Decline in the Persistence of Real Exchange Rates : But Not Sufficient for Purchasing Power Parity

The paper investigates the possibility of decline in the persistence of real exchange rates, or deviations from PPP. To this end, we test the null hypothesis of no decline in the PPP deviation persistence between two subsamples using a fractional integration framework. In addition, our rolling-window estimates show that the real exchange rate of many countries have experienced a sharp drop in their persistence once we use samples starting from the mid-1980s. Finally, we examine the relationship between the dynamics of PPP deviation persistence and several economic variables and confirm that the speed of convergence of PPP deviations is highly related to economic/financial integration and world economic stabilization.deviations from PPP, economic stabilization, financial integration

Financial Market Integration and World Economic Stabilization toward Purchasing Power Parity

Purchasing power parity (PPP) is one of the most important, but empirically controversial theories in international macroeconomics. Although many researchers believe that some variant of PPP holds in the long run, there are diverse empirical results regarding the PPP hypothesis. We examine the PPP hypothesis from an alternate point of view: We investigate the possibility of financial market integration, and world economic stabilization toward PPP, by examining the change in the persistence of PPP deviations during the last three decades. We employ a fractional integration framework, which provides a powerful tool to detect changes in the persistence for highly persistent time series. First, we test the null hypothesis of no decline in the persistence of PPP deviations. The test rejects the null at the 10% significance level for 11 out of 17 countries, thus providing strong support for financial market integration and world economic stabilization toward PPP. Second, we examine the dynamics of the persistence of PPP deviations during the last three decades through rolling-window estimation. Our results show that the persistence of PPP deviations has decreased gradually, and that many real exchange rates have experienced a sharp drop in their persistence once samples starting in the mid-1980s are used. Interestingly, this timing almost coincides with the timing of U.S./world economic stabilization reported by other studies. We also examine the relation between the persistence of PPP deviations and de facto measures of financial integration by Lane and Milesi-Ferretti (2006). We confirm that they are strongly correlated for all countries. This finding suggests that the recent promotion of financial integration is one of the main sources of the decline in the persistence of PPP deviations.fractional integration, PPP, real exchange rate, financial integration

Do Socially Responsible Investment Indexes Outperform Conventional Indexes?

The question of whether more socially responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the socially responsible investment (SRI) indexes and conventional stock indexes in the US, the UK, and Japan, first and second moments of firm performance distributions are estimated based on the Markov switching model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong comovements between the two indexes in both regimes

Measuring the effects of commodity price shocks on Asian economies

Commodity prices have become volatile over the past 2 decades, and their recent sharp decline has decreased the consumer price index inflation rates for most economies. While many Asian economies have benefited from low international oil and food prices, commodity exporters have suffered. Thus, the negative impact on production through the decline of producer prices has attracted considerable attention. Given this situation, policy makers have become increasingly concerned about measuring the magnitude of oil and food price shock diffusion on a country's various inflationary indicators. This study investigates this problem by using a Global Vector Autoregressive model. We extend the work by Galesi and Lombardi (2009), which primarily analyzed European economies using data from the pre-Global Financial Crisis (GFC) period, in the following four ways: (i) the sample period is extended to December 2015, thus covering the post-GFC turbulence period (beginning from January 2001); (ii) the model is enriched by considering the People's Republic of China's role in integrating the Asian region through international trade; (iii) the producer price index is included; and (iv) the impact on industrial production is investigated. Using generalized impulse response functions, we examine the impact of a one-time hike in oil and food prices on the general price levels and production for nine Asian countries and 13 other countries, including the United States and the eurozone. We also analyze the differences of shock propagations in the pre- and post-GFC periods. Results indicate that the increased integration and dependence on exports intensified the Asian region's vulnerability to external shocks

Do Socially Responsible Investment Indexes Outperform Conventional Indexes?

The question of whether more socially responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the socially responsible investment (SRI) indexes and conventional stock indexes in the US, the UK, and Japan, first and second moments of firm performance distributions are estimated based on the Markov switching model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong comovements between the two indexes in both regimes.Socially responsible investments; Markov switching model; Maximum likelihood estimations; Return and volatilities; Bear and bull market

Fiscal Sustainability in Japan

Japanese government debt is at unprecedented levels with a gross debt to gross domestic product ratio of over 230per cent and a net debt to gross domestic product ratio of 150per cent. There are three big challenges to fiscal sustainability: the huge amount of government bonds outstanding; continued budget deficits; and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s, there is every likelihood that the Japanese economy will muddle through

Sources of Variation in Holding Returns for Fed Funds Futures Contracts

This paper relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short-horizon contracts is mixed, we find that gains in longer horizon contracts can be well described using Markov-switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high.

Japanese Government Debt and Sustainability of Fiscal Policy

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40%-47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.

Does the price of oil interact with clean energy prices in the stock market?

In this paper, we analyze the relationships among oil prices, clean energy stock prices, and technology stock prices, endogenously controlling for structural changes in the market. To this end, we apply Markov-switching vector autoregressive models to the economic system consisting of oil prices, clean energy and technology stock prices, and interest rates. The results indicate that there was a structural change in late 2007, a period in which there was a significant increase in the price of oil. In contrast to the previous studies, we find a positive relationship between oil prices and clean energy prices after structural breaks. There also appears to be a similarity in terms of the market response to both clean energy stock prices and technology stock prices

Does the price of oil interact with clean energy prices in the stock market?

In this paper, we analyze the relationships among oil prices, clean energy stock prices, and technology stock prices, endogenously controlling for structural changes in the market. To this end, we apply Markov-switching vector autoregressive models to the economic system consisting of oil prices, clean energy and technology stock prices, and interest rates. The results indicate that there was a structural change in late 2007, a period in which there was a significant increase in the price of oil. In contrast to the previous studies, we find a positive relationship between oil prices and clean energy prices after structural breaks. There also appears to be a similarity in terms of the market response to both clean energy stock prices and technology stock prices