A typical finding in the empirical literature is that import and export demand elasticities are rather low, and that the Marshall-Lerner (ML) condition does not hold. However, despite the evidence against the ML condition, the consensus is that real devaluations do improve the balance of trade, though after a lag because of J-curve effects. The aim of this paper is to try and measure the effects of the real exchange rate on the balance of payments using structural cointegrating vector autoregressive distributed lag (VARDL) models for domestic and foreign output, the balance of trade and the real exchange rate. Small systems are estimated for eight OECD countries to investigate long-run cointegration. Generalized impulse response functions are calculated to investigate the response to shocks. These show evidence of J-effects. The VARDL estimates suggest a single cointegrating vector and that output and the real exchange rate can be treated as weakly exogenous for the parameters of the balance of payment equation. This allows estimation using a single-equation ARDL. Although there is considerable heterogeneity, overall the results suggest that the ML condition is satisfied in the long run.
There is now a vast literature on testing purchasing power parity (PPP). Any test is conditional on a particular econometric speci¢cation which embodies a set of auxiliary assumptions. This paper reviews the issues involved in econometric speci¢cation and estimation in the time series and panel models used to test PPP. We start from a general model and then systematically examine the implicit restrictions that are imposed to obtain the standard procedures and discuss the implications of these procedures for estimation and inference. The issues are illustrated on data for a panel of 31 developing countries, 1966^90. " IntroductionThere is now a vast literature on testing purchasing power parity (PPP) using national data on exchange rates and prices. Rogo¡ (1996) and Taylor (1995) provide recent reviews. Any test is conditional on a particular econometric speci¢cation, which embodies a set of auxiliary assumptions. In this paper we provide a systematic exposition of the alternative speci¢cations and illustrate the sensitivity of the results to speci¢cation on a sample of 31 developing countries over the period 1966^90. As with real exchange rates themselves, views about PPP have shown persistent swings. The orthodoxy of the early 1970s in favour of PPP was largely abandoned in the 1980s as new time series tests could not reject the hypothesis that there was a unit root in the real exchange rate. More recently failure to reject the unit root hypothesis has been interpreted as a product of the low power of the tests (e.g. Edison et al., 1997) and tests using either very long spans of historical data (e.g. Lothian and Taylor, 1996), panel data (e.g. Frankel and
PurposeThere is a growing consensus that monetary policy occupies a primary position in macroeconomic management. This study aims to analyse how monetary policy performed in a sample of Caribbean countries.Design/methodology/approachThe paper uses a univariate analysis on the price variables to conduct a comparative analysis on inflation and to examine the background to the relationship between mean inflation and inflation persistence.FindingsIn a descriptive statistics analysis, framed within the discretion versus rules debate, the paper argues that there is not only an association between monetary policy, inflation and economic performance but also that the institutional contexts provided varying degrees of constraints on policy.Originality/valueThe paper provides further confirmation that monetary policy occupies a primary position in macroeconomic management.
This paper examines the convergence experience of selected Caribbean countries. It examines evidence of reduced dispersion in real per capita income—Sigma convergence—and 'catch up' growth across the group—Beta convergence. Estimation of the Solow—Swan cross-section model for the Caribbean shows weak evidence of β and σ convergence. However, structural instability and evidence of divergence over the sample period, suggest this convergence to be spurious. Further tests on individual country data showed an absense of steady state convergence for any country over time. Institutional structures and adjustments to economic shocks appear to have been important for the determination of per capita income in the long run.
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