Fractional Output Convergence, with an Application to Nine Developed Countries

We argue that cross-country convergence of output per capita should be examined in a fractional-integration time-series context and we propose a new empirical strategy to test it, which is the first one that discriminates between fractional long-run convergence and fractional catching-up. The starting point of the paper is: since there are reasons to believe that aggregate output is fractionally integrated, the usual testing strategy based on unit-root or traditional I(1)-I(0) cointegration techniques is too restrictive and may lead to spurious results. We then propose a new classification of output convergence processes which is valid when outputs are fractionally integrated and which nests the usual definitions built for an I(1)-versus-I(0) world. The new testing strategy, which can identify the precise type of convergence, is based on the combined use of new inferential techniques developed in the fractional integration literature. The advantage of these new techniques is that of being robust both to the presence of a trend and to a memory parameter d above 0.5. We explain in detail the importance of this advantage for testing convergence. This strategy applied on a group of developed countries (G-7, Australia and New Zealand) shows that these countries converged in the last century; it also determines the type of convergence for each one. The main result is that per-capita-output differentials are typically mean-reverting fractionally I(d), with d significantly above 0 but below 1. This contrasts with the results of divergence obtained with six unit-root tests and by other authors with I(1)-I(0) (co)integration techniques. The paper therefore contributes to solve the puzzling negative or inconclusive results about convergence usually obtained with I(1)-I(0) tests; our results also prove that the proposed widening of the statistical definition of output convergence is necessary and that convergence does take place but is slower than traditionally expectedreal convergence, fractional integration, unit roots, non stationarity

Is the observed persistence spurious? A test for fractional integration versus short memory and structural breaks

Although it is commonly accepted that most macroeconomic variables are nonstationary, it is often difficult to identify the source of the non-stationarity. In particular, it is well-known that integrated and short memory models containing trending components that may display sudden changes in their parameters share some statistical properties that make their identification a hard task. The goal of this paper is to extend the classical testing framework for I(1) versus I(0)+ breaks by considering a a more general class of models under the null hypothesis: non-stationary fractionally integrated (FI) processes. A similar identification problem holds in this broader setting which is shown to be a relevant issue from both a statistical and an economic perspective. The proposed test is developed in the time domain and is very simple to compute. The asymptotic properties of the new technique are derived and it is shown by simulation that it is very well-behaved in finite samples. To illustrate the usefulness of the proposed technique, an application using inflation data is also provided.Fractional integration, structural breaks, unit roots, trends

SPDE/SPRE final summary report

Mechanical Technology Incorporated (MTI) performed acceptance testing on the Space Power Research Engine (SPRE), which demonstrated satisfactory operation and sufficient reliability for delivery to NASA Lewis Research Center. The unit produced 13.5 kW PV power with an efficiency of 22 percent versus design goals of 28.8 kW PV power and efficiency of 28 percent. Maximum electric power was only 8 kWe due to lower alternator efficiency. One of the major shortcomings of the SPRE was linear alternator efficiency, which was only 70 percent compared to a design value of 90 percent. It was determined from static tests that the major cause for the efficiency shortfall was the location of the magnetic structure surrounding the linear alternator. Testing of an alternator configuration without a surrounding magnetic structure on a linear dynamometer confirmed earlier static test results. Linear alternator efficiency improved from 70 percent to over 90 percent. Testing of the MTI SPRE was also performed with hydrodynamic bearings and achieved full-stroke, stable operation. This testing indicated that hydrodynamic bearings may be useful in free piston Stirling engines. An important factor in achieving stable operation at design stroke was isolating a portion of the bearing length from the engine pressure variations. In addition, the heat pipe heater head design indicates that integration of a Stirling engine with a heat source can be performed via heat pipes. This design provides a baseline against which alternative designs can be measured

Does the interest differential explain future exchange rate return? a re-examination of the UIP hypothesis for the Turkish economy

Akyuz, Y. and Boratav, K. (2003). The making of the Turkish financial crisis, World Development, 31/9, 1549-1566. Alper, C.E. (2001). The Turkish liquidity crisis of 2000: What went wrong, Russian and East European Finance and Trade, 37/6, 51-71. Aslan, O. and Korap L. (2007). Structural VAR identification of the Turkish business cycles, International Research Journal of Finance and Economics, 9, 72-86. Baillie, R.T. and Bollerslev, T. (2000). The forward premium anomaly is not as bad as you think, Journal of International Money and Finance, 19, 471-488. Beyaert, A., García-Solanes, J., and Pérez-Castejón, J.J. (2007). Uncovered interest parity with switching regimes, Economic Modelling, 24, 189-202. Bhatti, R.H. and Moosa, I.A. (1995). An alternative approach to testing uncovered interest parity, Applied Economics Letters, 2, 478-481. Chinn, M.D. and Meredith, G. (2004). Monetary policy and long-horizon uncovered interest parity, IMF Staff Papers, 51/3, 409-430. DeJong, D. N., Nankervis, J. C., Savin, N. E. and Whiteman, C. H. (1989). Integration versus trend-stationarity in macroeconomic time-series, University of Iowa Working Paper Series, No. 89/31, December. Dickey, D. A., Jansen, D. W. and Thornton, D. L. (1991). A primer on cointegration with an application to money and income, The Federal Reserve Bank of St. Louis Review, March/April, 58-78. Dornbusch, R. (2001). A primer on emerging market crises, NBER Working Paper, 8326, June. Dulger, F. and Cin, M.F. (2002). Monetary approach to determining exchange rate dynamics in Turkey and a test for co-integration (in Turkish), METU Studies in Development, 29/1-2, 47-68. Eichengreen, B. (2001). Crisis preventation and management: Any new lessons from Argentina and Turkey?, Background Paper Written for the World Bank’s Global Development Finance 2002, University of California, Berkeley. Ekinci, N.K. and Erturk, K.A. (2007). Turkish currency crisis of 2000-2001, revisited, International Review of Applied Economics, 21/1, January, 29-41. Engle, R. F. and Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing, Econometrica, 55, 251-276. Ertugrul, A. and Yeldan, E. (2002). On the structural weakness of the post-1999 Turkish disinflation program, Turkish Studies Quarterly, 4/2, 53-67. Flood, R.P. and Rose, A.K. (2002). Uncovered interest parity in crisis, IMF Staff Papers, 49/2, 252-266. Granger, C. W. J. (1986). Developments in the study of cointegrated economic variables, Oxford Bulletin of Economics and Statistics, 48/3, 213-228. Granger, C.W.J. and Newbold, P. (1974). Spurious regressions in economics, Journal of Econometrics, 2/2, 111-120. Huisman, R., Koedijk, K., Kool, C., and Nissen, F. (1998). Extreme support for uncovered interest parity, Journal of International Money and Finance, 17, 211-228. Isard, P. (2006). Uncovered interest parity, IMF Working Paper, WP/06/96. Johansen, S. (1988). Statistical analysis of cointegration vectors, Journal of Economic Dynamics and Control, 12, 231-254. Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration-with applications to the demand for money, Oxford Bulletin of Economics and Statistics, 52, 169-210. Kesriyeli, M. (1994). Policy regime changes and testing for the Fisher and UIP hypothesis: The Turkish experience, CBRT Research Department Discussion Paper, No. 9411, December. Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992). Testing the null hypothesis of stationary against the alternative of a unit root, Journal of Econometrics, 54, 159-178. Leigh, D. and Rossi, M. (2002). Exchange rate pass-through in Turkey, IMF Working Paper, WP/02/2004. MacKinnon, J.G. (1996). Numerical distribution functions for unit root and cointegration tests, Journal of Applied Econometrics, 11, 601-618. McCallum, B. T. (1994). A reconsideration of the uncovered interest parity relationship, Journal of Monetary Economics, 33, 105-132. Phillips, P. (1986). Understanding spurious regressions in econometrics, Journal of Econometrics, 33, 311-40. Sachsida, A., Ellery Jr., R. and Teixeira, J.R. (2001). Uncovered interest parity and the peso problem: The Brazilian case, Applied Economics Letters, 8, 179-181. Sul, D. (1999). Does ex-post uncovered interest differential reflect the degrees of capital mobility?, Applied Economics Letters, 6, 97-102. Uygur, E. (2001). From crisis to crisis in Turkey: 2000 November and 2001 February crises (in Turkish), Turkish Economic Association Discussion Paper, 2001/1.Exchange rates ; Interest differentials ; Uncovered interest parity ; Turkish economy ;

Energy consumption, CO2 emissions and the economic growth nexus in Bangladesh: cointegration and dynamic causality analysis

The paper investigates the existence of dynamic causality between the energy consumption, environmental pollutions and economic growth using cointegration analysis for Bangladesh. First, we tested whether any long run relationship exist using Johansen bi-variate cointegration model which is complemented with auto-regressive distributed lag model introduced by Pesaron for the results robustness. Then, we tested for the short run and the long causality relationship by estimating bi-variate vector error correction modeling framework. The estimation results indicate that a unidirectional causality run from energy consumption to economic growth both in the short and the long run; a bi-directional causality from electricity consumption to economic growth in long run but no causal relationship exists in the short run. A uni-directional causality run from CO2 emissions to energy consumption in the long run but it is opposite in the short run. CO2 granger cause to economic growth both in the short and in the long run, which is conflicting to the familiar environmental Kuznets curve hypothesis. Our results are different from existing analysis for electricity consumption and economic growth, however. The result of dynamic linkage between energy consumption and economic growth significantly reject the ‘neo-classical’ assumption that energy use is neutral to economic growth. Hence clearly an important policy implication, energy can be considered as a limiting factor to the economic growth in Bangladesh and conservation of energy may harm economic spurs. Therefore, it is a challenge for the policy makers to formulate sustainable energy consumption policy to support smooth energy supply for sustainable economic growth

Integration in the European Retail Banking Sector : Evidence from Deposit and Lending Rates

This paper investigates the degree of integration in the retail-banking sector for 15 European Union member states between the period 1991 to March 2008. In view of consolidating and creating a single market in their financial services sector, the EU has launched and implemented major initiatives over the past years. The wholesale banking sector has been studied extensively but the retail market to a much lesser extent. The difficulty in analysing the integration process in the banking market is linked to the heterogeneity that exists across the European countries with regards to factors such as risk attitudes, cultural differences, and the home-bias criteria. As a result, it is argued that any convergence process in the banking sector, if present, should rather be perceived as a long-run relationship. Consequently, cointegration analysis, a technique used to capture such long-term relationships between sets of variables is used to analyse the integration process in the EU retail-banking sector. The starting point in the empirical analysis involves conducting multiple structural break analysis. Given that during the period under investigation, there have been significant milestones in the history of the European single market, the deposit and lending rates corresponding to this period are likely to exhibit structural change. Moreover, the timing and pattern of structural break occurrence should also act as an indicator of retail banking integration. The next steps in the empirical analysis look at stationarity tests for both time series data and panel data on data series that are also individually demeaned so as to account for structural breaks. Finally, bivariate time-series cointegration analysis on each of the EU countries and a weighted European average rate is performed. The cointegration analysis is performed on both level and demeaned data

Testing for convergence in stock markets: A non-linear factor approach

This paper applies the Phillips and Sul (2007) method to test for convergence in stock returns to an extensive dataset including monthly stock price indices for five EU countries (Germany, France, the Netherlands, Ireland and the UK) as well as the US over the period 1973-2008. We carry out the analysis on both sectors and individual industries within sectors. As a first step, we use the Stock and Watson (1998) procedure to filter the data in order to extract the long-run component of the series; then, following Phillips and Sul (2007), we estimate the relative transition parameters. In the case of sectoral indices we find convergence in the middle of the sample period, followed by divergence, and detect four (two large and two small) clusters. The analysis at a disaggregate, industry level again points to convergence in the middle of the sample, and subsequent divergence, but a much larger number of clusters is now found. Splitting the cross-section into two subgroups including Euro area countries, the UK and the US respectively, provides evidence of a global convergence/divergence process not obviously influenced by EU policies

Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries

The aim of this article is to provide additional evidence on the fulfilment of the Purchasing Power Parity hypothesis in the so-called Mediterranean countries. In order to test for the empirical validity of such hypothesis, we have applied two types of unit root tests. The first group is due to Bierens (1997) who generalizes the alternative hypothesis to nonlinear trend stationariry and, the second is the Leybourne, Newbold and Vougas (1998) approach that uses a nonlinear specification for the intercept and slope in order to detrend the series. The results suggest that the evidence in favour of the Purchasing Power Parity hypothesis increases when we allow for nonlinear alternatives

Further evidence on the statistical properties of real GNP

The well-known lack of power of unit root tests has often been attributed to the short length of macroeconomic variables and also to DGP’s that depart from the I(1)-I(0) alternatives. This paper shows that by using long spans of annual real GNP and GNP per capita (133 years) high power can be achieved, leading to the rejection of both the unit root and the trend-stationary hypothesis. This suggests that possibly neither model provides a good characterization of these data. Next, more flexible representations are considered, namely, processes containing structural breaks (SB) and fractional orders of integration (FI). Economic justification for the presence of these features in GNP is provided. It is shown that the latter models (FI and SB) are in general preferred to the ARIMA (I(1) or I(0)) ones. As a novelty in this literature, new techniques are applied to discriminate between FI and SB models. It turns out that the FI specification is preferred, implying that GNP and GNP per capita are non-stationary, highly persistent but mean-reverting series. Finally, it is shown that the results are robust when breaks in the deterministic component are allowed for in the FI model. Some macroeconomic implications of these findings are also discussed.GNP, unit roots, fractional integration, structural change, long memory, exogenous growth models