New Zealand s Current Account Deficit: Analysis based on the Intertemporal Optimisation Approach

Transcription

1 Febuay 200 New Zealand s Cuen Accoun Defici: Analysis based on he Ineempoal Opimisaion Appoach Kunhong Kim, Viv B. Hall and Robe A. Buckle Absac New Zealand s Cuen Accoun of he Balance of Paymens has been pesisenly in defici since he ealy 970 s and inceased makedly duing he lae 990s. Is his a cause fo significan concen? This pape ackles his quesion by evaluaing New Zealand s exenal solvency, he degee of opimaliy of he ineempoal consumpion smoohing hough is cuen accoun, and whehe is inenaional financial capial flows have been used in an opimal (consumpion smoohing fashion. We cay ou saisical ess in elaion o exenal solvency. We also esimae a benchmak consumpion-smoohing componen fo is cuen accoun based on an ineempoal opimisaion model in ode o cay ou ess of he opimaliy of he size and volailiy of he cuen accoun. We could no eec he hypoheses ha New Zealand s cuen accoun was consisen wih opimal smoohing, ha he exenal solvency condiion has been saisfied, and ha hee is no excess volailiy in inenaional financial capial flows. JEL Classificaions: E2, F32 Keywods: Cuen accoun; ineempoal; consumpion-smoohing; New Zealand Kim and Hall: School of Economics and Finance, Vicoia Univesiy of Wellingon, P. O. Box 600, Wellingon, New Zealand ( Kunhong.Kim@vuw.ac.nz, Viv.Hall@vuw.ac.nz; Buckle: The Teasuy, P. O. Box 3724, Wellingon, New Zealand ( Bob.Buckle@easuy.gov.nz. Kunhong Kim wishes o hank he Inenal Gans Commiee of he Vicoia Univesiy of Wellingon (VUW fo he Special Reseach Gan awaded fo his eseach. We acknowledge wihou implicaion, vey helpful suggesions fom John Calson, Paul Cashin and John McDemo, and commens eceived duing pesenaions o VUW s Reseach in Economics and Finance (REF Wokshop, he New Zealand Teasuy s Macoeconomic Issues Goup, Osaka Univesiy s Macoeconomics Wokshop, he Depamens of Economics a Pudue Univesiy and he Univesiy of Auckland, he Fedeal Reseve Bank of S. Louis, Reseach Insuue fo Economics and Business Adminisaion of Kobe Univesiy, and he July 2000 Confeence of he New Zealand Associaion of Economiss. Valuable advice and assisance on daa maes has been povided by Vicki Plae.

2 2. Inoducion New Zealand s Cuen Accoun of he Balance of Paymens has been pesisenly in defici since he ealy 970s (see Figue. Two fuhe noable feaues of ecen hisoy have been: he cuen accoun defici o GDP aio deeioaed duing he peiod 984 o 986 fom aound 4% ino he 7-9% ange; and duing he lae pa of he 990s moved fom aound % ino a 5 o 7% band (see Figue 2. Duing his lae peiod he cuen accoun defici o GDP aios of New Zealand s wo main ading panes, Ausalia and he US, also moved o hisoically quie high figues of aound 6% and 4% especively. A fuhe noiceable aspec of Figue 2 is ha while he defici aios fo Ausalia and New Zealand have aveaged aound 5% duing he 980s and 990s, New Zealand s aio has been moe volaile han Ausalia s. Is his pesisen and ecen shap deeioaion in he cuen accoun defici a cause fo significan concen fo New Zealand and lendes of inenaional financial capial? The heoeical lieaue, empiical findings and policy udgemens abou he implicaions of pesisen and ising cuen accoun deficis have evolved consideably ove he pas decade o so. Fo example, ecen eseach by Milesi- Feei and Razin (996, p. 6 commenced by suggesing he convenional wisdom o be ha cuen accoun deficis above 5% of GDP flash a ed ligh, in paicula if he defici is financed wih sho-em deb o foeign exchange eseves, and if i eflecs high consumpion spending. They concluded, howeve, (p. 78 ha a specific heshold on pesisen cuen accoun deficis (such as 5% of GDP fo 3-4 yeas is no pe se a sufficienly infomaive indicao of susainabiliy. The size of cuen accoun imbalances should be consideed in conuncion wih exchange ae policy and sucual facos,. A ecen analysis fo New Zealand by Collins e al. (998 makes a simila udgemen. They concluded (p. 30, afe udging ha he senghs of New Zealand s wide susainabiliy indicaos consideably ouweigh he weaknesses., ha alhough New Zealand s cuen accoun defici is sizeable, and will undoubedly no emain a such an elevaed level in he long-un, hee ae few easons o believe ha he ansiion o lowe cuen accoun deficis will be disupive o he economy. The wok epoed in his pape akes a diffeen appoach. We cay ou saisical ess in elaion o exenal solvency. We also esimae a benchmak consumpionsmoohing componen fo New Zealand s cuen accoun based on an ineempoal opimisaion model and use i o es he opimaliy of he size and volailiy of he cuen accoun. Ou analyical modelling and esing follows in he adiion of he ineempoal heoeic and empiical wok developed in Sachs (982, Campbell (987, Campbell and Shille (987, Sheffin and Woo (990, Tehan and Walsh (99, and Ghosh (995. Mao aspecs of his lieaue have been summaised compehensively in The conceps of exenal solvency, susainabiliy, and opimaliy have ecenly been defined and addessed in Milesi-Feei and Razin (996 and Cashin and McDemo (998b. Exenal (ineempoal solvency is saisfied when a couny fully mees is exenal obligaions, in he sense of he pesen discouned value of is ne exenal liabiliies, i.e. is ineempoal budge consain (ibc is saisfied. Susainabiliy, in essence, equies ha a couny no be subec o liquidiy consains imposed by foeign lendes. i.e. in addiion o he ibc having o be saisfied, facos influencing ( willingness (as well as abiliy o pay, and (2 willingness o lend, should be aken ino accoun. Ineempoal opimaliy fo he puposes of his pape is as explained in secion 2.

3 3 Obsfeld and Rogoff (995 (OR. We specify an ineempoal opimisaion model of he cuen accoun suiable fo a small open economy, esimae he consumpionsmoohing cuen accoun pah using veco auoegession (VAR mehodology 2 and esablish i as a benchmak cuen accoun pah, and conduc a ange of saisical ess o assis in foming udgemens on a numbe of key empiical quesions. Key aims of his sudy ae heefoe ( o esablish an illusaive ineempoally opimal o benchmak pah fo New Zealand s cuen accoun, and o idenify he exen o which acual cuen accoun movemens have deviaed ove ime fom he consumpion-smoohed opimal pah and whehe inenaional financial flows have been excessively volaile; and (2 o esablish peliminay empiical conclusions elaing o exenal solvency. Simila wok has been epoed fo a numbe of counies. Fo example, Ghosh and Osy (995 have concluded ha fo a maoiy of developing counies, he hypohesis of full consumpion smoohing could no be eeced. The hypohesis could also no be eeced fo he US (Ghosh, 995. Howeve, fo Canada, Oo (992 found viually no suppo fo smoohing, and suggesed his migh have been due o Canada s cuen accoun being moe affeced by empoay changes in he esouce pices and ems of ade effecs. Ghosh (995 also found ha consumpion smoohing esicions wee eeced fo Canada, as well as fo Japan, Gemany and he Unied Kingdom. He was, howeve, comfoable wih he model s abiliy o capue cuen accoun diecions and uning poins in all cases. Conclusions fo Ausalia have vaied by sudy, by sample peiod and by daa souce. Fo example, Milboune and Oo (992, uilising pe capia daa fo he peiod 959:3 o 989:, found ha he consumpion smoohing hypohesis was eeced eihe fo he full sample peiod o fo he pos 983:4 floaing exchange ae peiod 3. Similaly, using he exended daa peiod o , an ineempoal opimisaion model based on less esicive assumpions, and individually deflaed expendiue componen seies, Gues and McDonald (998 eeced Ausalia s having opimally smoohed consumpion ove hei full sample peiod. Pehaps moe impoanly, hough, hey also epoed (p. 23 hee is less evidence fo his since , suggesing ha deegulaion of capial makes may have faciliaed he opimal smoohing of consumpion. Two ecen sudies by Cashin and McDemo (998a, 998b also sugges key conclusions can vay ove ime. Uilising annual daa fo he peiod , hey concluded ha he Ausalian cuen accoun was no used o smooh consumpion opimally in he peiod pio o he elaxaion of capial conols in he ealy 980s and ha in he peiod since he mid-980s [i.e. following he move o a fully flexible nominal exchange ae egime fo he Ausalian dolla in Decembe 983 and, a he same ime, he complee emoval of capial and exchange conols], 2 Milesi-Feei and Razin (996, p. 63 caegoise he wo main appoaches o empiical cuen accoun modelling as: sucual esimaion wih focus on he degee of pesisence of esponses o specific shocks; and VAR esimaion and analysis of benchmak consumpion smoohed cuen accouns. 3 One suggesion hey made fo fuhe wok (992, p. 383 was fo elaxing he single commodiy assumpion, since i inoduces a ole fo elaive pices in explaining consumpion and cuen accoun behaviou. See also Sheffin and Woo, p. 252, and OR pp

4 4 Ausalia s cuen accoun deficis have become excessive. Subsequenly, howeve, uilising quaely daa fo he peiod 984: 998:2, Cashin and McDemo suggesed ha despie hei having found inenaional capial flows o be lage han opimal duing he 980s, in he 990s such flows have been boadly consisen wih hose pediced by he consumpion-smoohing appoach. Moe specifically, hey idenified a sucual beak a 990:4, and hei oveall conclusion was ha i appeas ha, ove ime, Ausalia s inenaional boowing decisions have been inceasingly deemined by changes in economic fundamenals. I is eviden fom his bief eview ha esuls fom applying he ineempoal opimisaion appoach have vaied by couny and by ime peiod, and ha in some cases he degee of financial make egulaion can influence esuls. The applicaion of he ineempoal opimisaion appoach o New Zealand heefoe complemens ealie sudies in seveal especs. The sample used fo his sudy coves a smalle and moe volaile open economy han has peviously been examined, which was iniially chaaceised by pevasive financial make egulaion ha was emoved duing he second half of he sample peiod. Fuhemoe, he lae pa of he sample peiod includes he peiod of he Asian financial cisis when New Zealand s cuen accoun moved fuhe ino defici. The sucue fo his pape is as follows. Secion 2 inoduces and explains key economic and economeic mehodology. Mao empiical esuls ae pesened in Secion 3. Conclusions appea in Secion Mehodology The economic model uilised is a basic ineempoal opimisaion model of he cuen accoun, of he ype developed and explained in Sachs (982, Sheffin and Woo (990, Ghosh (995, Ghosh and Osy (995, Obsfeld and Rogoff (995, Cashin and McDemo (998a, 998b, and Agéno e al. (999. The model eflecs he pemanen income heoy of consumpion and saving 4. I heefoe implies ha empoay shocks could o a lage exen be smoohed in he sho em, and be efleced insead in subsanial sho em flucuaions in naional saving and he cuen accoun. We conside a small open economy ha consumes a single good. I is inhabied by a lage numbe of like individuals wih infinie planning hoizons. The economy is small in he sense ha i akes he pah of wold eal inees aes as exogenous. We assume ha only iskless bonds ae aded in he inenaional capial make and ha he wold eal inees ae on bonds is fixed 5. Thee is no esicion on inenaional 4 In his basic fom, i does no ea demogaphic influences explicily, has no explici ems of ade vaiables, has no explici (ime vaying isk pemium, and has no uilised alenaive foms of uiliy funcion. Sudies which have consideed hese issues include hose of : Gues and McDonald (998, p 27, who uilise an addiive, consan elasiciy fom of uiliy funcion; and OR (995, who have posulaed CES composie consumpion (p 752 and also an absolue isk avesion uiliy funcion ( p 79, have given peliminay consideaion (as have Milboune and Oo, 992, p 383 o ems of ade elaed specificaions (pp , and have explicily consideed demogaphic facos (pp Begin and Sheffin (2000 pesen and es an ineempoal model which allows fo vaiable inees aes and exchange aes. They find ha fo Ausalia and Canada, bu no fo he Unied Kingdom, including he vaiable inees and exchange ae influences significanly impoves he fi of he model elaive o a benchmak model ha excludes hem. The impovemen is aibued pimaily o he

5 5 boowing and lending. Populaion size is nomalized o one so ha we can idenify pe capia quaniy vaiables wih naional aggegae quaniies. The epesenaive agen of his economy maximizes lifeime uiliy 0 [ u( C ] β E ( whee β is he subecive discoun faco wih 0 < β < and ( β / β is he subecive ae of ime pefeence, E is he condiional expecaions opeao based on he infomaion se of he epesenaive agen a peiod, and C is pivae consumpion. The peiod uiliy funcion u (C is sicly inceasing in consumpion and sicly concave: u C ( > 0 and u C ( < 0. The seies of budge consains faced by he epesenaive agen is capued by he cuen accoun ideniy CA B B Y B C I G (2 whee Y is he economy s eal GDP, B is he beginning of peiod eal ne sock of ousanding foeign asses (debs if negaive, Y B is eal GNP (defined as eal GDP plus inees income on he ousanding sock of ne foeign asses, I is eal invesmen, G is eal govenmen consumpion, and CA is he eal cuen accoun balance (defined as eal GNP minus eal pivae and public expendiue, C I G. Taking expecaions of (2 condiional on he infomaion se, and ecusively eliminaing fuue values of he sock of foeign asses, yields he ineempoal budge consain: T C I G E ( T ( B E ( Y 0 lim B T. (3 Requiing ha he couny s budge pocesses be exenally solven ules ou Ponzi schemes in which deb is coninually olled ove. Exenal solvency equies ha he las em in (3 mus equal zeo: T lim E ( B T T 0. (4 inaempoal elemens of he heoy (i.e. allowing fo subsiuion beween inenaionally-aded goods and nonaded goods. The basic model specified and esed in his pape does no allow fo vaiable inees and exchange ae influences. This is paly because he Begin and Sheffin pape came o ou aenion afe he empiical wok epoed hee was compleed, and paly because (as shown in secion 3 ou fis ode, wo equaion (unesiced VAR model and benchmak consumpion-smooohed cuen accoun pah povides obus esuls and ae unlikely o be impoved significanly by he addiional equaion and vaiables. This could be because inaempoal subsiuion beween inenaionally-aded and nonaded goods has no been empiically significan fo New Zealand. The lae can, howeve, be esed in follow-up eseach.

6 6 If condiion (4 is saisfied, he discouned value of he expeced fuue sock of deb conveges o zeo as he ime hoizon goes o infiniy. Equaion (3 hen implies ha ( B 0 E ( Y C I G 0 E TB. (5 Cuen ousanding eal sock of deb, ( B, mus be equal o he pesen discouned value of cuen and expeced fuue ade balance supluses, TB (defined as eal GDP minus eal pivae and public expendiue, C I G. Poposiion in Tehan and Walsh (99 povides he necessay and sufficien condiion fo saisfying he solvency condiion (4 when he eal inees ae is consan. Tha poposiion applied o ou conex implies ha, if ( λl TB is a mean zeo saionay sochasic pocess wih 0 λ <, hen he solvency condiion (4 holds if and only if hee is a linea combinaion of TB and B ha is saionay. Theefoe if he cuen accoun balance CA (which is he linea combinaion of TB and B by he definiion of CA TB B is saionay, hen we can say ha he solvency condiion is saisfied. Hakkio and Rush (99 discuss he condiion equied fo solvency when he eal inees ae is no consan bu saionay. They show ha, if evenue and expendiue pocesses ae I(, solvency equies ha he inclusive of inees evenues be coinegaed wih expendiues. Poposiion 2 of Tehan and Walsh (99 applies o he moe geneal case when he eal inees ae is allowed o vay and is no necessaily saionay. In his case, saionaiy of he cuen accoun defici is sufficien o imply ineempoal solvency condiion holds, as long as he expeced eal inees ae is posiive. Wih pefec capial mobiliy, Fisheian sepaabiliy holds in his model. Facing an exogenously given wold eal inees ae, he epesenaive agen of he small open economy deemines invesmen and oupu independenly of he level of consumpion. We assume ha govenmen expendiue is exogenous. Theefoe oupu, invesmen, and govenmen consumpion may all be eaed as exogenous when choosing he opimal pah fo consumpion. Necessay condiions fo he epesenaive agen s opimal consumpion decision poblem include E [ ( ] ( E [ u C β u ( C ] 0,,L, (6 which implies fo 0 ha ( u C β ( E [ u ( C ]. (7 Wih a view o empiical implemenaion, we conside he case in which peiod uiliy is quadaic, 6 6 Wih a quadaic uiliy funcion, he ceainy equivalence pinciple holds, which implies ha he epesenaive agen s foecasing and opimisaion poblems sepaae. The epesenaive agen makes is decisions unde unceainy by acing as if fuue sochasic vaiables wee sue o un ou equal o hei expeced values. This sepaaion of foecasing fom opimisaion consideaions is

7 7 u a ( C C C wih a > 0 0. Wih quadaic peiod uiliy funcion, equaion (6 becomes a0 EC β ( [ a0ec ] 0,,L. (8 If he subecive discoun faco β and he make discoun faco /( ae equal so ha β (, (8 implies C E C L E C C L. (9 E Equaion (9 epesens he epesenaive agen s consumpion smoohing moive. When he subecive discoun faco is diffeen fom he make discoun faco he epesenaive agen has a consumpion iling moive as well as a consumpion smoohing moive. Fo example, if β is smalle han /( so ha β ( <, (8 implies C E C > L > E C > C >L ; > E and he epesenaive agen wans o have consumpion iled owads he pesen. Equaion (8 can be wien as EC EC α 0,,L β( (0 whee α a 0 β(. Recusions on equaion (0 imply ha [ β( ] EC, 2,L ( C α β [ β( ] ( Subsiuing ( ino (5 and solving fo C gives opimal consumpion compuaionally vey convenien and explains why quadaic funcions ae assumed in much applied wok. Fo moe geneal funcional foms, he ceainy equivalence pinciple does no hold. Wih quadaic uiliy, u ( C 0 so ha vaiabiliy of fuue ne oupu does no affec consumpion. When u ( C > 0, agens engage in pecauionay saving ha depends on he vaiabiliy of fuue ne oupu and no us expeced values. Ghosh and Osy (994 used consan absolue isk avesion uiliy funcion and added a pecauionay effec o he kind of ineempoal opimisaion cuen accoun model uilised hee. The key paamee appeaing in hei exended model is he lifeime innovaion in ne oupu. Bu he lengh of he daa seies equied o measue his paamee accuaely is such ha he exended model canno be uilised fo ou sudy.

8 8 G I Y B C α β 0 2 * ( E ( (, which can be ewien as G I Y B C α θ 0 * ( E (2 whee ( ( 2 β β θ. 7 Since ( ( ( ( ( 2 β β β β β θ, (3 i is vey clea ha < θ if and only if ( > β. The epesenaive consume wans o il consumpion owads he fuue if < θ. Ghosh (995, p.3, Ghosh and Osy (995, p.309, Cashin and McDemo (998a, p.35, Cashin and McDemo (998b, p.0, and Agéno e al. (999, p.4 all ake an inepeaion fo θ diameically opposie o he above, saing ha consumpion is iled owads he pesen when < θ. Also, unlike he above analysis, hey seem o have aken no explici accoun of he exisence of he consan em in he opimal consumpion when he uiliy funcion is quadaic. The opimal consumpion level can be decomposed ino he consumpion smoohing pa and he consumpion iling pa by noing ha when ( β, hee is no consumpion iling. The opimal consumpion level hen becomes 0 ( E G I Y B. We use C o denoe consumpion-smoohing componen of he opimal consumpion. 0 ( E G I Y B C. (4 I is he annuiy value of he epesenaive consume s oal discouned wealh ne of invesmen and govenmen consumpion. The consumpion-iling componen is he 7 A simila esul is shown in Sagen (987, p. 365.

9 9 diffeence beween he opimal level of consumpion * C and is smoohing componen C. Equaions (2 and (4 imply he following elaionship beween he opimal consumpion level and is consumpion-smoohing componen. C C θα θ * We define he consumpion-smoohing componen of he cuen accoun as C G I B Y C G I B Y CA θα θ * *. (5 Subsiuing (4 ino (5 implies ha he consumpion-smoohing componen of he cuen accoun can be epesened as * E ( E ( E Z Z G I Y G I Y G I Y B G I B Y CA (6 whee G I Y Z has been emed in he lieaue ne oupu o naional cash flow. Reaanging ems in he igh-hand side of he las equaliy in (6 yields * E ( Z CA. (7 Equaion (7 shows ha he consumpion-smoohing componen of he cuen accoun is in defici when he pesen discouned value of fuue ne oupu changes is posiive, and i is in suplus in he opposie case. The consumpion-smoohing componen of he cuen accoun defici is he pedico of fuue inceases in ne oupu. Accoding o equaion (7, pemanen shocks, which have no effec on Z, leave he consumpion smoohing componen of he cuen accoun unaffeced, wheeas empoay shocks o Z (e.g. an unexpeced empoay incease in G o I would lead he cuen accoun o ac as a buffe o smooh consumpion. Equaion (7 shows ha ceaing he model implied consumpion-smoohing componen of he cuen accoun seies equies esimaing he pesen value of expeced changes in ne oupu, whee expecaion is condiional on he infomaion se used by he epesenaive agen. As shown by Campbell and Shille (987 in a somewha diffeen conex, unde he null hypohesis ha equaion (7 is valid, he

10 0 consumpion-smoohing componen of he cuen accoun iself should incopoae all of he epesenaive agens infomaion on fuue ne oupu changes. This consideaion led he exising lieaue o esimae an unesiced vecoauoegession (VAR in Z and CA, whee CA is he acual consumpionsmoohing componen of he cuen accoun: CA θα θα Y B I G θc Z B θc. (8 Fo he VAR esimaion, i is necessay o define a way o deend he acual cuen accoun and deive he consumpion-smoohing componen. We explain below how o esimae θ and θα /, and deive he acual consumpion-smoohing componen of cuen accoun. The VAR may be wien as Z CA ψ ψ 2 ψ ψ 2 22 Z CA ε ε 2 whee ε and ε 2 ae disubance ems wih condiional mean of zeo and whee Z and CA ae now expessed as deviaions fom uncondiional means. Making use of Z E CA ψ ψ 2 ψ ψ 2 22 Z CA and subsiuion ino equaion (7 leads o he esimae of he model implied consumpion-smoohing componen of he cuen accoun CA * ψ ψ [ 0] ψ ψ Z CA [ 0] Ψ I Z CA [ Φ Φ ] Z CA Ψ Z CA (9 I emains o descibe how o esimae θ and θα / so ha he acual daa on cuen accoun can be deended o puge he consumpion-iling componen. If ne oupu Z is I(, is fis diffeence Z will be saionay. Equaion (7 implies ha, unde he null hypohesis ha he acual consumpion-smoohing componen of he cuen * accoun CA is equal oca, he acual consumpion-smoohing componen of he cuen accoun is also I(0. This means ha he lef-hand side of equaion (8 is I(0. Theefoe, if ne oupu inclusive of inees eanings, Z B, and consumpion, C, ae boh I(, θ and θα / may be obained fom he coinegaing veco beween C

11 and Z B. Because of he exisence of θα /, a consan should be included in he coinegaing egession. Once he model implied consumpion-smoohing componen of cuen accoun has been esimaed a numbe of ess may be pefomed. Fis, equaion (7 implies ha cuen accoun should Gange-cause subsequen movemens in ne oupu. This can be easily esed by using he esuls of he VAR esimaion. Second, if he ineempoal appoach embodied in (7 is ue, hen he heoeically pediced value of [ Φ Z ΦCA] in equaion (9 is [0 ]. The equiemen ha he coefficien on ne oupu be close o zeo and ha on he consumpion smoohing componen of cuen accoun be close o uniy can be esed. Thid, he equaliy of he vaiances of he acual consumpion smoohing componen of cuen accoun and he model implied consumpion-smoohing cuen accoun can be esed. Fouh, equaion (7 holds if and only if E * * [ CA Z ( CA ] 0. Theefoe, if he model is coec so ha he model implied consumpion-smoohing * cuen accoun CA and he acual consumpion smoohing componen of cuen accoun CA ae equal, CA Z CA should be saisically R ( uncoelaed wih lagged values of he seies Z and CA. This esicion can be esed by consucing R and unning appopiae egessions wih lagged values of he seies Z and CA. Finally, supplemenay o he fomal ess can be visual * inspecion of he acual CA and he esimaed CA seies, and he esuling coelaion coefficien beween hem. The esimaion and esing pocedues can be summaised in fou basic caegoies: ( As a pelude o any coinegaion elaions esimaed unde sep wo, conduc appopiae uni oo ess on he seies C, Z, Z B, TB, CA, and hei fis diffeences, in ode o check he saionaiy of hose seies. If TB is eihe I(0 o I( and CA is I(0, hen he exenal solvency condiion is saisfied (e.g. Tehan and Walsh, 99, Poposiion ; (2 Whee appopiae, calculae he acual consumpionsmoohing componen of he cuen accoun as he (saionay esidual fom he coinegaing egession of Z B on C. This saionay consumpion-smoohing componen of CA eflecs emoval of he non-saionay consumpion iling componen of CA; (3 Esimae he (fis ode unesiced VAR in Z and CA, in ode o obain an esimaed opimal consumpion-smoohing componen of he * cuen accoun. The esimaed CA seies can be compaed (hough gaphical, coelaion coefficien and vaiance aio measues wih he acual value calculaed fom he coinegaing egession, and also uilised in he hypohesis ess descibed unde sep fou. (4 The fomal saisical ess can be pefomed and associaed empiical measues can be consideed in elaion o exenal solvency and ineempoal consumpion smoohing opimaliy.

12 2 3. Empiical Resuls The maximum sample peiod available fo he equied quaely eal seasonally adused daa was 982:2 o 999:3. I heefoe eflecs, amongs ohe hings, he ecen quaes duing which New Zealand s eal GDP gowh and cuen accoun deficis wee likely o have been significanly advesely affeced by evens elaing o he Asian Cisis. Ou daa seies and souces ae as defined in he Appendix: Daa Souces. The empiical esuls pesened in his secion of he pape come fom nominal daa conveed o eal ems by using he implici pice deflao fo GDP. This is pimaily because hese esuls ae much moe obus han hose emanaing fom seies uilising he individual componens of Goss Domesic Expendiue (GDE available diecly in eal ems 8. I is also done o faciliae compaison wih esuls epoed fo ohe counies, including hose epoed ecenly fo Ausalia in Cashin and McDemo (998b. The ohe key daa-elaed issue was whehe o pesen esuls in pe capia o nonpe capia fom. An agumen o suppo pesenaion in non-pe capia fom is ha many policy analyss and policy makes focus geae aenion on his fom. Howeve, some auhos (e.g. Hakkio and Rush, 99; Oo, 992; Milboune and Oo, 992; Sheffin and Woo, 990 have pefeed o (addiionally epo hei esuls in pe capia fom. This may have been because he pe capia fom can be moe closely aligned wih ceain economic heoeic models, o pehaps fo nomalizaion easons consideed o be moe elevan fo a gowing economy (e.g. Hakkio and Rush, 99. Hence, because hee seems no clea cu agumen fo pefeing one fom ove he ohe, we have pesened Tables including empiical esuls in boh foms. The obusness of ou empiical esuls will in his sense heefoe be clealy eviden. Saionaiy ess Uni oo ess fo he ode of inegaion/saionaiy of he seies C, Z, Z B, TB, and CA, based on he augmened Dickey-Fulle (ADF -saisic es, ae pesened in Table. The fis esul of noe is ha conclusions ae consisen acoss he pe capia and non-pe capia daa seies. Secondly, apa fom he convenionally expeced oucomes ha he seies C, Z and Z B ae saionay in fis diffeence (bu no level fom, he key esul fo boh pe capia and non-pe capia CA is ha he null hypoheses of he exisence of uni oos in levels of hose seies ae eeced quie songly a 5% levels of significance, 8 Fo example, see he noiceably diffeen ime pahs fo he wo eal seasonally adused CA seies, pesened in Figue 3: Cuen Accoun Balance, eal $m, New Zealand 982:2 o 999:3, Nominal Expendiue Seies deflaed by Implici GDP Deflao, and Nominal GDE Componens individually deflaed. Eyeballing he lae seies shows an a pioi case fo a sucual beak in he individual componens seies a 993:4, bu no obvious a pioi beak fo he implici GDP deflaed seies. In conas o he esuls obained fom individually deflaed seies, hose fo he sub-sample 982: 2 o 993:4 fo he implici GDP deflaed seies wee no significanly diffeen fom hose fo he full sample.

13 3 even hough hey ae no eeced a % levels. So if we ae conen wih 5% level of significance, CA seies ae saionay in he level fom. Also hee is clea eecion of he null hypoheses of he exisence of uni oos in levels of he TB seies. As poined ou above in secion 2, hee ae a couple of key implicaions of hese esuls. Fis, CA, which is equal o TB B, is a linea combinaion of TB and B. Poposiion of Tehan and Walsh (99 applied o ou case implies ha ineempoal solvency is saisfied as long as CA is saionay. 9 The second key implicaion of uni oo ess on he CA seies is ha sochasic deending of CA seies using he coinegaion egession (and hence he esimaion of he paamee θ is no equied if we ae conen wih he 5% level of significance, bu is equied if we insis on he % level of significance. 0 We obained empiical esuls, boh wih and wihou sochasic deending, in ode o gauge he sensiiviy of he esuls o he decomposiion beween he consumpion-iling and consumpion-smoohing componens. Coinegaion egessions, and esimaes of θ These esuls appea in Table 2, and again he key esuls ae consisen fo boh pe capia and non-pe capia daa. Based on he ADF -es saisics epoed in Table 2, he null hypohesis of no coinegaion is eeced a he 5% level of significance, hough no a he % level. This fuhe suppos exenal solvency saisfied duing he sample peiod. If we apply Hakkio and Rush (99 s esul o ou conex, solvency equies ha Z B be coinegaed wih C. The consan em in he coinegaion egession is no significan in eihe case, and he consumpion iling paamee θ has values obusly in he ange 0.90 o 0.92, whehe he consan em is explicily included o no. We use he esidual fom he coinegaion egession as he consumpion smoohing componen of he cuen accoun in he following ess on opimal consumpion smoohing. Esimaion of he VAR model, and compuaion of acual and esimaed consumpion smoohed cuen accoun seies and vaiances Paamee esimaes fo he (fis ode unesiced VAR model, ogehe wih hei -saisics, ae pesened in Table 3. As indicaed in secion 2, one way of evaluaing whehe ineempoally opimal consumpion smoohing can be eeced is o conduc a es fo whehe he CA vaiable Gange causes (i.e. helps pedic changes in ne oupu (i.e. in Z. In Table 3, all he coefficiens on lagged CA in egessions of Z ae negaive so ha he CA defici is pedicing fuue inceases in ne oupu Z. Fuhemoe, hey ae significan a sandad convenional significan levels. The 9 Inuiion is vey clea. TB and CA TBB saionay implies ha B is saionay. Wih saionay B, lim T T [ /( ]E ( B T 0 so ha exenal solvency holds. 0 I is now well known ha uni oo ess ypically have vey low powe agains he alenaives of oos less han bu close o one. Because of he low powe of uni oo ess, some eseaches apply even 0% level of significance. In ou case, even wih elaively sho sample peiod, he exisence of uni oo is eeced songly a 5% level of significance. This obusness is no mainained fo he individually deflaed daa se, whee θ anges beween 0.37 and 0.9.

14 4 esuls ae consisen in all cases wih eecing he null hypohesis of no Gange causaliy a he 5% level of significance, i.e., ou esuls ae consisen wih Gange causaliy and heefoe opimal consumpion smoohing. Table 4 epos he esuls of egessions of R CA Z ( CA on lagged Z and CA. As pediced by he model, coefficiens ae all insignifican so ha CA Z CA is uncoelaed wih he lagged Z and CA. R ( As shown in Secion 2, Φ CA should be equal o uniy and Φ Z should be zeo if he model used is valid. These wo paamee esicions can be esed individually by he sandad -es and oinly by he Wald es. The Wald saisic fo he oin es has a 2 χ disibuion wih degees of feedom equal o he numbe of esicions, which is equal o wo. Esimaed values of Φ Z and Φ CA implied by he VAR coefficien esimaes ogehe wih he -saisics fo he deviaions of hose values fom hei 2 especive heoeical values, and he Wald ( χ saisics necessay fo esing he oin (non-linea esicions ae pesened in Table 5. 2 In all cases, one is unable o eec he esicions a a high level of confidence. These esuls heefoe imply ha New Zealand has been opimally smoohing is pivae consumpion by using he cuen accoun as a buffe agains unexpeced empoay movemens in ne oupu. The acual consumpion smoohed cuen accoun pah (compued fom he esiduals of he coinegaion egession and he consumpion smoohed cuen accoun pah pediced fom he model ae illusaed (fo he non-pe capia, wih consan em, case in Figue 4. Visual inspecion shows he acual and pediced obsevaions move in emakably simila diecions, and Table 6 shows he coesponding coelaion coefficien ρ ( CA, CA * o be In ode o check he saisical significance of he deviaion beween he acual and pediced obsevaions, we have esimaed a 95 pecen confidence ineval using boosap simulaions. 3 Figue 6 shows he compaison of he acual cuen accoun balance, expessed as a pecenage of GDP, wih he pediced cuen accoun balance and he esimaed 95% confidence band. 4 Almos all of he obsevaions fo he acual cuen accoun balance fall wihin he 95% confidence band. Fo he few 2 As shown by equaion (9 of Secion 2, esimaes of Φ Z and Φ CA ae funcions of he wold inees ae. Fo he empiical esuls epoed hee, we used 0.04 pe annum. 3 The boosap algoihm o evaluae confidence inevals fo pediced cuen accoun seies woks as follows: (i calculae he esiduals fom he oiginal bivaiae VAR( esimaion fo cuen accoun and ne oupu; (ii independen disubances ae obained by sampling andomly, wih eplacemen, fom he VAR esiduals, keeping he iming he same acoss equaions o peseve conempoaneous coelaions; (iii aificial daa fo he cuen accoun and he ne oupu ae geneaed using he coefficiens of he oiginal VAR, and he disubances dawn in sep (ii, and he same iniial values as he acual seies; (iv eesimae he pediced cuen accoun seies by feeding aificial daa ino equaion (9; (v epea seps (ii-(iv a lage numbe of imes in ou case 0,000 imes; (vi fo each ime peiod, so he seies of pediced cuen accoun values geneaed ino ascending ode o poduce a disibuion; (vii 95% confidence ineval is given by aking he 2.5 and 97.5 peceniles fom his disibuion fo each peiod. We hank Paul Cashin and John McDemo fo allowing us o uilize hei boosap simulaion pogamme and fo access o hei Ausalian daa. 4 Figue 6 coesponds o he non-pe capia case. In pesening he seies in Figue 6, consumpion iling componen of he cuen accoun ha was emoved hough sochasic deending has been added back.

15 5 cases whee he obsevaions lie ouside he confidence band, he magniude is vey small. This confims he obusness of he VAR model used o esimae New Zealand s cuen accoun balance and is in shap conas o he esuls obained fo Ausalia by Cashin and McDemo (998b, Figue, lowe panel 5. Of fuhe noe, hough, is ha he acual and pediced seies ae somewha less simila in hei ampliudes and hence in he vaiance aios of acual o pediced. The poin esimaes used in compuing he vaiance aios epoed in Table 6 ae in he ange.8 o 2., suggesing hey could be subsanially diffeen fom uniy, and hence consisen wih some degee of excess volailiy of inenaional financial capial flows. This is in he sense of Ghosh s (995 oin es of he assumpion of a high degee of capial mobiliy and he validiy of he ineempoal model of he cuen accoun. Howeve, pehaps supisingly, he χ 2 es saisics and p-values also pesened in Table 6 ae such ha he null hypohesis of equaliy of he vaiances canno be eeced a convenional significance levels, and ae heefoe consisen wih no excess volailiy of inenaional financial capial flows. 6 i.e. in he face of shocks, New Zealand s consumpion smoohed cuen accoun flows have no been moe volaile han usified by expeced changes in (naional cash flow fundamenals. Sensiiviy analysis In ode o gauge he sensiiviy of he esuls o he decomposiion beween he consumpion-iling and consumpion-smoohing componens, we also obained empiical esuls wihou sochasic deending. This is equivalen o assuming no consumpion iling and imposing he paamee θ o be equal o one. This did no ale ou esuls in any maeial way. Figue 5 shows ha he pediced cuen accoun sill acks he acual cuen accoun exemely well. 7 The coelaion beween he acual and pediced cuen accoun seies, ρ ( CA, CA *, emains vey high a The maginal significance level fo he Wald es saisic fo he oveall fi of he model is 0.38, which implies ha he model wihou consumpion iling is no eeced. We also invesigaed he sensiiviy of ou esul wih espec o he value of he wold eal inees ae used. We ied vaious eal inees aes beween and 8% pe annum and go vey simila esuls. 8 Implicaions fo exenal solvency and opimaliy The exenal solvency condiion appeas o have been saisfied ove he sample peiod. Two pieces of evidence suppo his. Fis, he cuen accoun balance seies, 5 Fo example, hei VAR model was unable o explain a numbe of lage movemens in Ausalia s acual cuen accoun defici, including hose in he mid-and lae-980s, and mid- and lae- 990s. 6 This esul is consisen wih conclusions eached fom Ghosh (995, Table 5 and Ghosh and Osy (995, Table 4 ha, fo a numbe of hei counies wih quie high (and low vaiance aios, he aios ae no saisically diffeen fom uniy. 7 Figue 5 coesponds o he non-pe capia case. Resuls ae vey simila wih ohe cases. 8 In ode o educe he numbe of Tables, deailed esuls peaining o sensiiviy analysis ae no aached. They ae available on eques fom he auhos.

16 6 CA, is saionay a he 5% level of significance (hough no a he % level; 9 secondly, he hypohesis of no coinegaion beween Z B and C is eeced a he 5% level (hough again no a he % level. The conclusion is obus acoss he pe capia and non-pe capia daa ses, and whehe he consan em is included in he coinegaion egession o no. Opimal consumpion smoohing: I has been shown ha Gange causaliy ess, Wald ess on nonlinea esicions, and visual inspecion all imply non-eecion of he opimal consumpion smoohing hypohesis. The esul is consisen wih New Zealand s having opimally smoohed is pivae consumpion by using he cuen accoun as a buffe agains unexpeced empoay movemens in ne oupu. No-excess volailiy of inenaional financial capial flows?: Whils he empiical esuls pesened above ae consisen wih exenal solvency condiions having been saisfied and opimal consumpion smoohing no being eeced, he poin esimae evidence fom he vaiance aio of acual o model implied (consumpion smoohed cuen accoun movemens, suggess he possibiliy of excess volailiy in (foeign financial capial flows and hence possibly inappopiae uilisaion of hese flows fo domesic consumpion puposes. The χ 2 es saisics and p-values pesened in Table 6 ae, howeve, such ha he null hypohesis of equaliy of he vaiances canno be eeced a convenional significance levels, and ae heefoe consisen wih no excess volailiy of inenaional financial capial flows 4. Conclusion Thee has been a long-sanding debae concening he implicaions and appopiae policy esponse o New Zealand s pesisen cuen accoun defici. This debae has been heighened by he subsanial incease in he cuen accoun defici duing he 990s, especially following he Asian financial cisis in he lae 990s. This pape conibues o his debae by evaluaing New Zealand s exenal solvency, he degee of opimaliy of he ineempoal consumpion smoohing hough is cuen accoun, and whehe is inenaional financial capial flows have been used in an opimal (consumpion smoohing fashion. We caied ou saisical ess in elaion o exenal solvency. We also esimaed a benchmak consumpion-smoohing componen fo is cuen accoun based on an ineempoal opimisaion model and used i o es he opimaliy of he size and volailiy of he cuen accoun. 9 A noe of cauion is in ode hee. The cuen accoun seies ha we used do no eflec he effec of he exchange ae changes on he value of exising foeign liabiliies. Theoeically, a couny s eal cuen accoun balance ove a peiod is he change in he value of is eal ne claims on he es of he wold. In ode o mach wih he heoeical concep, he acual cuen accoun daa should be adused fo he change in he eal value of exising foeign liabiliies caused by inflaion o changes in he exchange ae. This kind of adusmen can aely be done because of daa limiaions. One possible way o ovecome his poblem is o use he fis diffeence of he daa on eal ne foeign liabiliies as he daa on he eal cuen accoun defici. Tehan and Walsh (99 used he fis diffeence of he daa on eal ne foeign liabiliies in hei empiical invesigaion of exenal solvency of he U.S. economy. Howeve, while Saisics New Zealand publishes daa fo New Zealand s Ne Inenaional Invesmen Posiion, o dae he seies (in nominal ems ae no sufficienly long, compehensive, o consisen fo use in his sudy.

17 Specific esuls ae: ( Despie subsanial deeioaion in New Zealand s cuen accoun deficis duing he lae 990s, is cuen accoun movemens ove ou sample peiod as a whole have been consisen wih is ineempoal budge consain and hence is fomal exenal solvency condiion has been saisfied; (2 The cuen accoun balance pediced by he simple ineempoal opimisaion model used in his pape has saisfacoily efleced he acual diecions and uning poins fo he consumpion smoohing componen of he cuen accoun. The null of he No- Gange causaliy hypohesis ha he cuen accoun has no signalled subsequen changes in ne oupu has been eeced. Fuhemoe, a Wald es of nonlinea esicions implied by he model has no been eeced. All of hese esuls ae consisen wih opimal smoohing having been achieved; (3 We also examined he sensiiviy of he esuls o he decomposiion beween he consumpion-iling and consumpion-smoohing componens, by obaining empiical esuls wihou sochasic deending. This is equivalen o imposing no consumpion iling. This did no ale ou esuls in any maeial way; (4 Finally, i can be noed ha he vaiance aio of ou acual and model implied cuen accoun seies is consisen wih no excess volailiy in inenaional financial capial movemens fo consumpion smoohing puposes. 7

18 8 APPENDIX: DATA SOURCES Two basic daa ses wee consuced fo he peiod 982:2 o 999:3. One se was conveed fom nominal o eal ems, by using he implici pice deflao fo GDP; he ohe uilises seies fo he individual componens of GDE published diecly in eal ems. The lae ae heefoe he sandad naional sysem of accouns consan pice measues. Seasonally adused seies fo pivae final consumpion expendiue (C, goss fixed capial fomaion and incease in socks (I, geneal govenmen final consumpion expendiue (G, and GDP (goss domesic expendiue, Y, in cuen and consan pices wee aken fom Saisics New Zealand s (SNZ Sepembe 999 quae elease of Goss Domesic Poduc daa. The implici pice deflao fo GDP seies was compued as he aio of ou cuen pice and consan pice GDP seies, and is he same (afe conveing o base as SNZ s published seies. The Goss Naional Poduc (i.e. Y B seies ae obained by adding o GDP SNZ s Balance of Paymens (BoP seies Balance on (Inenaional Invesmen Income. The B seies in cuen pice fom was seasonally adused using X (and deflaed by he GDP deflao. The nominal seies fo ou sample peiod was aken pimaily fom he ecenly eleased BoP saisics compiled using he IMF s BoP Manual, 5 h ediion (BPM5, and fo obsevaions pio o 986:4 fom BPM4. No official seies exiss in eal seasonally adused fom. The B seies have negaive values fo all obsevaions in ou sample peiod. Ou cuen accoun seies (CA in cuen and consan pice ems wee compued (in esidual fashion fom (Y B (C I G, and when conveed o yea ended cuen accoun o GDP aios a quaely inevals, follow vey closely he coesponding aios published by SNZ using BPM4. Naional Cash Flow / Ne Oupu, Z, was calculaed fom Y - I - G; and he populaion seies used o conve ou daa o pe capia fom was obained by linking (a 99:2 SNZ s seies fo de faco mean populaion (SBEC and esiden mean populaion (SEIC. The value imposed fo he eal wold inees ae,, was he convenionally used 4% pe annum.

19 9 REFERENCES Agéno, Piee-Richad, Claude Bismu, Paul Cashin, and C. John McDemo (999, Consumpion Smoohing and he Cuen Accoun: Evidence fo Fance, Jounal of Inenaional Money and Finance, 8, -2. Begin, Paul R. and Seven M. Sheffin (2000, Inees Raes, Exchange Raes and Pesen Value Models of he Cuen Accoun, The Economic Jounal, 0, Apil, Campbell, John (987, Does Saving Anicipae Declining Labo Income? An Alenaive Tes of he Pemanen Income Hypohesis, Economeica, 55, Novembe, Campbell, John and Robe Shille (987, Coinegaion and Tess of Pesen Value Models, Jounal of Poliical Economy, 95, Ocobe, Cashin, Paul and C. John McDemo (998a, Ae Ausalia s Cuen Accoun Deficis Excessive?, The Economic Recod, 74 (227, Decembe, Cashin, Paul and C. John McDemo (998b, Inenaional Capial flows and Naional Cediwohiness: Do he Fundamenal Things Apply as Time Goes By?, IMF Woking Pape, WP/98/72, Decembe. Collins, Sean, Fancisco Nadal De Simone, and David Hageaves (998, The Cuen Accoun Balance: An Analysis of he Issues, Reseve Bank of New Zealand Bullein, 6(, Mach, Ghosh, Aish R. (995, Inenaional Capial Mobiliy Amongs he Mao Indusialised Counies: Too Lile o Too Much?, The Economic Jounal, 05, Ghosh, Aish R. and Jonahan D. Osy (994, Expo Insabiliy and he Exenal Balance in Developing Counies, IMF Saff Papes, 4(2, Ghosh, Aish R. and Jonahan D. Osy (995, The Cuen Accoun in Developing Counies: A Pespecive fom he Consumpion-Smoohing Appoach, The Wold Bank Economic Review, 9(, Gues, Ross S. and Ian M. McDonald (998, The Socially Opimal Level of Saving in Ausalia, o , Ausalian Economic Papes, 37(3, Sepembe, Hakkio, Caig S. and Mak Rush (99, Is he Budge Defici Too Lage?, Economic Inquiy, 29, Milboune, Ross and Glenn Oo (992, Consumpion Smoohing and he Cuen Accoun, Ausalian Economic Papes, 3, Decembe,

20 20 Milesi-Feei, Gian Maia and Assaf Razin (996, Pesisen Cuen Accoun Deficis: a Waning Signal?, Inenaional Jounal of Finance and Economics,, 6-8. Obsfeld, Mauice and Kenneh Rogoff (995, The Ineempoal Appoach o he Cuen Accoun, Chape 34 in G. Gossman and K. Rogoff (eds. Handbook of Inenaional Economics, Volume 3, Oo, Glenn (992, Tesing a Pesen-value Model of he Cuen Accoun: Evidence fom US and Canadian Time Seies, Jounal of Inenaional Money and Finance,, Sachs, Jeffey (982, The Cuen Accoun in he Macoeconomic Adusmen Pocess, Scandinavian Jounal of Economics, 84, Sagen, Thomas J. (987, Macoeconomic Theoy, Academic Pess. Sheffin, Seven M. and Wing Thye Woo (990, Pesen Value Tess of an Ineempoal Model of he Cuen Accoun, Jounal of Inenaional Economics, 29, Tehan, Bhaa and Cal E. Walsh (99, Tesing Ineempoal Consains: Theoy and Applicaions o U.S. Fedeal Budge and Cuen Accoun Deficis, Jounal of Money, Cedi, and Banking, 23(2,

21 2 Figue : Balance on Cuen Accoun, New Zealand Nominal NZ$m, Mach Yeas 950/5 o 998/99 Figue 2: Cuen Accoun o GDP (% New Zealand (IMF 4 h ed., Ausalia

22 22 Figue 3: Real Cuen Accoun Balance Based on Nominal Expendiue Seies Deflaed by he GDP Deflao Based on Real Expendiue Seies

23 23 Figue 4: Acual and Pediced Cuen Accoun Demeaned and Deended, 99/92 NZ$m, 0.04 p.a. Figue 5: Acual and Pediced Cuen Accoun Demeaned bu No Deended, 99/92 NZ$m, 0.04 p.a.

24 Figue 6: Acual vs. Pediced Cuen Accoun wih 95% Confidence Band in pecen of GDP, 0.04 p.a. 24

25 25 Table :Tess fo Uni Roos Seies Deflaed by GDP Deflao, 982:3 999:3 (Augmened Dickey-Fulle -saisic Non-pe capia daa Pe capia daa Level s diffeence Level s diffeence C ** ** Z ** ** Z B ** ** TB ** ** ** ** CA * ** * ** Asympoic ciical values ae: %, -3.5; 5%, -2.89; 0%, * Null hypohesis of uni oo eeced a 5% level of significance, in favou of saionaiy ** Null hypohesis of uni oo eeced a % level of significance, in favou of saionaiy Means of seies ae all posiive a $22.26m, $7.0m, $32.60, and $5.3, especively. Table 2:Coinegaion Regessions and Esimaes of q Seies Deflaed by GDP Deflao, 982:2 999:3 Non-pe capia daa Pe capia daa Consan Tem No Consan Tem Consan Tem No Consan Tem Coinegaion Regession Consan (-sa (0.40 (0.2 θ (-sa (22.0 (89.92 (2.9 (85.69 ADF -sa * * * * Asympoic ciical values ae: %, -3.96; 5%, -3.37; 0%, * Null hypohesis of uni oo eeced a 5% level of significance, in favou of saionaiy

26 26 Table 3: VAR Paamees, 982:4 999:3 Seies Deflaed by GDP Deflao, Coinegaion Regession Used Non-pe capia daa Pe capia daa Cons.Tem No Cons. Tem Cons. Tem No Cons.Tem Z CA Z CA Z CA Z CA Z (-sa (-.73 (-0.74 (-.73 (-0.73 (-.67 (-0.75 (-.67 (-0.74 CA (-sa (-2.23 (8.6 (-2.9 (8.64 (-2.33 (8.66 (-2.30 (8.67 Table 4: Tess based on R, 982:4 999:3 Seies Deflaed by GDP Deflao, Coinegaion Regession Used Non-pe capia daa Pe capia daa Cons. Tem No Cons. Tem Cons. Tem No Cons. Tem Z (-sa (.2 (.22 (.8 (.8 CA (-sa (-0.79 (-0.79 (-0.66 (-0.67

27 27 Table 5: Wald Tess of he Model, 982:4 999:3 Seies Deflaed by GDP Deflao, Coinegaion Regession Used Coefficien, Non-pe capia daa Cons. em No Cons. Tem Cons. Tem Pe capia daa No Cons. Tem Φ Z (-saisic, Φ Z 0 (.02 (.02 (0.90 (0.90 Coefficien, Φ CA (-saisic, Φ CA (-.39 (-.40 (-.4 (-.5 Wald es saisic, 2 χ (p-value (0.37 (0.37 (0.52 (0.5 Table 6: Vaiance Raios and Coelaions, 982:4 999:3 Seies Deflaed by GDP Deflao, Coinegaion Regession Used Non-pe capia daa Cons. Tem No Cons. Tem. Cons. Tem Pe capia daa No Cons. Tem * σ ( CA / σ ( CA χ es saisic (p-value (0.08 (0.08 (0.7 (0.6 ρ ( CA, CA * Tes saisic fo he null hypohesis ha ( * ( σ CA σ CA