Essays On Interrelationships Among Economic Time Series

Author

Puneet Vatsa, Southern Illinois University CarbondaleFollow

Date of Award

1-1-2009

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Sharma,Subhash

Abstract

The advent of advanced means of communication, faster modes of transportation and sophisticated trading technologies has facilitated economic and financial integration across the world. The emergence of globalization in the last two decades has transformed the economic outlook and perceptions of consumers, investors and policymakers. Consumers have a vast range of goods and services to choose from, investors seeking to maximize profits and minimize risks have access to markets worldwide and last, but not least, policymakers can harness the benefits accruing from international trade to abet economic growth and development. Although augmented economic and financial integration has its benefits, it does have its pitfalls as well. Highly synchronized financial and goods markets are relatively less insulated from disturbances or shocks arising in foreign markets. This synchrony makes these markets more susceptible to foreign shocks, thus, compromising their economic autonomy. Accordingly, the issue economic interdependence among countries warrants a detailed investigation. This dissertation consists of three essays. The first essay investigates exchange rate dynamics among the ASEAN-5 economies of Indonesia, Malaysia, Philippines, Singapore and Thailand. The second essay is dedicated to a detailed analysis of real and monetary interrelationships among the economies of Norway, Sweden, the UK and the US. In the third essay, the short-term and the long-term co-movements among the price of crude oil and the real exchange rates of the Canadian Dollar and the Norwegian Krone are examined. Exchange rate movements are central to international trade and finance as they directly impact the relative price of goods and services in domestic and foreign markets. Fluctuations in exchange rates can have a significant bearing on the terms of trade and the value of foreign asset holdings. Moreover, they can potentially transmit economic shocks across countries. Consequently, exchange rate dynamics are of keen interest to investors and policymakers alike. In the first essay, common trends and common cycles among the exchange rates of Indonesia, Malaysia, Philippines, Singapore and Thailand are investigated in detail. We identify and isolate the permanent and transitory components of the nominal exchange rates of the currencies of Malaysia, Philippines, Singapore and Thailand in an effort to examine the similitude of their responses to within-country and across-country economic disturbances in the long-run as well as in the short-run. This also allows us to ascertain the relative impacts of permanent and transitory shocks on the behavior of the observed exchange rate series. We find that a large proportion of economic and financial shocks have a dual impact on the behavior of the exchange rates, i.e., while a proportion of the impact of certain shocks is transitory and fades away with time, there is a persistent proportion of these shocks that alters the long-run path of the exchange rates. Thus, most shocks cannot be considered as exclusively transitory or permanent. It is observed that in the case of pegged exchange rate regimes, the trend and cyclical components move in opposite directions and offset the impacts of one another. The small open economies of Norway and Sweden rely extensively on foreign trade. Outside the Scandinavian group of countries, Germany and the UK are two of their biggest trading partners within the European Union (EU), while the US is one of their largest non-EU trading partners. Real and monetary disturbances in one or more countries can easily be transmitted to other countries that are linked through channels of trade. Consequently, the assessment of the impact of foreign shocks on the domestic economy is central to the formulation of economic policy. In light of this, the second essay is dedicated to the investigation of the impact of real and monetary disturbances arising in the major trading partners of Norway and Sweden on their respective price levels and outputs. Such an assessment may provide useful insights into the nature of the transmission mechanism of economic disturbances across these countries and may prove to be useful in the formulation and conduct of monetary policy. The central banks of Norway and Sweden seek output stability while explicitly targeting pre-specified inflation rates in order to conduct monetary policy. The achievement of such quantitative targets relies considerably on the forecasts of the target variables themselves, and of the impact of the changes in the instrument variables that are adjusted to achieve the targets. Our results indicate that output shocks have a more significant impact than monetary shocks on the GDPs of both Norway and Sweden. While the GDPs of Norway and Sweden are predominantly influenced by output shocks originating in Norway and Sweden in the short-run, the output shocks originating in the larger economies of the UK and the US dominate the variation in the GDPs of Norway and Sweden in the long-run. We find that monetary shocks have a more significant impact than real shocks on the CPI variables of both Norway and Sweden. Specifically, the monetary shocks originating in Norway, Sweden and the UK are found to be more significant than those originating in the US. Crude oil constitutes a large proportion of exports for Canada and Norway. In fact, they are two of the largest net exporters of crude oil in the world. Therefore, oil price shocks may significantly impact the trade balance of these countries, thereby, prompting their monetary and fiscal authorities to intervene. The nature and the degree of the intervention would depend significantly on the assessment as to whether these shocks are permanent and/or transitory. Accordingly, the links among the trends and cycles in the price of crude oil, the real exchange rate of the Canadian Dollar and the real exchange rate of the Norwegian Krone are investigated in the third essay. We address this issue by ascertaining the presence of common trends and common cycles among the price of crude oil and the two real exchange rates, and then decomposing them into their trend and cyclical components in a multivariate modeling framework. We find that, while the real exchange rates of the Canadian Dollar and the Norwegian Krone vis-à-vis the US Dollar are trend-dominated, the West Texas Intermediate (WTI) crude oil price is neither trend-dominated nor cycle-dominated. We also find evidence for a positive relationship among the cyclical components of the WTI crude oil price and the two real exchange rates. As a robustness check, common trends and common cycles among the Brent crude oil price denominated in Euros, and the real exchange rates of the Canadian Dollar and the Norwegian Krone vis-à-vis the Euro are also examined. As in the previous case, we find evidence for the presence of common trends as well as common cycles. The positive co-movement among the cyclical components of the price of crude oil and the real exchange rates appears to be robust to changes in the numeraire currency. However, we observe a slight contrast in the co-movement among the trend components of the three variables when different numeraire currencies are used. The composition of the dissertation is as follows: The first chapter serves as an introduction to the dissertation and presents a broad picture of the analyses undertaken in this dissertation. Chapters two, three and four comprise essays one, two and three respectively. Chapter five concludes the dissertation.