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Long Run Macroeconomic Relations in the Global Economy

Author

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  • Pesaran, Mohammad Hashem
  • Holly, Sean
  • Dees, Stephane
  • Smith, L. Vanessa

Abstract

This paper presents tests of long run macroeconomic relations involving interest rates, equity, prices and exchange rates suggested by arbitrage in financial and goods markets. It uses the global vector autoregressive (GVAR) model to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. It finds strong evidence in favour of a long run version of uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but the test results for the purchasing power parity relation are much weaker. Also the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

Suggested Citation

  • Pesaran, Mohammad Hashem & Holly, Sean & Dees, Stephane & Smith, L. Vanessa, 2007. "Long Run Macroeconomic Relations in the Global Economy," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 1, pages 1-20.
    • Handle: RePEc:zbw:ifweej:5582
    DOI: 10.5018/economics-ejournal.ja.2007-3
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    More about this item

    Keywords

    Global VAR; Fisher relationship; Uncovered Interest Rate Parity; Purchasing Power Parity; persistence profile;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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