Testing for Cointegration Using the Johansen Methodology When Variables Are Near-Integrated

We investigate the properties of Johansen''s (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.Economic models;cointegration, inflation, nominal interest rate, equation, nominal interest rates, sample size, statistics, real exchange rates, probability, time series, monte carlo simulations, real interest rate, confidence intervals, confidence interval, correlations, statistic, inflation rate, maximum likelihood estimation, predictability, vector autoregression, statistical model, equations, econometrics, constant term, maximum likelihood estimator, samples, number of variables, inflation rates, monte carlo simulation, hypothesis testing, correlation, monetary economics

Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence From Out-Of-Sample Forecasts Using Bayesian Vars

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.Monetary aggregates;European Central Bank;inflation, money growth, monetary policy, monetary economics, central bank, inflation forecasts, monetary aggregate, low inflation, money demand, aggregate demand, forecasting inflation, monetary indicators, inflation target, quantity theory, monetary fund, money supply, monetary phenomenon, monetary analysis, monetary policy strategy, monetary models, high inflation, monetary model, quantity theory of money, average inflation, demand for money, inflation dynamics, nominal interest rate, real interest rate, theory of money, monetary policy rules

Testing the expectations hypothesis when interest rates are near integrated

Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in 10 of the 14 countries we consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory. We relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia.Bonferroni tests Cointegration Expectations hypothesis Near integration Term premium

The Effect of External Conditionson Growth in Latin America

This paper investigates the sensitivity of Latin American GDP growth to external developments using a Bayesian VAR model with informative steady-state priors. The model is estimated on quarterly data from 1994 to 2006 on key external and Latin American variables. It finds that 50 to 60 percent of the variation in Latin American GDP growth is accounted for by external shocks. Conditional forecasts for a variety of external scenarios suggest that Latin American growth is robust to moderate declines in commodity prices and U.S. or world growth, but sensitive to more extreme shocks, particularly a combined external slowdown and tightening of world financial conditions.Commodity prices;Latin America;Economic growth;world growth, bond, bond spread, high yield bond, external shocks, corporate bond, market bond, emerging market bond, high-yield corporate bond, bond index, high-yield bond, dynamic impact, external financing, aggregate demand, financial systems, trading partners, world economy, bond markets, bond spreads, import demand, open economy, terms of trade, futures prices, export prices, financial assets, current account surplus, trade share

Imperfect Central Bank Communication

Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. There is a risk that the central bank can distract the public; this means that the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public''s understanding to the extent that it "crowds out" a role for communicating imperfect information.Transparency;inflation, central banks, central bank, monetary policy, monetary fund, inflation-targeting, monetary theory, monetary economics