Cointegration analysis of money demand in the Euro Area

The analysis of the evolution of the M3 money aggregate is an important element in the definition and implementation of monetary policy for the ECB. A well-defined and stable long run demand function is an essential requisite for M3 to be a valid monetary tool. Therefore, this paper analyzes based in cointegration techniques the existence of a long run money demand, estimating it and testing its stability for the Euro Area and for ten of its member countries. Specifically, bearing in mind the high degree of monetary instability that the current economic crisis has created in the Euro Area, we also test whether this has had a noticeable impact in the cointegration among real money demand and its determinants. The analysis gives evidence of the existence of a long run relationship when the aggregated Euro Area and six of the ten countries are considered. However, these relationships are highly instable since the outbreak of the financial crisis, leading in some cases to even rejecting cointegration. All this suggests that the ECB’s strategy of focusing in the M3 monetary aggregates could not be a convenient approach under the current circumstances

A panel cointegration analysis of the demand for oil in the Middle East

This article applies recently developed panel unit root and panel cointegration techniques to estimate the long-run income and price elasticities for oil in the Middle East. The results for the panel indicate that demand for oil is highly price inelastic and slightly income elastic in the Middle East. There is considerable variation in the results for the income variable across countries, with the coefficient on the income variable statistically insignificant for several countries. The coefficient on the price variable is statistically significant in all cases with the expected sign and the price elasticity is uniformly low. While the results for the income variable differ across countries, the results for the panel as a whole suggest that the demand for oil in the Middle East is being driven largely by strong economic growth, while consumers are largely insensitive to price changes.

Electricity consumption in G7 countries : a panel cointegration analysis of residential demand elasticities

This article applies recently developed panel unit root and panel cointegration techniques to estimate the long-run and short-run income and price elasticities for residential demand for electricity in G7 countries. The panel results indicate that in the long-run residential demand for electricity is price elastic and income inelastic. The study concludes that from an environmental perspective there is potential to use pricing policies in the G7 countries to curtail residential electricity demand, and thus curb carbon emissions, in the long run.

Investigating relationships of construction prices in Australia using cointegration analysis

Research on construction prices is significant for contractors and traders. A comprehensive understanding of construction prices may influence crucial decisions in business operation and arbitrage activities. This study focuses on the cointegration relationships of regional construction prices in Australia by using a range of econometric techniques including the stationarity test, the Engle-Granger cointegration approach examines the long run equilibrium relationships within the regional markets, and the error correction models explore the short run disequilibrium relationships. Finds of this study reveal that the economic system in which the construction industry participants operate is characterized by a highly competitive, integrated marketplace, Especially in Melbourne and Sydney. But exclude Northern Territory and Queensland. Furthermore, the results of long term relationships estimation suggest that there are 15 pairs of regional construction prices have long term equilibrium relationships. Additionally, the causalities and diffusion among the construction price indices in six states and two territories of Australia are estimated in this study. These outcomes suggest that causal links between regions mainly exist among adjoining states.

Energy consumption and income in six Asian developing countries: a multivariate cointegration analysis

 This article examines the short- and long-run causal relationship between energy consumption and GDP of six emerging economies of Asia. Based on cointegration and vector error correction modeling the empirical results show that there exists unidirectional short- and long-run causality running from energy consumption to GDP for China, uni-directional short-run causality from output to energy consumption for India, whilst bi-directional short-run causality for Thailand. Neutrality between energy consumption and income is found for Indonesia, Malaysia and Philippines. Both the generalized variance decompositions and impulse response functions confirm the direction of causality. These findings have important policy implications for the countries concerned. The results suggest that while India may directly initiate energy conservation measures, China and Thailand may opt for a balanced combination of alternative polices.

The Real Exchange Rate in Small Open Developed Economies: Evidence from Cointegration Analysis

We examine the effects of the terms of trade and the expected real interest rate differential on the real exchange rate in a sample of small open developed economies. We employ cointegration analysis to search for possible long-term linkages. We find that while both the terms of trade and the expected real interest rate differentials affect the real exchange rate in the long run, the role of the terms of trade generally proves more consistent across countries. The speed of adjustment for the expected real interest rate differential in the error-correction model, however, is quantitatively larger than it is for the terms of trade.

Output and labor productivity in organized manufacturing: a panel cointegration analysis for India

One of the policy puzzles faced in India during the last two and half decades has been the weak association between output and labor markets, particularly in the manufacturing sector. In this research, we investigate the long-run relationship between output, labor productivity and real wages in the case of organized manufacturing. We adjust the measure of labor productivity incorporating bottlenecks, such as lack of infrastructure, access to external finance, and labor regulations, which all may influence labor market outcomes. Using panel data from seventeen manufacturing industries, we establish long-run dynamics for the output-labor productivity-real wages series over a period of nearly three decades. We employ recently developed panel unit root and cointegration tests for cross-sectional dependence to incorporate heterogeneity across industries. Long-run elasticities are generally found to be low for labor productivity compared to real wages due to the changes in manufacturing output. There are variations across industries within the manufacturing sector for the effects of the labor market on manufacturing output. In some industries, lower wages are associated with higher output, and the reason for the positive relationship in other industries could be due to workers' bargaining power.

Testing for non-stationarity and cointegration allowing for the possibility of a structural break: an application to EuroSterling interest rates

In this paper we examine the order of integration of EuroSterling interest rates by employing techniques that can allow for a structural break under the null and/or alternative hypothesis of the unit-root tests. In light of these results, we investigate the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates employing two techniques, one of which allows for the possibility of a break in the mean of the cointegrating relationship. The aim of the paper is to investigate whether or not the interest rate series can be viewed as I(1) processes and furthermore, to consider whether there has been a structural break in the series. We also determine whether, if we allow for a break in the cointegration analysis, the results are consistent with those obtained when a break is not allowed for. The main results reported in this paper support the conjecture that the ‘short’ Euro-currency rates are characterised as I(1) series that exhibit a structural break on or near Black Wednesday, 16 September 1992, whereas the ‘long’ rates are I(1) series that do not support the presence of a structural break. The evidence from the cointegration analysis suggests that tests of the expectations hypothesis based on data sets that include the ERM crisis period, or a period that includes a structural break, might be problematic if the structural break is not explicitly taken into account in the testing framework.

Determinants of tourist expenditure in Fiji : a cointegration approach

Tourism is Fiji's largest industry in terms of foreign exchange earnings and employment creation. The industry earns around F$600 million per annum in foreign exchange, employs around 40,000 people, and tourist expenditure per capita is valued at around F$671. On the basis of this contribution, the industry is seen as a catalyst for economic development in Fiji; hence, it is imperative to understand the behavior of the industry. This article focuses on examining the determinants of tourist expenditure in Fiji. Using cointegration analysis and error correction models, the article finds that in the long run, real GDP in the country of origin impacts tourist spending in Fiji positively while prices and transport costs (airfares) have a negative effect. In the short run, coups d'êtat impact tourist expenditure negatively. It is envisaged that these results will help Fiji's policy makers and tourism industry stakeholders to understand the industry better.

An economic analysis of construction industries producer prices in Australia

Research on construction prices is significant for contractors and traders. A comprehensive understanding of construction prices may influence crucial decisions in business operation and arbitrage activities. This study focuses on the cointegration relationships of regional construction prices in Australia by using a range of econometric techniques including the stationarity test, the Engle-Granger cointegration approach and error correction model. The cointegration relationships amongst the regional construction prices are detected in this study. The application of the Engle-Granger cointegration approach examines the long run equilibrium relationships within the regional markets, and the error correction models explore the short run disequilibrium relationships. Results of this study suggest that the economic system in which construction industry participants operate is characterised by a highly competitive integrated marketplace. Furthermore, the causalities and diffusion patterns among the construction price indices in six states and two territories of Australia are drawn by the cointegration analysis. These outcomes reveal a pattern of diffusion paths and network linkages among the six states and two territories, and then expose the regional price linkages.

Estimating short and long-term residential demand for electricity : new evidence from Sri Lanka

This study investigates the short-run dynamics and long-run equilibrium relationship between residential electricity demand and factors influencing demand - per capita income, price of electricity, price of kerosene oil and price of liquefied petroleum gas - using annual data for Sri Lanka for the period, 1960-2007. The study uses unit root, cointegration and error-correction models. The long-run demand elasticities of income, own price and price of kerosene oil (substitute) were estimated to be 0.78, - 0.62, and 0.14 respectively. The short-run elasticities for the same variables were estimated to be 032, - 0.16 and 0.10 respectively. Liquefied petroleum (LP) gas is a substitute for electricity only in the short-run with an elasticity 0.09. The main findings of the paper support the following (1) increasing the price of electricity is not the most effective tool to reduce electricity consumption (2) existing subsidies on electricity consumption can be removed without reducing government revenue (3) the long-run income elasticity of demand shows that any future increase in household incomes is likely to significantly increase the demand for electricity and(4) any power generation plans which consider only current per capita consumption and population growth should be revised taking into account the potential future income increases in order to avoid power shortages ill the country.

Did Gold Remain Relevant in the Post-1971 International Monetary System?

The central hypothesis to be tested is the relevance of gold in the determination of the value of the US dollar as an international reserve currency after 1971. In the first section the market value of the US dollar is analysed by looking at new forms of value (financial derivative products), the dollar as a safe haven, the choice of a standard of value and the role of SDRs in reforming the international monetary system. Based on dimensional analysis, the second section analyses the definition and meaning of a numéraire for international currency and the justification for a variable standard of value based on a commodity (gold). The second section is the theoretical foundation for the empirical and econometric analysis in the third and fourth sections. The third section is devoted to the specification of an econometric model and a graphical analysis of the data. It is clear that an inverse relation exists between the value of the US dollar and the price of gold. The fourth section shows the estimations of the different specifications of the model including linear regression and cointegration analysis. The most important econometric result is that the null hypothesis is rejected in favour of a significant link between the price of gold and the value of the US dollar. There is also a positive relationship between gold price and inflation. An inverse statistically significant relation between gold price and monetary policy is shown by applying a dynamic model of cointegration with lags.