Studies in Economics and Finance

AN EMPIRICAL EXAMINATION OF THE LONG RUN MONETARY (EXCHANGE RATE) MODEL

Swarna D. Dutt Dipak Ghosh
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Swarna D. Dutt Dipak Ghosh, (1998),"AN EMPIRICAL EXAMINATION OF THE LONG RUN
MONETARY (EXCHANGE RATE) MODEL", Studies in Economics and Finance, Vol. 19 Iss 1/2 pp. 62
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 AN EMPIRICAL EXAMINATION OF THE LONG RUN
MONETARY (EXCHANGE RATE) MODEL

Swarna D. Dutt*,**
Dipak Ghosh***

ABSTRACT

The monetary approach to long run exchange rate determination is

reexamined for the Canadian - US dollar exchange rate. We first test
for non-stationarity, and then conduct a multivariate cointegration
analysis to examine the validity of the monetary model in
determination of exchange rates over the long run. Our results uphold
the validity of the monetary approach.

I. Introduction
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In the area of international finance, exchange rates are probably

the most intensively and extensively researched topic. Its importance
is ever increasing with the introduction of open economy
macroeconomics and the acceptance of the fact that international
transmissions of economic disturbances across geographical
boundaries today are a reality of life. In this study we re-examine a
very important contribution to exchange rate economics, which is the
monetary model (MM). A chronological exposition of this approach is
lengthy and beyond the scope of this work, and hence we will touch on
the highlights. Meade's (1951) Keynesian model paved the way for
the Mundell (M, 1963) - Flemming (F, 1962) synthesis of asset
markets and capital mobility into open economy macroeconomics.
Although a seminal contribution in its own right, the MF story had not
knitted the stock flow implications of interest rate differentials, and
with the genesis of the floating era, gave way to the monetary model.
In this study we test the flexible price MM (which assumes
continuous purchasing power parity (PPP)), because of its dismal
empirical credibility. The in-sample and out- of- sample performance
has been poor along with the MM parameter restrictions being

*Dutt would like to acknowledge the Faculty Research Grant

#1021114107000 from State University of West Georgia for 1998-99.
** Department of Economics, Richards College of Business, State University
of West Georgia, Carrollton, GA 30118
***Division of MMFE, Box 4058, Emporia State University, Emporia, KS
66801
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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

normally rejected (Haynes and Stone (1981)). To add insult to injury,

the MM had an abysmal performance as a long run exchange rate
model (Baillie and Selover (1987), Meese (1986) and Kearney and
MacDonald (1990)). On the other hand two studies by MacDonald and
Taylor (MT, 1991, 1993), using non-stationarity and cointegration
analysis have upheld the validity of the MM as a long run solution to
exchange rates over the floating regime for the German mark, Japanese
yen and the British pound,1 giving it a new lease of life. Thus, in the
literature today we have a plethora of tests and a variety of results.
The performance of the MM in the case of the Canadian - US
dollar exchange rate is even more controversial (and unsettled) and
hence the focus of this study. Backus (1984) studied the floating
period, but reported no significant statistical evidence in support of the
MM. A decade later, the study by Florentis et al. (1994) examined the
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period between 1971-86, and not only rejected the significance of the
MM as a long run exchange rate determination process, but reported
that a random walk model outperformed the MM. This indictment, a
la the Meese and Rogoff (1983) study, literally spelt the death knell of
the monetary approach. The interesting part is that a previous study
(chronologically speaking) by Boothe (1983) did report significant
statistical evidence in favor of the MM for the floating period between
1971-1978. This is the inconclusive juncture where the literature
stands today. We believe it warrants another look and hence forward
this study.2
The major reservation we have against these studies is the fact that
none of them take the issue of variable non-stationarity into
consideration. As we all know after the seminal work by Engle and
Granger (1987), classical/standard tests are invalid in the presence of
unit roots or integrated processes. In this study non-stationarity of the
data is taken into consideration, and the long run properties of the MM
is examined. Our contribution to the literature is twofold. First an
intensive examination of the stationarity stature of the MM variables is
conducted, starting with the classical Dickey-Fuller (1981) null
hypothesis of non-stationarity approach. The next step is the Phillips-
Perron (1988) test followed by the recently available null of
stationarity test i.e., the Kwiatkowski et al., (KPSS, 1992). Second, we
apply the powerful and robust Johansen-Juselius (1990) multivariate
cointegration methodology to examine for cointegrating vectors or
common stochastic trends in the complete MM system. We do this
since a prerequisite for proving the validity of the MM is that the

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 Studies In Economics and Finance

variables considered should move together over time, and this is

precisely what the JJ procedure will tell us. We also distinguish
between the restricted model (assuming uncovered interest parity
holds) and the unrestricted one, and examine both of them. Our results
support the presence of a unique cointegrating vector in both models
and hence support the MM as a viable long run exchange rate
determination process.
This study is divided into four sections. Section II is a brief
literature review of the MM and sets up the model under study. In
section III we discuss the non-stationarity tests. Section IV deals with
the cointegration tests, followed by our results and concluding
remarks.

II. Monetary Exchange Rate Model

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In the realm of asset market models of exchange rates, we have

two distinct approaches. The portfolio-balance model, which assumes
imperfect asset substitutability between domestic and foreign assets
(bonds) and the monetary model (MM) which assumes perfect asset
substitutability between the two. Thus, in the MM portfolio shares are
highly sensitive (theoretically infinitely responsive) to the minutest
difference in the expected rate of returns. Thus, uncovered interest
parity (UIP) holds and bond supplies/shares are irrelevant as
determinants of exchange rates. This perfect substitutability assumes
perfect capital mobility and hence the differential between actual and
desired portfolio composition is zero.3 There is also the implicit
assumption of zero default risk and no capital control impediments.
Now the responsible variables are the money market demand and
supply determinants.4
The MM is based on the fact that exchange rate, being the price of
one country's money in terms of another is determined by the relative
demand for and supply of the two monies. In the flexible price MM,
the domestic and foreign (*) real money demand eq. is5

Purchasing power parity (PPP) holds i.e.,

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

and Uncovered interest parity (UIP) holds, i.e.,

where m, p, i, s, y, t, E and I are the log of money supply, log of

prices, interest rates, log of exchange rate (domestic price of foreign
currency), log of income, time subscript, the expectations operator and
the information set respectively. Δst+1 is the first difference of the
exchange rate expectation series. MT (1993) solve the reduced form
equation based on the present value model of Campbell and Shiller
(1987). Now if m t , mt *, y t , yt * and st are all integrated of order
one [1(1)], then if PPP holds we can write
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If both PPP and UIP hold, then we can write the restricted version of
eq.(5) as

MT (1993) solve the reduced form equation based on the present

value model of Campbell and Shiller (1987). Equation (5) can be
rewritten as

(which is the unrestricted version, with the only assumption being that
PPP holds), or equation (5a) can be rewritten as

(which is the restricted version, with the assumption that both PPP and
UIP hold), and where Lt is the spread between the spot exchange rate
and the variables in the MM which are determinants of the spot
exchange rate.
Now if mt, mt *, yt, yt * and st are all integrated of order one [ I
(1) 1, then according to Engle and Granger (1987) there may exist one
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 Studies In Economics and Finance

or more linear combinations of these variables, Lt, which is stationary,

i.e., I (0). This would imply the existence of one or more cointegrating
vectors, which would be consistent with the flexible price monetary
equation, assuming UIP holds. This is true because it, it * and st are
all I(1) processes6 and assuming UIP holds in eq. (4), (it - it *) will be
I(0) for st ~ I(1). We sequentially test both models and since eq. (5)
and (6) have more than two variables, the JJ multivariate cointegration
approach is best suited for an examination of the presence/absence of
common trends or cointegrating vectors (CV's) in the system. The
very presence of one or more CV(s) in the format would uphold the
validity of the flexible price monetary model as a viable long run
equilibrium solution for exchange rates.

III. Tests of non-stationarity

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First a brief description of the data set and the time period is
warranted. The data for Canada is taken from the International
Monetary Fund's International Financial Statistics (IFS) CD-ROM, and
for the US from CITIBASE. The time frame under consideration is the
floating exchange rate regime from January 1973 (1) - December 1996
(12).
We examine the nonstationarity of the variables under consideration
using the standard Dickey-Fuller (DF, 1979, 1981) procedure.7 To
confirm the presence of one and only one unit root in our data series we
run the augmented DF tests on their first differences. The results are
reported in Table 1.
As shown in Table 1, the value of the test statistic for the log-levels
of each series in each case is less than the critical value, implying that
the null hypothesis of non-stationarity (presence of unit roots), cannot be
rejected at the 5% significance level. However, we can see from the third
column of the table that the value of the test statistic for the first
difference of each series is greater than the critical value, implying that
the null hypothesis of a unit root is rejected at any reasonable level in
favor of the alternate hypothesis of stationarity. Since the log-levels of
each series contains a unit root while their first difference is stationary, it
confirms the presence of one and only one unit root i.e., they are all
integrated of order one or are I(1) in cointegration terminology.
The DF results cannot be taken as conclusive evidence of the
existence of unit roots. This method is restrictive because of the
unrealistic assumption of identically and independently distributed (iid:
0,σ2) Gaussian processes. There is now a substantial body of

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

documented evidence that financial time series including exchange rates

exhibit time dependent heteroskedasticity. Also, in the DF procedure,
with increasing importance of the moving average (MA) component,
higher lags of Δyt is needed as regressors in the autoregressive (AR)
correction. These nuisance parameters need to be estimated, and for each
Δyt we loose one effective observation, thus reducing the power of the
test. Thus, we propose the Phillips-Perron (PP, 1988) test. The PP
procedure is a non-parametric correction method that avoids the pitfalls
of selecting the truncation lag, since nuisance parameters do not have to
be estimated. It is robust to autocorrelated errors i.e., allows greater
general dependence including conditional heteroskedasticity. The
Perron (1988) stepwise regression equation and test statistic is as
follows:
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where

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 Studies In Economics and Finance

From Table 2, we see that the variables under consideration are non-
stationary processes.
Another lingering criticism of the classical unit root testing
procedure is that it cannot distinguish between unit roots and near unit
root stationary processes. Diebold and Rudebusch (1991) have shown
that the DF procedure has low power against stable AR alternatives with
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unit roots near unity and fractionally integrated alternatives. This

prompted the use of the Kwiatkowski et al. (KPSS, 1992) method, where
the null is of stationarity and the alternative is the presence of a unit root.
This ensures that the alternative will be accepted (null rejected) only
when there is a strong evidence for (against) it. The series is decomposed
into a deterministic trend, a random walk and a stationary error:

where a is an unknown constant, ut=ut-1+ et, et = iid (0, λσ2 v ) errors for
some λ > 0. Vt is a stationary ARMA process whose variance is σ2 v .
Hereσ2vis I(0) and ut is I(1). The random walk component is driven by et
while vt is the deviations from trend. When λ= 0, the I(1) error
disappears and yt is stationary. Thus, a test of the null hypothesis Ho: λ =
0 against H1:.λ≠0 provides a test of the stationarity of yt. The LM test
statistic is given by

where

and w t are the OLS residuals from eq.(10), and θ(j, L) is the optional
weighting function chosen to ensure that σ2(L) is a non-negative

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

number. It is in fact the Bartlett window θ(j,L)=l-j/(L+l), as given in

Newey and West (1987). We use the sample auto-correlation function
of Δwt to determine the maximum value of the lag length L. The test
statistic ητ and ηµ in Table 3 is the null of stationarity with and without
a time trend respectively.
The null hypothesis for the test statistics presented in Table 3 is
stationarity of the series against the alternative of presence of unit roots
(non-stationarity). Since in each case the test statistic is greater than the
critical value, we reject the null of stationarity in favor of the alternative
of unit roots for all the forecast and the forward rate series. Thus, all
three tests support the fact that the model variables are nonstationary,
single order integrated processes, in conformity with the literature.

IV. Multivariate Cointegration Analysis

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To examine for common trends or comovements in the entire MM

system, we apply the Johansen and Juselius (JJ, 1990) methodology
which is a multivariate analogue of the Engle-Granger (EG, 1987)
bivariate test procedure. We justify our choice of methodology used
based on Gonzalo (1994). He has compared the asymptotic as well as
the small sample properties of the ordinary least squares, nonlinear least
squares, maximum likelihood model, principal components and the
canonical correlation's (JJ) model of estimating cointegrating vectors.
These methods are all super consistent i.e. convergence rate is T instead
of T l/2, but in the Johansen systems approach, the asymptotic
coefficient estimates are symmetrically distributed with the smallest bias
in median and sample dispersion, measured by interquartile range. The
distribution is concentrated around the true parameter value and hence
has the greatest probability of accurate estimates. Even in finite samples
the above conclusions hold. None of the other methods have similar
strengths. Moreover, even when the error structure is nonnormal or its
dynamics are unknown (as is usually the case), the standard procedure is
to over parameterize by including more lags in the error correction
model. Here the loss in terms of efficiency is minimal, and the JJ
canonical correlation's method is still the best performer.
The systems approach considered here includes the money supply m
and m*, prices p and p*, interest rate i and i* and the exchange rate s.
The unrestricted version of MM is

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 Studies In Economics and Finance

where eq. (6) is equal to eq. (14) and the restricted variant of the model
is eq. (14 a), which is equal to eq. (6a),

with Lt being the spread between the spot exchange rate and the
variables in the MM which determine the spot exchange rate in the
monetary model. If the variables in the MM are cointegrated, then the
spread should be stationary. Existence of cointegration would be
evidence in favor of at least long-run validity of the MM (MacDonald
and Taylor 1993, p. 101). We use the JJ procedure described below to
test for the presence of cointegrating vectors in (14) and (14a).
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Since the JJ procedure is so widely used we only give a brief outline

here. A p-dimensional vector {Yt} can be generalized as

We define two matrices α and

ß such that

The rows of ß' form the r cointegrating vectors, such that, ßI is one of
the r cointegrating vectors, then

JJ demonstrate that the likelihood function for this problem is

proportional to

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

A A A

where λ1,λ2, ,λn, are the squared canonical correlations between

Yt-k and the ΔYt series, arranged in descending order. The number of
cointegrating vectors is equal to the number of non-zero λi 's .
There are two test statistics which are applied sequentially to
determine the exact number of cointegrating vectors in a system. In the
Trace test the null hypothesis is that there are "r" or less CV's, where r =
0, 1,2. Here the null of r ≤ 0 is tested against the general hypothesis of r
< 1, r < 2. In the next step we apply the Maximum Eigenvalue Test
(MET) where the null of r = 0 is tested against the specific hypothesis of
r=l, r=2 and so on. According to JJ (1990), both the methods should be
used since the power of the Trace test is lower relative to the MET, since
it does not use the information from the eigenvalues not significantly
different from zero. The trace statistic has greater power when the λi's
(in eq. 21) are evenly distributed and the A. max gives better results when
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the λi 's are either large or small. We first compute the trace test:

The null hypothesis is that there are r or less cointegrating vectors,

against the alternative hypothesis of r+1 cointegrating vectors.
We then run the maximum eigenvalue test to check the significance
of the (i+l)th eigenvector against the ith eigenvector. This uses the
(r+l) th largest squared canonical correlation or eigenvalue as follows :

(20) Maximum eigenvalue = -T In ( 1-λr+1 ).

Therefore, we will be using the JJ procedure on equation (14) and

(14a), and then we will use the Trace statistic (eq. 19), and the Maximum
Eigenvalue statistic (eq. 20) to determine the number of cointegrating
vectors in our system. Existence of one or more cointegrating vectors
will be evidence in favor of the validity of the monetary model.
The JJ maximum likelihood error correction model cannot
characterize the data generating process and hence may result in an
arbitrary choice of autoregressive (AR) lags at the discretion of the
researcher. Here Kasa (1992) argues in favor of higher order lags based
on the fact that the error structure may be non-Gaussian and that the
correct autocorrelation structure is unknown. The rational is that the

71
 Studies In Economics and Finance

higher-order VAR's are more consistent with the non-normal error

structure assumptions.
First, the appropriate lag length was selected using the likelihood-
ratio test (Greene, 1993, Chap. 19: p. 553). Then the residuals from the
VAR with the selected lag length was tested for serial correlation using
the Ljung Box statistic (Greene, 1993, p. 427) and for the presence of
autoregressive conditional heteroskedasticity (ARCH) effects (Engle,
1982 and Greene 1993). The lag length was then increased by one at
every stage until the null hypothesis of no serial correlation and no
ARCH effects could not be rejected. This final lag length will produce a
VAR with white noise residuals and therefore was used in the JJ test. In
our sample this final lag length was 9, and therefore we use a VAR (9)
model in the JJ procedure.
In case of the trace test (TT) the null hypothesis is that the number of
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cointegrating vectors is less than or equal to 0, 1, 2, 3,4,5, and 6 given

that our system as a whole consists of seven different series. We start
with the r < 0 and move upwards. The idea is that accepting r ≤ n implies
that we should also accept the r < n+i, where i=1,2,3..., we stop the first
time we are unable to reject the null. From Table 4, we see that the
tabulated value is greater than the critical value (at the 5 % significance
level) for the first time at r = 0. Thus, the data is consistent with one or
fewer cointegrating vectors (CV's) in the system.
According to JJ (1990) for conclusive evidence regarding the exact
number of CV's in the system, we have to check the maximum
eigenvalue test (MET) results. The null hypothesis in this case is more
specific than the trace test. Here the null is specific about the number of
CV's in the system as r = i, where i= 0, 1,2, ... 6 for the complete
monetary model. The MET indicates the presence of exactly one CV (at
r = 1, tabulated value is greater than critical value) in the system.
Thus, in Table 4, for both the Trace test (TT) and the maximum
eigenvalue test (MET), we find evidence of one unique CV in the
system. This is similar to Diamandis et al. (1996) who also report one
and only one CV in the complete system.
The eigenvalues are also examined since they reflect how strongly
the cointegrating vectors are correlated with the stationary part of the
process. The eigenvalues are the weights of the cointegrating vectors in
descending order. The number of significant non-zero eigenvalues equals
the number of CV's in the system. The empirical evidence suggests the
presence of one and only one significant non-zero eigenvector.
Next, the restricted variant of the MM is tested and the results are
reported in Table 5.

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

Here too evidence from the TT and MET suggests the presence of
one CV in the system9 and the eigenvalues indicate one significant non-
zero eigenvector.
This is evidence of the presence of comovement in the system (since
cointegrating vectors and common trends are complementary) which
includes all the five variables eq. 14 and the seven variables eq. 14 a, of
the two variants of the monetary model. Thus, the whole MM system is
cointegrated, and hence it is indeed a solution to long run equilibrium
exchange rates.

V. Conclusion

This study reexamines the monetary approach to exchange rate

theory, specifically as a long run solution. Based on a number of
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empirical studies conducted in the 70's and 80's, the MM lost its
credibility and along with it the idea that macroeconomic fundamentals
as money, interest rates and income were the primary determinants of
exchange rates was being questioned. One study even established that
a random walk model outperformed the MM in exchange rate
forecasting. But the results of these studies were not unanimous, with
some exceptions as Boothe (1983), who reported evidence supportive
of the monetary approach.
Our reservation in this area arises from the fact that these studies
did not consider non-stationarity of the model variables and hence
applied classical inference methods. After EG (1987), we now know
the inappropriateness of these applications. Once the presence of unit
roots in the variables under consideration was established, the studies
of the early 90's mainly MT(1991, 1993) found evidence supporting
the MM. Their analysis was confined to the British pound, Japanese
yen and the German mark, with special emphasis on the mark. The
Canadian -US relationship which was highly controversial (due to the
contradictory empirical evidence) was not examined.
Here we test the flexible price version of the MM, with the
Canadian -US exchange rate as the reference currency. Our results
(which are supported by Diamandis, 1996, and MacDonald and Taylor,
1991 and 1993) uphold the credibility of the MM as a valid long run
exchange rate model. Previous rejections of the MM may have been
due to the incorrect implementation of the econometric tests, a fact
pointed out by MacDonald and Taylor (1993, p. 90).

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 Studies In Economics and Finance

ENDNOTES

1. These studies also examined the MM parameter restrictions,

which were upheld for the German mark only.

2. We were made aware of a study by Diamandis et al. (1996) also

dealing with the Canadian - US exchange rate and the MM at the
very last stages of our research, to be exact a few months before
this work was sent out for publication. It took the nonstationarity
issue under consideration, and examined the long run validity of
the monetary approach. Our work is different on two counts. A
minor extension is the time frame, which goes upto December
1996, and the inclusion of the PP unit root test of stationarity. The
major contribution is the additional examination of the restricted
version of the monetary model which assumes that uncovered
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interest parity holds.

3. Moreover, this perfect substitutability also makes the portfolio

composition irrelevant since the rate of return between the
different (various denominations) assets is equal when expressed
in a common numeraire. Thus, UIP holds, or the interest rate on
domestic bonds is equal to the interest rate on foreign bonds plus
the expected rate of appreciation of the foreign currency.

4. These characteristics fit very well into the Canadian -US financial
structure and hence are the desired market under study.

5. The model is on the lines of MT (1993), which they applied to

the Mark -dollar exchange rate. Our study and presentation
owes much to them.

6. The literature is unanimous about these variables being I(1)

processes, and we find the same.

7. We are brief about the Dickey-Fuller, Phillips-Perron and the

KPSS test procedure since they are fairly routine these days. The
technical details are anyway available in the referenced papers.

8. This section owes much to Dickey et al. (1991), and MacDonald

and Taylor (1993). For an excellent exposition of cointegration
theory and its application see Dickey and Rossanna (1994).

9. MT (1993, Table 2b, pp. 99-100) report a unique CV in their test

of a similar model for the Mark-dollar exchange rate.

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 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

TABLE 1

ADF/ADF FD UNIT ROOT TEST

(All variables are in log form)

TIME PERIOD 1973(1)-1996 (12) 1973 (1) - 1996 (12)

ADF ADF:FD

US m -1.24 -4.73

US I -2.14 -4.47

US y -2.47 -4.41
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E -2.32 -4.40

CAN m -2.02 -3.88

CAN I -1.85 -4.55

CAN y -2.92 -5.04

Notes: ADF: Augmented Dickey-Fuller test, FD: First difference, m --

Money supply; i — interest rate; y — industrial output; e-- exchange
rate. The same symbols hold for tables 2 & 3. Critical value at the 5%
significance level for sample size 250 is -3.43 (Fuller, 1976).

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TABLE 2

Phillips-Perron Unit Root Test

STAT Z(φ 3 ) Z(α) Z(φ 2 ) Z(α*) Z(φ l ) z(α)

Z(t-) z(tα*) Z(tα)
α

US m 0.88 -0.32 -1.39 2.39 -1.23 -0.52 4.36 5.03 0.22

US 1 2.80 -2.26 -9.05 1.87 -1.76 -6.36 1.56 -0.41 -0.29

US y 4.00 -2.77 -15.27 4.75 -0.23 -0.32 2.39 2.14 0.12

76
E 1.41 -1.62 -5.14 1.62 -1.33 -2.74 1.86 0.46 0,51

CAN m 1.07 -1.46 -4.25 3.47 -0.24 -0.12 3.45 3.96 0.48

CAN I 4.89 -2.09 -8.63 3.28 -1.59 -6.89 1.30 -0.47 -0.34
Studies In Eco
CAN y 3.34 -2.58 -13.27 3.59 -0.83 -1.51 1.98 1.74 0.11

Critical Values at the 5% significance level for sample size 250 for Z(φ j), Z ( t _ ) , Z(a ), Z(φ 2 ) , Z(tα*,), Z(a*),
a
Z(φ 1), Z ( t α ) , Z ( α ) are 6.43, -3.43, -21.3, 4.75, -2.88, -14.0, 4.63, -1.95 and -8.0, respectively (Dickey-Fuller 1979,
1981).
 An Empirical Examination of the Long Run Monetary (Exchange Rate) Model

TABLE 3

KPSS Null of Stationarity Approach to Unit Root Tests

Time Frame: 1973 (1) - 1996 (12)

STAT *ητ

US m 0.19 2.31

US 1 0.28 0.75

US y 0.16 2.18
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E 0.32 1.41

CAN m 0.22 2.28

CAN I 0.38 0.56

CAN y 0.18 2.09

Notes: Critical values for ΗΤ and Ηµ at the 5%

significance level are 0.146 and 0.463,
respectively.

77
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TABLE 4

J J Multivariate Cointegration Test: VAR (Lag length = 9)

NH TT CV NH λ MAX CV EV
R≤6 3.3534 9.09 r=6 r=7 3.3534 9.09 0.0119
78
R≤5 10.3073 19.96 r=5 r=6 6.9539 15.67 0.0247
R≤4 18.0674 34.91 r=4 r=5 7.7600 22.00 0.0275
R≤3 35.7781 53.12 r=3 r=4 17.7107 28.14 0.0617
R≤2 56.0258 76.07 r=2 r=3 20.2476 34.40 0.0702
R≤1 88.8847 102.14 r=l r=2 32.8589 40.30 0.1114
R = 0 138.9744 * 131.70 r=0 R=l 48.0897 * 46.46 0.1405#
Notes: NH: Null hypothesis, TT: trace test, CV: Critical value, EV: Eigenvalues, λ Studies In Econ
MAX: Maximum eigenvalue test. The critical values are from Osterwald - Lenum (1992).
*: Indicates statistical significance at the 5% level. #: Significant non-zero eigenvalue.
Same symbols hold true for Table 5 also.
 TABLE 5
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JJ Multivariate Cointegration Test: VAR (Lag length = 15)

NH TT CV NH X MAX CV EV

R≤4 1.3193 9.09 R=4 r=5 1.3193 9.09 0.0048

R<3 8.2227 19.96 R=3 r=4 6.9034 15.67 0.0252

79

R<2 23.6268 34.91 R =2 r =3 15.4040 22.00 0.0554

R<1 45.5703 53.12 R= 1 r=2 21.9435 28.14 0.0780

R= 0 91.4917* 76.07 R=0 r= 1 45.9213* 34.40 0.1564#

An Empiric
 Studies In Economics and Finance

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