The relative dynamics of investment and the current account in the G-7 economies

This paper contributes to the empirics of the intertemporal approach to the current account. We use a cointegrated VAR framework to identify permanent and transitory components of country-specific and global shocks. Our approach allows us to empirically investigate the sensitivity to persistence implied by many forward-looking models and our results shed new light on the excess volatility of investment encountered by Glick and Rogoff (JME 1995). In G7 data, we find the relative current-account and investment response to be in line with the intertemporal approach

International macroeconomic fluctuations and the current account

Intertemporal models of the current account generally assume that global shocks do not affect the current account. We use this assumption to identify global and country-specific shocks in a bivariate VAR. We test the quality of the identification using evidence from G7-data. In accordance with the theory, we observe a link between the global shock and a measure of the world real interest rate. We also find that long-term output growth is driven by global factors in most countries, that country-specific shocks are less persistent in smaller economies and generally less volatile than global shocks

International financial markets' influence on the welfare performance of alternative exchange rate regimes

In this paper Friedmann (1953) and Mundell´s (1968) position favouring flexible over alternative exchange rate regimes is reassessed in the context of international financial market integration. In a new open economy macroeconomic framework the paper shows that financial market integration causes a monetary policy trade-off between stabilising domestic goods prices as opposed to stabilising the terms of trade. Therefore, the welfare ranking of different exchanges rate rules changes during the process of international financial integration. It becomes evident that no single exchange rate regime outperforms in stabilising both domestic consumption and output variability in the process of financial market integration. --International Financial Market Integration,Exchange Rate Rules,Optimal Monetary Policy,Welfare

Long run recursive VAR models and QR decompositions

Long-run recursive identification schemes are very popular in the structural VAR literature. This note suggests a two-step procedure based on QR decompositions as a solution algorithm for this type of identification problem. Our procedure will always deliver the exact solution and it is much easier to implement than a Newton-type iteration algorithm. It may therefore be very useful whenever quick and precise solutions of a long-run recursive schemes are required, e.g. in bootstrapping confidence intervals for impulse responses

Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows

This paper empirically investigates the relationship between public infrastructure and international capital flows. Out of a sample of thirty countries a cross-sectional econometric model is constructed to estimate the effects. Different components of infrastructure variables are tested in relation to their impact on different kinds of external capital liabilities. The results suggest a positive relationship between the level of infrastructure and capital inflows. However, statistical significance cannot be established for all variables in question.

A real differential view of equilibrium real exchange rates and misalignments

This paper examines the interaction of G7 real exchange rates with real output and interest rate differentials. Using cointegration methods, we generally find a link between the real exchange rate and the real interest differential. This finding contrasts with the majority of the extant research on the real exchange rate - real interest rate link. We identify a new measure of the equilibrium exchange rate in terms of the permanent component of the real exchange rate that is consistent with the dynamic equilibrium given by the cointegration relation. Furthermore, the presence of cointegration also allows us to identify real, nominal and transitory disturbances with only minimal identifying restrictions. Our findings suggest that persistent deviations of real exchange rates from their equilibrium value can have feedback effects on the underlying fundamentals, hence altering the equilibrium exchange rate itself. This has important implications for the persistence measures of real exchange rates that are reported elsewhere in the literature

A Re-examination of the link between Real Exchange Rates and Real Interest Rate Differentials

Although the real exchange rate - real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we reinvestigate the RERI relationship using bilateral real exchange rate data spanning the period 1978 to 1997. We propose an alternative way of investi- gating the relationship using the present value VAR-based test of Campbell and Shiller (1987). Our empirical results provide robust evidence that the RERI relationship is economically signi…cant and that the real interest rate di¤erential is a reasonable approximation of the expected rate of depreciation over longer horizons. Although we report a statistical rejection of cross equa- tion restrictions, this can largely be ascribed to the fact that excess returns on a currency have a signi…cant degree of medium-run predictability, rather than to a rejection of the RERI. Our findings corroborate Baxters (1994) substantive conclusion that there is an important link between real exchange rates and real interest rates at business cycle frequencies.Real Exchange Rates; Real Interest Rates; Present Value Model