
on International Finance 
By:  Ivan Paya (Universidad de Alicante); David A. Peel (University Management School) 
Abstract:  Nonlinear models of deviations from PPP have recently provided an important, theoretically well motivated, contribution to the PPP puzzle. In recent work the equilibrium level has been modeled either as constant or as time varying with very similar statistical fits and very different economic implications. The high persistence of both PPP deviations and the proxy variables for the equilibrium real rate might create a problem of spurious coefficient significance. This paper investigates the possibility of spurious regression within nonlinear models of PPP. Monte Carlo experiments show that standard critical values are not appropriate in such a context. To illustrate we consider the real DollarSterling exchange rate over the period 18711994. Due to many exchange rate regime changes over the sample period we employ a Bootstrap methodology that preserves the original structure of the estimated residuals and obtain new critical values of the coefficient estimates. A nonlinear (ESTAR) process with a time varying equilibrium proxied by relative wealth and relative income per capita seems to parsimoniously fit the data. Our results provide further evidence for the nonlinear model with a shifting equilibrium and the implied speed of adjustment is found to be substantially faster than previously reported in the literature. 
Keywords:  ESTAR, Purchasing Power Parity, Bootstrapping 
JEL:  F31 C22 C51 
Date:  2005–04 
URL:  http://d.repec.org/n?u=RePEc:ivi:wpasad:200516&r=ifn 
By:  Ivan Paya (Universidad de Alicante); David A. Peel (University Management School) 
Abstract:  Recent research has reported the lack of correct size in stationarity test for PPP deviations within a linear framework. However, theoretically well motivated nonlinear models, such as the ESTAR, appear to parsimoniously fit the PPP data and provide an explanation for the PPP ¿puzzle¿. Employing Monte Carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses. We also fit the ESTAR model to data from high inflation economies. Our results provide further support for ESTAR specification. 
Keywords:  ESTAR, Real Exchange Rate, Size, Linearity Test. 
JEL:  C15 C22 F31 
Date:  2005–06 
URL:  http://d.repec.org/n?u=RePEc:ivi:wpasad:200523&r=ifn 
By:  Khalid Sekkat (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); MarieAnge VeganzonesVaroudakis (CERDI, Centre National de la Recherche Scientifique, Clermont Ferrand) 
Abstract:  The paper assess the relative importance of trade and foreign exchange liberalization, infrastructure availability and economic and political stability in increasing Middle East and North African (MENA) countries attractiveness with respect to FDI. The analysis is conducted for total FDI and for FDI in manufacturing. The results show that trade and foreign exchange liberalization, infrastructure availability and sound economic and political conditions increase FDI inflows. Their effects are much higher for FDI in the manufacturing sector than for total FDI. This result is robust to alternative indicators of trade and foreign exchange liberalization, and to change in the specification. The message to MENA’s policy makers is twofold. First, efforts toward trade and foreign exchange liberalization should be initiated or further increased in order to make the region attractive to foreign investors. Second improvements in other aspects of the investment climate are important complements to liberalization and result in additional and sensitive increase of FDI inflows. 
Keywords:  Reforms, MENA, FDI. 
JEL:  F21 F15 K42 
Date:  2004–05 
URL:  http://d.repec.org/n?u=RePEc:sol:wpaper:04023&r=ifn 
By:  Alejandro Rodriguez Caro; Santiago Rodriguez Feijoó; Carlos Gonzalez Correa 
Abstract:  In the present paper we study the degree of convergence in the European Union from the Purchasing Power Parity (PPP) point of view. The price of the shopping basket can be the cause of disparities in a global market in construction that, like the European Union, is formed by different countries with different consumption habits. In addition, in this construction process twelve out of fifteen countries of the EU have left its national currency to adopt the Euro like common currency. Therefore, it is necessary for the stability of the Union process in the long run that, among others, purchasing power of the different state members tends towards a same common value. Moreover, the question is whether that process of convergence within the European Union is taking place or not. In order to solve this question, the series of the Absolute Purchasing Power Parity (APPP) are estimated through the suggestion of Rodriguez et al (2004). These authors use the Harmonized Consumer Price Index in the European Union and the nominal exchange rates of the different currencies with euro. Monthly estimates of the APPP series for the 19952002 period are obtained for each of the fifteen countries. These figures show, for each country, their relative position to the average value of the European Union. Using these series we applied the Markov Chain methodology to study the time evolution of the distribution of APPP in the European Union. This methodology has been very used by its facility of calculation and interpretation of the results. Nevertheless, with the purpose of obtaining good estimations it is necessary to solve the discretization problem of a continuous variable. This is, to use a finite set, and relatively small number of states, for a variable with infinite values. In the present work different approaches are used to solve the problem. We test for structural change on the estimated probabilities using adapted test to Markov Chains. This allows us to study if an effect exists on the Purchasing Power Parity with the entrance of the Euro. Markov Chains are estimated by Maximum likelihood, and allow us to do different analyses. In the first place, we can study the mobility of the distribution, measured through the probabilities of permanence or not in the same state, and in the degree of diagonal structure of the resulting matrix. This objective can obtained by direct observation, calculating Mobility Index, or using expected time of first passage. Secondly, we can obtain the ergodic or long term distribution. This one shows the temporary evolution in the long run of the distribution, under the hypothesis of maintenance of the present conditions. This distribution would show the possible convergence or not of the whole distribution. We also estimate elasticities of ergodic probabilities, to analyze the effect of each probability in the Markov chain in the long run distribution. Results show differences with the Euro Entry, mobility towards convergence within the distribution is slow, with high elasticities of the ergodic distribution to changes in the transition probabilities. 
Date:  2005–08 
URL:  http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p457&r=ifn 
By:  Aikaterini Kokkinou; Yannis Psycharis 
Abstract:  The aim of this paper is to analyse the relationship between the inward Foreign Direct Investment in Southeastern European countries in relation with the factors which determine the ability of a country to attract foreign investment capital. The paper begins with the definition of the main terms related with Foreign Direct Investment and literature review related with the factors which determine the regional allocation of the FDI flows. Specifically, the article focuses on the definition of the Foreign Direct Investment flows, regional attractiveness, location of FDI, as well as the factors which affect the location of FDI activities within and across countries and regions. Then, the article presents a comparative analysis of the relative position of the Southeastern European countries, as far as FDI is concerned. Moreover, the paper attempts, through a model specification and results analysis to estimate the relationship between FDI and a selection of potential determining factors. The analysis is made for thirteen Southeastern European countries covering a period of twelve years. The paper is completed with reference to prospects regarding the implementation and planning of an effective FDI attraction policy aiming at economic development and cohesion. 
Date:  2005–08 
URL:  http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p382&r=ifn 
By:  Falko Juessen; Christian Bayer 
Abstract:  Differences in regional unemployment rates are often used to describe regional economic inequality. This paper asks whether changes in regional unemployment differences in West Germany are persistent over time. Only if such changes are persistent, the differences are a sensible measure of inequality and only then can policies be effective that aim at lowering the dispersion of unemployment rates. Our analysis follows a timeseries approach to economic convergence and we test whether unemployment differences between regions are stationary or not. While univariate tests show that changes in unemployment differences are persistent, more powerful panel tests find them to be only transitory. However, these tests reveal only a moderate speed of convergence. Since there is a structural break following the second oil crisis, we also employ unitroot tests that allow for such break. Again we find strong evidence for convergence and now also the speed of convergence is found to be very high. Both results, the presence of regimewise conditional convergence in regional unemployment rates and fast equilibrium adjustment, have important implications for economic policy targeted at regional unemployment. On the one hand, small government interventions loose their effect quickly as unemployment rates adjust back to their equilibrium levels. On the other hand, large interventions might move the economy from one equilibrium of regional unemployment rates to the other. This means the policy intervention needs to take the form of a substantial regime shift. Most policies that aim at reducing relative unemployment differentials are unlikely to make permanent contributions to social welfare. 
Date:  2005–08 
URL:  http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p410&r=ifn 
By:  Vanda Serpa; Vasco Silva; Tomaz Dentinho 
Abstract:  Science is driven by research funds, research funds are associated with decision making, and decision making is attached to valuation. Therefore every scientific paradigm tend to devise its own valuation system. Ecconomists prefer cost benefit analysis where everything can be translated into money. Planners assume values to infinity which lines in a map difining restrictions and enforceable land uses. Ecologists design maps with values for biodiversity. Historians value things according to their age. And engineers enjoy the mathematical control over multicriteria analysis. Anyway, concerning spatial planinng, most of the time there is a line on a map, assumed by polititions and experts and more or less respected by stakeholders. Along this line the total value of alternative uses must be the same. And the total value assumes all the infomation values provided by economists, ecologists, planners, engineers and historians. Because a line has many points it is possible to estimate the exchange rate function between all these different scientific currencies and derive the total economic value of different land uses. 
Date:  2005–08 
URL:  http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa05p254&r=ifn 
By:  Klaus Adam; Roberto M. Billi 
Abstract:  We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. markup shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not imply positive average inflation rates in equilibrium. Interestingly, the presence of binding real rate shocks alters the policy response to (nonbinding) markup shocks. 
Date:  2005 
URL:  http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp0507&r=ifn 