paper reviews recent developments in the analysis of nonstationary panels, focusing on empirical applications of panel unit root and cointegration tests in the context of PPP. It highlights various drawbacks of existing methods. First, unit root tests suffer from severe size distortions in the ..."
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Cited by 12 (5 self)
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This paper reviews recent developments in the analysis of nonstationary panels, focusing on empirical applications of panel unit root and cointegration tests in the context of PPP. It highlights various drawbacks of existing methods. First, unit root tests suffer from severe size distortions in the presence of negative moving average errors. Second, the common demeaning procedure to correct for the bias resulting from homogeneous crosssectional dependence is not effective; more worryingly, it introduces crosscorrelation when it is not already present. Third, standard corrections for the case of heterogeneous crosssectional dependence do not generally produce consistent estimators. Fourth, if there is betweengroup correlation in the innovations, the SURE estimator is affected by similar problems to FGLS methods, and does not necessarily outperform OLS. Finally, cointegration between different groups in the panel could also be a source of size distortions. We offer some empirical guidelines to deal with these problems, but conclude that panel methods are unlikely to solve the PPP puzzle.
The Nature of Persistence in Turkish Real Exchange Rates”, Emerging Markets Finance and Trade
, 2003
"... Testing whether real exchange rates are stationary and, thereby, obtaining evidence of whether the absolute version of the purchasing power parity (PPP) hypothesis holds, have, initially, be done by using the ADF statistic to test for a unit root. Subsequently, to mitigate the low power of the ADF t ..."
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Cited by 11 (1 self)
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Testing whether real exchange rates are stationary and, thereby, obtaining evidence of whether the absolute version of the purchasing power parity (PPP) hypothesis holds, have, initially, be done by using the ADF statistic to test for a unit root. Subsequently, to mitigate the low power of the ADF test, several alternatives have been used for the same purpose. Panel unit root testing is one of these alternatives. In Erlat (2003), I had previously considered two other alternatives; namely, introducing multiple structural shifts in the deterministic terms and fractional integration, in the context of the two primary bilateral Turkish real exchange rates; the $US and the German DM based rates. This investigation did indicate that these two rates may, in fact, be taken to be stationary with significant longmemory components. In the present paper, I utilise panel procedures to see if they, also, give corroborating evidence. I used monthly data for the period 1984.012001.06 and constructed a panel of 17 bilateral CPIbased real exchange rates corresponding to Turkey’s main trading partners for which complete data were available. I implemented seven panel procedures. The first two, Levin, Lin and Chu (LLC) (2002) and Im, Pesaran and Shin (IPS) (2003) are the most commonly used procedures. LLC assumes a common coefficient for the lagged dependent variable in the autoregressions while IPS recognises the full heterogeneity of the coefficients. The third procedure utilised, Hadri (2000), also assumes full heterogeneity but has stationarity
The impossibility of consistent discrimination between I(0) and I(1) processes. Econometric Theory 24
, 2008
"... Abstract An I(0) process is commonly defined as a process that satisfies a Functional Central Limit Theorem, i.e. whose scaled partial sums converge weakly to a Wiener process, and an I(1) process as a process whose first differences are I(0). This paper establishes that with this definition, it is ..."
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Cited by 8 (1 self)
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Abstract An I(0) process is commonly defined as a process that satisfies a Functional Central Limit Theorem, i.e. whose scaled partial sums converge weakly to a Wiener process, and an I(1) process as a process whose first differences are I(0). This paper establishes that with this definition, it is impossible to consistently discriminate between I(0) and I
Net Foreign Assets and Imperfect Financial Integration: An Empirical Approach”. Working Papers, 252
, 2003
"... La serie de Documentos de Trabajo en versión PDF puede obtenerse gratis en la dirección electrónica: ..."
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Cited by 3 (2 self)
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La serie de Documentos de Trabajo en versión PDF puede obtenerse gratis en la dirección electrónica: