Balassa-Samuelson Effect Approaching Fifty Years: Is it Retiring Early in Australia?

This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for Australia. We applied the ARDL cointegration technique developed by Pesaran et al. (2001) and found evidence of a significant long-run relationship between real exchange rate and Australia-US productivity differential during the period of 1950-2003. We found that a one per cent increase in labour productivity in Australia relative to the US will lead to 5.6 per cent appreciation in the real exchange rate of Australia. We suspect that the elasticity coefficient is “over-estimated” due to the exclusion of relevant explanatory variables. The dynamics and the determinants of the real exchange rate movements are numerous; they include terms of trade, interest rate differentials, net foreign liabilities among others along with labour productivity differential.Real Exchange Rate, Balassa-Samuelson hypothesis, Unit-root, Structural break and ARDL.

Convergence of Per Capita GDP Across SAARC Countries

In this paper we have examined the issue of convergence of per capita GDP across 7 South Asian countries during 1960-2000 using World Bank data. Empirical results failed to find evidence of s convergence, b convergence and conditional b (bc) convergence in South Asia. The reasons for non-convergence of per capita GDP can be explained by low and falling volume of intra-country trade, weak governance and low level of growth achieved by the individual countries. Further, non-convergence can be attributed to explanations provided by endogenous growth models.Per Capita GDP, Convergence

Are The Real Exchange Rate Indices of Australia Non-Stationary in the Presence of Structural Break?

This paper examines the time series properties of real exchange rate indices of Australia in the presence of structural break. Traditional unit root procedures have low power when structural break is ignored. By including structural change in the data, Perron’s (1997) Additive Outlier model was found optimal. Three indices (Trade-weighted index (TWI), Export-weighted index (EWI) and Import-weighted index (IWI) are found to be stationary while G7 GDP-weighted index (G7WI) was found non-stationary. The estimated break dates correspond to the period of huge real GDP downturn in Australia (early 1990s), and the global recession in the early 1980s affecting the G7 countries.Real exchange rate, purchasing power parity, unit root, structural break.

Dynamics, Structural Breaks and the Determinants of the Real Exchange Rate of Australia

This paper examines the dynamics, structural breaks and determinants of the real exchange rate (RER) of Australia derived from an inter-temporal general equilibrium model. Autoregressive Distributed Lag (ARDL) modelling results show that a one per cent increase in: (1) terms of trade appreciates the RER by 0.96 to 1.05 per cent in the long-run; (2) government expenditure appreciates the RER by 0.53 to 0.46 per cent in the long-run; (3) net foreign liabilities appreciates the RER by 0.18 to 0.22 per cent in the long-run; (4) interest rate differential depreciates the RER by 0.007 to 0.01 per cent in the long-run; (5) openness in trade depreciates the RER by 1.15 to 1.31 per cent in the long-run; and (6) per-worker labour productivity depreciates the RER by 0.38 to 0.55 per cent in the long-run. The two endogenously determined structural breaks are positive but are statistically insignificant. The speed of adjustment towards equilibrium is high with short-run disequilibrium correcting by nearly 39 to 47 per cent per quarter. These results add new insights to the literature on the determinants of RER in Australia. Apart from the terms of trade, the effects of other determinants of RER are contrary to the results obtained in previous studies.Determinants of RER; Endogenous Structural Breaks; Unit-root; ARDL

Deficit Financing in LDCs: Evidence From South Asia

Fiscal policy triggers three distinct effects on the economy such as (1) interest rate effect (2) price effect and (3) exchange rate effect. A VAR system was developed to capture these effects in five South Asian countries. Empirical results suggest that budgetary action does not have any perceptible influence on the interest rate of the sampled countries. In terms of the price effect, fiscal action has opposite effects in Bangladesh and India. Fiscal action tends to increase aggregate price level in India but reduces the price level in Bangladesh, although the magnitude is very small. For Pakistan the price effect is positive but statistically insignificant while the price effect for Nepal and Sri Lanka is negative but statistically insignificant. Fiscal action is found to have no perceptible influence on the exchange rates of the sampled countries except Nepal where increased government expenditure tends to appreciate the Nepali currency. Overall, empirical findings suggest that expansionary fiscal action does not lead to crowding out behaviour in the sampled countries.Deficit financing, crowding-out, South Asia

SPair-Wise Output Convergence in East Asia and the Pacific: An Application of Stochastic Unit Root Test

The objective of this paper is to examine time series cross-country output convergence in eleven counties of East Asia and the Pacific. Specifically, we modelled the cross-country output differences as a Stochastic Unit Root (STUR) processes a la Granger and Swanson (1997). Since, STUR commonly occur in economic theory as well as in everyday macroeconomic applications, therefore, modelling cross-country output differences as STUR is considered pertinent and superior in terms of performance and forecasting. Leybourne et al. (1997) test has been applied that has a null hypothesis of exact unit roots against an alternative of STUR. The presence of a constant unit root in output differences implies divergence while the presence of a stochastic unit root implies convergence. Using the output-differences between Japan and the 10 other countries, we find output convergence only for the Japan-New Zealand and Japan-Taiwan country-pairs. Alternatively, using the output-differences between Australia (reference country) and the other 10 sampled countries; we fail to find any evidence of convergence.Per Capita GDP, Convergence, Deterministic unit root; STUR

ARDL Modelling Approach to Testing the Financial Liberalisation Hypothesis

It is a stylised fact that financial "repression" retards economic growth. Hence, financial liberalisation is advocated to remove the stranglehold on the economy. Financial liberalisation policy argues that deregulation of interest rate would result into a higher real interest rate which would lead to increased savings, increased investment and achieve efficiency in financial resource allocation. Past studies have reported inconclusive results regarding the interest rate effects on savings and investment. This paper examines the financial liberalisation hypothesis by employing autoregressive distributed lag (ARDL) modelling approach on Nepalese data. Results show that the real interest rate affects both savings and investment positively.Financial Liberalisation, Interest Rate Effects, Unit Roots, Cointegration, ARDL Modelling

Sequential Procedure for Testing Unit Roots in the Presence of Structural Break in Time Series Data

Testing for unit roots has special significance in terms of both economic theory and the interpretation of estimation results. As there are several methods available, researchers face method selection problem while conducting the unit root test on time series data in the presence of structural break. This paper proposes a sequential search procedure to determine the best test method for each time series. Different test methods or models may be appropriate for different time series. Therefore, instead of sticking to one particular test method for all the time series under consideration, selection of a set of mixed methods is recommended for obtaining better results.Time Series, Stationarity, Unit Root Test, Structural Break, Sequential Procedure

Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalisation: Evidence from Sri Lanka after War: the case of a bridge too far?

This paper examines the long-run and short-run relationships between the current account deficit, budget deficit, savings and investment gap and trade openness in Sri Lanka using the autoregressive distributive lagged (ARDL) approach. The time series properties of the variables, in the presence of endogenous structural breaks, was previously analysed using Perron’s (1997) additive outlier (AO) and innovational outlier (IO) models. The empirical analysis supports the Keynesian view that a link exists between the current account, budget deficit and savings and investment gap. We found that trade openness has a positive effect on the current account deficit, but is statistically insignificant, and offer some strategies to stabilise the budget deficit and current account deficits in Sri Lanka.twin deficit, structural change, unit roots, ARDL

An Analysis of the World’s Environment and Population Dynamics with Varying Carrying Capacity, Concerns and Skepticism

Due to the open-access nature of the environment we consider an ad hoc adjustment of people’s footprints to the quality of the environment. The adjustment is due to concerns, but hindered by skepticism about announced changes in the state of the environment. Changes in the quality of the environment affect Earth’s carrying capacity. By expanding the Lotka-Volterra predator-prey model to include these features we show that despite skepticism the environment-population system does not collapse. We also show that in the ideal case of no skepticism, the interplay between the non-optimally changing environmental concerns and carrying capacity sends the world’s environment and human population on an oscillating course that leads to a unique interior steady state. These results require no further technological, social or international progress.Environment; Population; Carrying Capacity; Concerns; Skepticism