US–Euro Area Monetary Policy Interdependence – New Evidence from Taylor Rule Based VECMs

This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999– 2006. Two models are specified: a partial Vector Error Correction Model (VECM) and a general VECM. In the partial VECM, we look for a long-run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long-run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks.Weak exogeneity is checked in both models in order to establish a possible leader-follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader-follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.Monetary policy, interdependence, European Central Bank, Federal Reserve, Taylor rule,VECM

Time series analyses of inflation in New Zealand : a thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Statistics at Massey University

Modelling of the economy has become increasingly important over the years. It serves two main purposes. It enables forecasts and it can be used for the evaluation of various economic policies. Economic models come with various degrees of size and statistical complexity. Models can be of a qualitative or of a quantitative nature. The soundness of the statistical techniques that are used for quantitative models is critical. In recent years a number of such techniques have been developed. This thesis will evaluate some on existing economic New Zealand time series. Inflation plays a main role in everyday life and it has been of major ongoing concern to the New Zealand governments in recent times. These governments have instructed the Reserve Bank of New Zealand (RBNZ) to set monetary policies to ensure certain targets are met. The RBNZ achieves this to a large degree by setting the Official Cash Rate which is the major determinant of the interest rates that are used by the banks. This thesis will consider some theoretical aspects of time series analysis. In particular the Dickey-Fuller tests and cointegration analysis are considered. Also some theoretical aspects of inflation are considered. Examples are given of aspects of New Zealand life other than the interest rates that may also affect the current inflation rates. The time series that were analysed could be categorised as inflation indices, monetary aggregates, interest rates and gross domestic product. The thesis attempted to evaluate the time series in such a manner that there was little room for an analyst's bias. This was mainly achieved by developing a standardised approach to the analysis of these series. A number of interactions between the time series were evaluated and some were identified as being suitable for further research with the ultimate aim of developing a small model of the New Zealand economy. Another aim was to evaluate some aspects of economic policy where possible given the small number of time series that were used. Granger Causality tests seemed to show the effect of economic policy, where the interest rates affect the inflation rates. However, this was not further supported by cointegration analyses. There are various possible explanations for this. It was surmised that the standardised way of analysis may not have identified this relationship where it existed. The analyses showed that at times the results of the statistical tests were inconsistent. This applied to the Dickey-Fuller tests as well as the cointegration analyses. In some cases unit root models with significant coefficients for the deterministic components were identified. Further analysis would show that the deterministic components were not significant after all. However, the resulting models without these components did not have a unit root. The cointegration analyses invariably showed a number of Vector Error Correction Models with significant cointegration equations. Since their economic implications would be quite different at times there was a reason for concern. In conclusion there are some worrying problems when the methodology is used for existing short New Zealand data series. However, at times some plausible results were shown as well. Suggestions for further research were made

Employment growth, inflation and output growth: Was phillips right? Evidence from a dynamic panel

Copyright @ 2011 Brunel UniversityIn this paper we analyse the short- and long-run relationship between employment growth, inflation and output growth in Phillips’ tradition. For this purpose we apply FMOLS, DOLS, PMGE, MGE, DFE, and VECM methods to a nonstationary heterogeneous dynamic panel including annual data for 119 countries over the period 1970-2010, and also carry out multivariate Granger causality tests. The empirical results strongly support the existence of a single cointegrating relationship between employment growth, inflation and output growth with bidirectional causality between employment growth and inflation as well as output growth, giving support to Phillips’ Golden Triangle theory

Correlation, price discovery and co-movement of ABS and equity

Asset-backed securitization (ABS) has become a viable and increasingly attractive risk management and refinancing method either as a standalone form of structured finance or as securitized debt in Collateralized Debt Obligations (CDO). However, the absence of industry standardization has prevented rising investment demand from translating into market liquidity comparable to traditional fixed income instruments, in all but a few selected market segments. Particularly low financial transparency and complex security designs inhibits profound analysis of secondary market pricing and how it relates to established forms of external finance. This paper represents the first attempt to measure the intertemporal, bivariate causal relationship between matched price series of equity and ABS issued by the same entity. In a two-dimensional linear system of simultaneous equations we investigate the short-term dynamics and long-term consistency of daily secondary market data from the U.K. Sterling ABS/MBS market and exchange traded shares between 1998 and 2004 with and without the presence of cointegration. Our causality framework delivers compelling empirical support for a strong co-movement between matched price series of ABS-equity pairs, where ABS markets seem to contribute more to price discovery over the long run. Controlling for cointegration, risk-free interest and average market risk of corporate debt hardly alters our results. However, once we qualify the magnitude and direction of price discovery on various security characteristics, such as the ABS asset class, we find that ABS-equity pairs with large-scale CMBS/RMBS and credit card/student loan ABS reveal stronger lead-lag relationships and joint price dynamics than whole business ABS. JEL Classifications: G10, G12, G2

Testing for Codependence of Non-Stationary Variables

We analyze non-stationary time series that do not only trend together in the long run, but restore the equilibrium immediately in the period following a deviation. While this represents a common serial correlation feature, the framework is extended to codependence, allowing for delayed adjustment. We show which restrictions are implied for VECMs and lay out a likelihood ratio test. In addition, due to identification problems in codependent VECMs a GMM test approach is proposed. We apply the concept to US and European interest rate data, examining the capability of the Fed and ECB to control overnight money market rates

Codependence and Cointegration

We introduce the idea of common serial correlation features among non-stationary, cointegrated variables. That is, the time series do not only trend together in the long run, but adjustment restores equilibrium immediately in the period following a deviation. Allowing for delayed re-equilibration, we extend the framework to codependence. The restrictions derived for VECMs exhibiting the common feature are checked by LR and GMM-type tests. Alongside, we provide corrected maximum codependence orders and discuss identification. The concept is applied to US and European interest rate data, examining the capability of the Fed and ECB to control overnight money market rates

Pair correlation densities of inhomogeneous quadratic forms II

Denote by $\| \cdot \|$ the euclidean norm in \RR^k. We prove that the local pair correlation density of the sequence \| \vecm -\vecalf \|^k, \vecm\in\ZZ^k, is that of a Poisson process, under diophantine conditions on the fixed vector \vecalf\in\RR^k: in dimension two, vectors \vecalf of any diophantine type are admissible; in higher dimensions ($k>2$), Poisson statistics are only observed for diophantine vectors of type $\kappa<(k-1)/(k-2)$. Our findings support a conjecture of Berry and Tabor on the Poisson nature of spectral correlations in quantized integrable systems

A systematic framework for analyzing the dynamic effects of permanent and transitory shocks

This paper proposes a systematic framework for analyzing the dynamic effects of permanent and transitory shocks on a system of n economic variables. We consider a two-step orthogonolization on the residuals of a VECM with r cointegrating vectors. The first step separates the permanent from the transitory shocks, and the second step isolates n?r mutually uncorrelated permanent shocks and r transitory shocks. The decomposition is computationally straightforward and entails only a minor modification to the Choleski decomposition commonly used in the literature. We then show how impulse response functions can be constructed to trace out the propagating mechanism of shocks distinguished by their degree of persistence. In an empirical example, the dynamic responses to the identified permanent shocks have properties similar to shocks to productivity, the real interest rate, and money growth, even though no economic theory was used to achieve the identification. We highlight two numerical issues that could affect any identification of permanent and transitory shocks.Publicad