Cointegration and the joint confirmation hypothesis

Recent papers by Charemza and Syczewska (1998) and Carrion, Sansó and Ortuño (2001) focused on the joint use of unit root and stationarity tests. In this paper, the discussion is extended to the case of cointegration. Critical values for testing the joint confirmation hypothesis of no cointegration are computed and a small Monte Carlo experiment evaluates the relative performance of this procedure.Cointegration; Joint confirmation hypothesis; Monte Carlo simulations.

Assessing Fiscal Sustainability Subject to Policy Changes: a Markov Switching Cointegration Approach

We propose a Markov switching cointegration approach to assess long run fi?scal sustainability. This method allows us to simultaneously: 1) test for cointegration in the presence of signifi?cant ?fiscal policy changes; 2) assess the type of fi?scal regime (whether strongly/weakly sustainable or unsustainable) that a country experienced at a given period and 3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enables us to uncover a richer and more complex dynamics in the analysis of fi?scal sustainability, which standard linear cointegration methods fail to capture.

The Cost Channel Reconsidered: A Comment Using an Identification-Robust Approach

We re-examine the empirical relevance of the cost channel of monetary policy (e.g. Ravenna and Walsh, 2006), employing recently developed moment-conditions inference methods, including identiÂ…cation-robust procedures. Using US data, our results suggest that the cost channel effect is poorly identiÂ…ed and we are thus unable to corroborate the previous results in the literatureCost channel, Phillips curve, GMM, Generalized Empirical Likelihood, Weak IdentiÂ…cation

An Efficient test of Fiscal Sustainability

We suggest a multivariate efficient test of the 'strong' fiÂ…scal sustainability hypothesis, based on Horvath and Watson's (1995) cointegration test when cointegration vectors are pre-specified. Using data for a set of developed and developing economies, we show that, unlike our procedure, conventional methodologies tend to penalize the sustainability hypothesis.

Cointegration Tests under Multiple Regime Shifts: An Application to the Stock Price-Dividend Relationship

We examine the properties of several residual-based cointegration tests when long run parameters are subject to multiple shifts driven by an unobservable Markov process. Unlike earlier work, which considered one-off deterministic breaks, our approach has the advantage of allowing for an unspeci?ed number of stochastic breaks. We illustrate this issue by exploring the possibility of Markov switching cointegration in the stock-price dividend relationship and showing that this case is empirically relevant. Our subsequent Monte Carlo analysis reveals that standard cointegration tests are generally reliable, their performance often being robust for a number of plausible regime shift parameterizations.Present value model, Cointegration tests, Markov switching

An Efficient Test of Fiscal Sustainability

We suggest a multivariate efficient test of the 'strong' fiscal sustainability hypothesis, based on Horvath and Watson's (1995) cointegration test when cointegration vectors are pre-specified. Using data for a set of developed and developing economies, we show that, unlike our procedure, conventional methodologies tend to penalize the sustainability hypothesis.

Taylor-type rules versus optimal policy in a Markov-switching economy¤

We analyse the e®ect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modelled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of ¯nancial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.Asset Prices, Monetary Policy, Markov Switching.

Taylor-type rules versus optimal policy in a Markov-switching economy

We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.Asset Prices, Monetary Policy, Markov Switching

A Floating versus managed exchange rate regime in a DSGE model of India.

We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.DSGE model, Indian economy, Monetary interest rate rules, Floating versus managed exchange rate, Financial frictions

The Forecast Performance of Long Memory and Markov Switching Models

Recent research has focused on the links between long memory and structural change, stressing the long memory properties that may arise in models with parameter changes. In this paper, we contribute to this research by comparing the forecasting abilities of long memory and Markov switching models. Two approaches are employed: a Monte Carlo study and an empirical comparison, using the quarterly Consumer Price inflation rate in Portugal in the period 1968-1998. Although long memory models may capture some in-sample features of the data, when shifts occur in the series considered, their forecast performance is relatively poor, when compared with simple linear and Markov switching models. Moreover, our findings, in a more general framework, are in accordance with the works of Clements and Hendry (1998) and Clements and Krolzig (1998), reinforcing the idea that simple linear time series models remain useful tools for prediction.Long Memory; Structural change; Forecasting