Political cycles in a small open economy and the effect of economic integration: evidence from Cyprus

This paper examines whether partisan politics and opportunistic government behavior generate political cycles in a small open economy, and, if so, whether such effects survive under increased economic integration. We discuss evidence drawn from Cyprus for the period 1978-2006. The empirical analysis extends the work of Alesina et al. (1997) to accommodate the special features of the Cypriot economy in a controlled environment era and follows a more technical econometric approach to ensure that our estimations will not draw misleading inferences. The results are in line with the rational partisan model and are similar to the ones obtained for other countries. On the other hand, the findings for Cyprus support also the existence of an electoral cycle in fiscal policy and reject the one in monetary policy. We argue that the unique politico-economic profile of a country is crucial for the empirical success of different theories. Furthermore, we find that the reported effects do not persist in the run-up to EU accession and ERM II participation. The implementation of several structural reforms and the Maastricht criteria seem to affect governments' ability to influence the domestic economy

Nonstationary Nonlinear Heteroskedasticity in Regression

This paper considers the regression with errors having nonstationary nonlinear heteroskedasticity. For both the usual stationary regression and the nonstationary cointegrating regression, we develop the asymptotic theories for the least squares methods in the presence of conditional heterogeneity given as a nonlinear function of an integrated process. In particular, it is shown that the nonstationarity of volatility in the regression errors may induce spuriousness of the underlying regression. This is true for both the usual stationary regression and the nonstationary cointegrating regression, if excessive nonstationary volatility is present in the errors. Mild nonstationary volatilities do not render the underlying regression spurious. However, their presence makes the least squares estimator asymptotically biased and inefficient and the usual chi-square test invalid. In the paper, we develop an unbiased and efficient method of estimation and a chi-square test applicable for the regression with mild nonstationary volatilities in the errors. We provide some illustrations to demonstrate the empirical relevancy of the model and theory developed in the paper. For this purpose, examined are US consumption function, EURO/USD forward-spot spreads and capital-asset pricing models for some major NYSE stocksvolatility, nonstationary nonlinear heteroskedasticity, regression with heteroskedastic errors, spurious regression, cointegration

Do Stock Returns Hedge against High and Low Inflation? Evidence from Brazilian Companies

This paper investigates the relationship between stock returns and inflation using monthly data from ten Brazilian firms and the general Brazilian stock market. The period under investigation, 1986-2008, includes periods of unstable high inflation (1986-1994) and stable low inflation (1994-2008). Standard linear regressions are applied to estimate the relationship after testing first for the stochastic structure of the variables. Results indicate that stock returns do act as a hedge against high inflation but fail to act against low inflation. Variance decomposition tests indicate innovations to the inflation rate affect the movement of the stock returns during the total period and the high inflation period.

Time-series Econometrics: Cointegration and Autoregressive Conditional Heteroskedasticity

Advanced information on the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, 2003. Empirical research in macroeconomics as well as in financial economics is largely based on time series. Ever since Economics Laureate Trygve Haavelmo's work it has been standard to view economic time series as realizations of stochastic processes. This approach allows the model builder to use statistical inference in constructing and testing equations that characterize relationships between economic variables. This year's Prize rewards two contributions that have deepened our understanding of two central properties of many economic time series - nonstationarity and time-varying volatility - and have led to a large number of applicationstime-series; cointegration

A Time-Series Analysis of the Shanghai and New York Stock Price Indices

A time series analysis of the Shanghai and New York Stock Exchange composite price indices is provided to compare the weekly rates of return and volatilities of these two markets and to study their co-movement in 1992-2002. The rate of return and volatility of the Shanghai market were higher. The rates of returns in the two markets were approximately serially uncorrelated and mutually uncorrelated. Volatility, as measured by the absolute change in the rate of return, has positive serially correlations in both markets as expected, but the autoregressions are temporarily unstable. Most surprisingly the volatility measures of the two markets are significantly negatively correlated. Volatility in each market was found to Granger cause volatility in the other market negatively. This spurious correlation is explained by the negative correlations of macroeconomic fundamentals in the United States and China as indicated by a negative correlation between the rates of change in their GDP while their capital markets are not integrated. The analysis has implications for the use of autoregressions and Granger causality tests, and the interpretation of spurious correlation.Time series analysis; Rate of return; Volatility; Autogressions; Granger causality; Spurious correlation; Shanghai stock price; New York stock price

Rival Macroeconomic Models And Australian Stylised Facts

This paper reports the stylised facts resulting from the tests of rival macroeconomic models in explaining the Australian business cycle during the sample period 1966(3)-1995(3). The dominant rival paradigms such as the New Classical, Keynesian the Real Business Cycle theories have been tested using both Granger causality and non-nested testing techniques. The time-series data used for modelling the rival paradigms were processed using unit root and cointegration econometrics to guard against possible spurious regression inferences due to nonstationarity in the data. Parsimonious data congruent models for testing the rival paradigms were derived by the application of the general-to-specific methodology. The problem of non-spherical errors created by the use of generated regressors in the specification of business cycle models was tackled by replacing ordinary least squares by generalised least squares estimates. The empirical results supported the conclusion that hybrid macroeconomic paradigms encompassing both demand and supply side shocks provide more plausible explanations of the Australian business cycle than tests narrowly focussed only on demand side shocks. The study results challenges the narrow view that rival macroeconomic theories would have failed to provide meaningful guidelines to Australian policymakers to implement counter-cyclical policies during the study period.

Dynamic Econometric Testing of Climate Change and of its Causes

The goal of this paper is to empirically test for structural breaks of world mean temperatures that may have ignited at some date the phenomenon known as “Climate Change” or “Global Warming”. Estimation by means of the dynamic Generalized Method of Moments is conducted on a large dataset spanning the recordable period from 1850 until present, and different tests and selection procedures among competing model specifications are utilized, such as Principal Component and Principal Factor Analysis, instrument validity, overtime changes in parameters and in shares of both natural and anthropogenic forcings. The results of estimation unmistakably show no involvement of anthropogenic forcings and no occurrence of significant breaks in world mean temperatures. Hence the hypothesis of a climate change in the last 150 years, suggested by the advocates of Global Warming, is rejected. Pacific Decadal Oscillations, sunspots and the major volcanic eruptions play the lion’s share in determining world temperatures, the first being a dimmer and the others substantial warmers.Generalized Method of Moments, Global Warming, Principal Component and Factor Analysis, Structural Breaks.

Exports and growth: an econometric analysis

This paper dicusses the sources of rapid economic growth in Koreaı in recent times and their economic implications by means of three types of econometric tests based on the modern theory of cointegration, the dominant role of demand over supply and the significant degree of economies of scale due to the spillover effects of human capital and of technological diffusion. The empirical growth profile of Korea in recent times seems to vindicate some of the major tenets of the new growth theory

Cointegration and Forward and Spot Exchange Rate Regressions

In this paper we investigate in detail the relationship between models of cointegration between the current spot exchange rate, st, and the current forward rate, ft, and models of cointegration between the future spot rate, st+1, and ft and the implications of this relationship for tests of the forward rate unbiasedness hypothesis (FRUH). We argue that simple models of cointegration between st and ft more easily capture the stylized facts of typical exchange rate data than simple models of cointegration between st+1 and ft and so serve as a natural starting point for the analysis of exchange rate behavior. We show that simple models of cointegration between st and ft imply rather complicated models of cointegration between st+1 and ft. As a result, standard methods are often not appropriate for modeling the cointegrated behavior of (st+1, ft)' and we show that the use of such methods can lead to erroneous inferences regarding the FRUH.cointegration, exchange rates, forward rate unbiasedness, weak exogeneity