Testing for long-run stability - an application to money multiplier in India

In testing for a stable long-run relation between monetary aggregates and reserve money most previous studies have used the conventional tests for cointegration. Using the recently developped residual-based cointegration tests of Gregory and Hansen that explicitly allow for regime shifts, the present paper, contrary to the findings of previous studies, finds that there exists a stable, but time-varying, longrun relation between measures of money stock and reserve money in the Indian context. It also finds that the observed variation in cointegrating relations is better characterized by a discrete one-time shift, rather than a gradually evolving random walk process, attributable, probably, to discrete changes in monetary policy.

Nonlinear Adjustment in Real Exchange Rates and Long Run Purchasing Power Parity--Further Evidence

The paper investigates, using a threshold autoregression model, the nature of nonlinear adjustments in real exchange rates (RERs) arising from the presence of transaction costs and uncertainty, and their implications for the testing of unit roots. Using monthly data for the U.S. vis-a-vis 19 trading partners we find that most RERs are better characterized by a mean reverting nonlinear stochastic process, with large changes converging faster than small changes, implying that there is convergence towards PPP equilibrium at least in the long-run, albeit in a non-linear manner. It is found that, across countries and commodity groups, there is an association between geographical and trade related proximity and the estimated speeds of adjustment. In addition, policy agreements that mitigate exchange rate uncertainty such as the Louvre Accord could have contributed to greater international commodity arbitrage.

"International Equity Cross-Listings and Financial Integration"

ABSTRACT Foreign stock listing in the US has increased dramatically over the past decade, significantly reducing barriers to foreign investment by domestic residents. These declining barriers have led some to claim that optimal international diversification can be achieved using domestically traded stocks. At the same time, global capital markets appear to be more highly correlated. In this paper, we use the available history of foreign stock returns of companies that list in the United States to analyze whether their asset pricing relationships change over time. For this purpose, we use extend the structural time series break methodology of Perron (1998, 2001) to estimate the cross-sectional breaks in the asset pricing relationships of foreign stocks that list in the US. We then compare these structural asset pricing break estimates with cross-listing dates. While the literature has largely assumed that changes in asset pricing relationships have occurred before or during foreign listings, we find that most occur before stock crosslistings. We also analyze the asset pricing implications of the after cross-listing market, finding an overall increase in betas with respect to the world index after cross-listing. (Also on the agenda, we will use these estimates to calculate the effects of structural changes on welfare gains.