This paper establishes the link of microstructure and macroeconomic factors with the timevarying conditional correlation of foreign exchange and excess equity returns. By using the proposed DCC model with exogenous variables, capital flows and interest rate differentials are shown to be significant determinants of this correlation which is inclusive of the short-run variation of both asset retu...

This note conducts a simulation study of parameter-stability tests using conditional cointegrated vector autoregressive (CVAR) models. Monte Carlo experiments show that, in small samples, the stability tests based on conditional CVAR models under the assumption of weak exogeneity are more powerful than those based on a joint CVAR model; the reverse is observed, however, when the assumption does...

The consumption Euler equation implies that the output growth rate and the real interest rate are of the same order of integration; i.e., if the real interest rate is I(1), then so is the output growth rate and hence log output is I(2). To estimate the natural rates and gaps of macroeconomic variables jointly, this paper develops the multivariate Beveridge–Nelson decomposition with I(1) and I(2...

The importance of consumer confidence in stimulating economic activity is a disputed issue in macroeconomics. Do changes in confidence represent autonomous fluctuations in optimism, independent of information on economic fundamentals, or are they a reflection of economic news? I study this question by using high-frequency microdata on spending and consumer confidence, and I find that consumer c...

This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. We consider cases where the unobserved factors are the optimal instruments but also cases where the factors are not necessarily the optimal instruments but can provide a summary of a large set of instruments. Further, the situation where many weak instruments exi...

This paper attempts to quantify the effect of skill shortages on the UK labour market by developing a simultaneous equation model of unemployment and real wage growth. The model is developed following a structural approach based on a priori economic information and is initially estimated using a two-stage least squares procedure. The model is also estimated using Zellner’s seemingly unrelated r...

Recently, considerable emphasis has been placed on the problems arising out of cross-sectional dependence in panel unit root tests. This paper adopts the factor based cross-sectional dependence paradigm of Bai and Ng (2004) but suggests alternative factor extraction methods. Some theoretical results for these methods are provided. Further, a detailed Monte Carlo study of these methods for multi...

In this paper, I show how to use the generalized Schur form to solve a system of linear expectational di!erence equations (a multivariate linear rational expectations model). The method is simple to understand and to use, and is applicable to a large class of rational expectations models. The only hard part is taken care of by just two standard algorithms, both of which are available as freewar...

The present paper analyzes propagation of shocks to food and energy prices in 46 countries with data from the period 1999-2010. The empirical evidence suggests that in only one of the countries considered, a shock to the price of either energy or food shows no propagation to the prices of the goods and services included in the core inflation measure. In general, the propagation effect of food p...

Campbell and Shiller (1987) proposed a graphical technique for the present value model which consists of plotting the spread and theoretical spread as calculated from the cointegrated vector autoregressive model. We extend these techniques to a number of rational expectation models and give a general definition of spread and theoretical spread. The main results are the asymptotic distributions ...