Testing the joint hypothesis of rationality and neutrality under seasonal cointegration: The case of Korea

Ermini, Luigi; Chang, Dongkoo

doi:10.1016/0304-4076(95)01758-5

Cited by 15 publications

(12 citation statements)

References 85 publications

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“…However, the cause of non‐neutrality was not known, and the results did not confirm the vertical Phillips curve. A similar study was carried out by Ermini and Chang () who examined the Joint MN‐RE hypothesis for Korea. The study rejected the joint MN‐RE hypothesis for the seasonally adjusted data but accepted the hypothesis for seasonally unadjusted data.…”

Section: Literature Reviewmentioning

confidence: 99%

Assessing Long‐run Money Neutrality in Monetary Unions

Haughton

Iglesias

2011

Int. J Fin Econ

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This paper analyses the issue of Long-Run Money Neutrality in the Organization of Eastern Caribbean States (OECS) by using the European Monetary Union (EMU) and a group of other countries from the Caribbean as control groups. We employ several panel unit root and panel cointegration tests as robustness measures to support our results. First, we propose a methodology to test for longrun money neutrality in a panel data context. Second, we test for longrun money neutrality by using our proposed methodology, and other popular panel cointegration tests in the literature. Moreover, and contrary to the main literature on money neutrality, we disaggregate output in its various components, and we test for money neutrality in each of them. The results show that, at aggregate level of output, money is neutral for both control groups although mixed evidence exists for the main group of the OECS. The disaggregated level that is employed in this paper allows us to uncover important differences that otherwise are not observable at aggregated level. We conclude that in terms of government expenditure, consumption and exports, there is strong evidence that in monetary unions such as the EMU and the OECS, those variables are neutral to money, contrary to other countries that do not belong to a monetary union. Therefore, we find a clear difference between those countries that belong to a monetary union or not. Our results support the existence of a central bank in monetary unions as being beneficial in order to allow that increase in money supply has no influence on real economic variables in the long run.

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Section: Literature Reviewmentioning

confidence: 99%

Assessing Long‐run Money Neutrality in Monetary Unions

Haughton

Iglesias

2011

Int. J Fin Econ

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“…Because the roots AEi are complex conjugates, they cannot be distinguished from each other with quarterly data. It follows that in practice, researchers such as Lee (1992), Kunst (1993), Engle et al (1993), Ermini and Chang (1996), Huang and Shen (1999), and Shen and Huang (1999) have concentrated their analyses of seasonal cointegration on the first three frequencies, i.e., at frequencies zero, p, and p=2. The current paper follows this convention.…”

Section: A) Seasonal Cointegration Analysismentioning

confidence: 99%

“…This article extends a new econometric modelling, first developed by Ermini and Chang (1996), who tested the macroeconomic rational expectations hypothesis of rationality and money neutrality, to the joint test of the validity of RE-PIH for three countries, where seasonally-unadjusted data are available. The testing procedure is novel, because the SC framework is applied for the first time to the area of agents' behaviours of consumption decisions.…”

Section: C O N C L U S I O N Smentioning

confidence: 99%

“…To test the RE-PIH, the joint conditions of H 1 ðLÞ ¼ H 2 ðLÞ ¼ 0 (implied by the permanent income hypothesis), d Ã 1j ðLÞ ¼ d 1j ðLÞ, and d Ã 2j ðLÞ ¼ d 2j ðLÞ; j ¼ 1; 2, must be imposed on equation (7). This leads to sets of non-linear cross-equation restrictions summarised in Appendix C, with notations similar to that found in Ermini and Chang (1996). The main difference between the restrictions of (A1) in Appendix C and those of Ermini and Chang (1996) is that (A1) contains an extra (the second) term, which arises from the assumption that consumption growth is associated with both the predicted and unpredicted components of DDI and DUN .…”

Section: Introductionmentioning

confidence: 99%

“…Specifically, Johansen's approach is used to exemplify how non-seasonal cointegration can distort statistical inference. This paper provides an alternative procedure, first developed by Ermini and Chang (1996) who tested the joint hypothesis of rationality and money neutrality under the framework of seasonal and nonseasonal cointegration, to the joint test of RE-PIH, subject to certain important modifications. II I .…”

Section: Introductionmentioning

confidence: 99%

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A Joint Test of the Rational Expectations‐Permanent Income Hypothesis under Seasonal Cointegration

Huang

2002

Australian Economic Papers

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This study re-evaluates the validity of the joint rational expectations-permanent income hypothesis under the framework of seasonal cointegration using seasonally unadjusted quarterly data from Austria, Canada and Taiwan. Evidence is found that the consumption change only depends on the innovations of the income and the unemployment rate changes, and that agents are rational in forming their expectations, i.e., the joint hypothesis is supported by the data used. However, with the same data set, a similar test based on non-seasonal cointegration tends to reject the joint hypothesis, since the test ignores completely the possible stochastic seasonalities that may contain important information, as has been pointed out by Wallis (1974), embodied in the data. I . In t r o du c t i o nThe current study re-examines the permanent income hypothesis (PIH), which was developed by Friedman (1957) and has figured prominently in consumption theory over the past forty years, under the additional hypothesis of rational expectations. The rational expectations-permanent income hypothesis (RE-PIH) postulates that agents are forward looking and make consumption plans on the basis of their permanent income rather than their current income. This hypothesis implies that temporary changes in income should have less impact on consumption than changes in permanent income. Hall (1978) showed theoretically that, under rational expectations with fixed real interest rates, consumption changes are unpredictable since the desired consumption evolves as a random walk process.According to Flavin (1985), the optimal consumption in period t, C t , under the PIH is expressed in first differences aswhere D denotes the first difference operator, y p t is the permanent income in period t, y t is current income, and y t À y p t is transitory income. Equation (1) is quite a general form that nests special cases of both the PIH, when b T ¼ 0, and an extreme form of the Keynesian consumption function, when b p ¼ b T . To avoid any potential misspecifications, equation (1) often extends to incorporating extra exogenous variables affecting consumption. Similar to the treatment of income, both the expected and unexpected components of the extra variables are included in equation (1). If the coefficients of the unexpected part of the extra variables are significantly different from zero, then the optimal consumption plan (1) is incorrect, which invalidates the PIH.

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Seasonal cointegration and cross-equation restrictions on a forward-looking buffer stock model of money demand

Huang

Shen

2002

Journal of Econometrics

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Testing the joint hypothesis of rationality and neutrality under seasonal cointegration: The case of Korea

Cited by 15 publications

References 85 publications

Assessing Long‐run Money Neutrality in Monetary Unions

Assessing Long‐run Money Neutrality in Monetary Unions

A Joint Test of the Rational Expectations‐Permanent Income Hypothesis under Seasonal Cointegration

Seasonal cointegration and cross-equation restrictions on a forward-looking buffer stock model of money demand

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