Cointegration Analysis in a German Monetary System

ISBN-13: 9783790813524 / Angielski / Miękka / 2000 / 177 str.

Kirstin Hubrich; K. Hubrich

Opis

The decision of the European Central Bank to assign a prominent role to a monetary aggregate in its policy strategy raises issues around the policy of monetary targeting of the German Bundesbank. Here, the focus of the empirical analysis is on long-run monetary relationships.

Spis treści

1 Introduction.- 1.1 Motivation.- 1.2 Outline.- 2 Systems Cointegration Tests.- 2.1 Introduction.- 2.2 Cointegration Rank Tests: The Framework.- 2.2.1 Data Generating Process.- 2.2.2 Hypotheses and Testing Procedure.- 2.3 Likelihood Ratio Tests.- 2.3.1 DGPs and Test Statistics.- 2.3.1.1 Arbitrary Mean and Trend Term.- 2.3.1.2 Trending Variables and No Trend in the Cointegration Relations.- 2.3.1.3 Arbitrary Mean and No Trend Term.- 2.3.2 Summary of Models and Test Statistics.- 2.3.3 Previous Simulation Studies.- 2.4 Other Tests.- 2.4.1 Tests Based on Canonical Correlations of Levels.- 2.4.1.1 DGPs and Test Statistics.- 2.4.1.2 Previous Simulation Results.- 2.4.2 Stock-Watson Tests.- 2.4.2.1 DGPs and Test Statistics.- 2.4.2.2 Previous Simulation Results.- 2.4.3 Bierens’ Nonparametric Tests.- 2.4.3.1 DGPs and Test Statistics.- 2.4.3.2 Previous Simulation Results.- 2.5 New Small Sample Simulations.- 2.5.1 Previous Simulation Studies.- 2.5.2 Simulation Details.- 2.5.3 The Toda DGP.- 2.5.4 Two-dimensional VAR(1): Simulation Results.- 2.5.4.1 Sizes of the Tests.- 2.5.4.2 Power Performance: DGP without Linear Trend.- 2.5.5 Three-dimensional VAR(1): Simulation Results.- 2.5.5.1 Size of the Tests.- 2.5.5.2 Power Performance: DGP with Linear Trend.- 2.5.6 Three-dimensional VAR(2): DGP and Simulation Results.- 2.5.7 Conclusions from Simulations.- 2.6 Further Deterministic Terms: Dummy Variables.- 2.7 Recommendations for Applied Research.- 3 A Cointegrated Monetary System for Germany.- 3.1 Introduction.- 3.2 Monetary Policy Strategies and the ECB.- 3.2.1 Inflation Targeting versus Monetary Targeting.- 3.2.2 ‘Discretion versus Rule’ or ‘Flexibility versus Transparency’.- 3.2.3 German Monetary Policy: Monetary Targeting and the Stability of the Demand for Money.- 3.3 Long-Run Monetary Relations.- 3.3.1 The Demand for Money.- 3.3.1.1 Theories on Money Demand.- 3.3.1.2 Recent Empirical Literature of the Demand for the Monetary Aggregate M3 in Germany.- 3.3.1.3 Estimation of Money Demand Systems for other Countries.- 3.3.2 The Term Structure of Interest Rates.- 3.3.2.1 The Expectations Theory of the Term Structure.- 3.3.2.2 Cointegration Analysis of the Term Structure of Interest Rates.- 3.3.3 The Fisher Effect.- 3.3.3.1 Is the Real Interest Rate Stationary?.- 3.3.3.2 Recent Empirical Evidence for the Fisher Effect.- 3.4 Empirical Analysis.- 3.4.1 The initial VAR.- 3.4.1.1 Data.- 3.4.1.2 Univariate Tests for Unit Roots.- 3.4.1.3 Model Specification.- 3.4.2 Tests for the Cointegration Rank.- 3.4.2.1 The Johansen Rank Test.- 3.4.2.2 Trend-adjusted LR Tests.- 3.4.2.3 Rank Test for a Model without a linear Trend.- 3.4.3 Testing Restrictions on the Cointegration Space.- 3.4.3.1 Weak Exogeneity and Stationarity.- 3.4.3.2 Long-run Restrictions.- 3.4.3.3 The Cointegration Vectors: Economic Interpretation.- 3.4.4 Conclusion.- 4 Concluding Remarks and Outlook.- 4.1 Systems Cointegration Tests.- 4.2 Empirical Analysis of a German Monetary System.- 4.3 Further Research.- 4.4 Outlook: Lessons for the ECB.- A Trend-adjusted LR Tests: Dummy Variables.- B Data.- List of Figures.- List of Tables.

Blurb

With the decision of the European Central Bank to assign a prominent role to a monetary aggregate in its policy strategy, it is essential to further understand the policy of monetary targeting of the German Bundesbank and the conditions under which it succeeded. The focus of the empirical analysis is on long-run monetary relationships. A small sample simulation analysis compares the size and power properties of a broad range of systems cointegration tests. The results determine the methods chosen for the cointegration analysis of a small system of macroeconomic variables for Germany. Three stable long-run economic relationships are found which are of major interest for the conduct and transmission of monetary policy in Germany. With the stability of the long-run money demand relation one precondition for the monetary targeting strategy of the Bundesbank is fulfilled. The analysis accounts for the structural break of German reunification and examines the robustness of the empirical results.