Exchange Rate Movements and International Interdependence of Stock Markets

Bhanda i, Jagdeep S.; Genbe g, Hans A icle Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s K edi und Kapi al P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Bhanda i, Jagdeep S.; Genbe g, Hans (1990) : Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 23, Iss. 4, pp. 496-532, h ps://doi.o g/10.3790/ccm.23.4.496 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/293183 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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In oduc ion Close in e na ional in eg a ion o inancial ma ke s is widely ega ded as a majo con ibu ing ac o in he economic in e dependence o coun ies. In pa icula , shocks in indi idual coun ies a e hough o be apidly ans- mi ed o o he economies h ough changes in in e es a es and exchange a es. Dis u bances o a wo ldwide na u e a e inco po a ed immedia ely in o asse p ices in all inancial cen e s, and economic ac i i y in he coun- ies o a inancially in eg a ed a ea can be in luenced almos simul ane- ously as i ms and households eac o he signals inco po a ed in hese asse p ices.1 Theo e ical and especially empi ical esea ch on hese phenomena has cen e ed on ma ke s o inancial asse s. Po en ially, equally impo an ansmission e ec s could occu h ough ma ke s o claims on eal asse s. Al hough pe haps less in e na ionally in eg a ed, na ional equi y ma ke s a e belie ed o p ocess in o ma ion e icien ly and he eby o ake in o accoun ele an ex e nal de elopmen s in p icing (e en non aded) asse s. P ices o hese asse s may in u n ha e impo an in luences on domes ic economic ac i i y h ough i ms' in es men decisions o h ough household spending. * The au ho s a e g a e ul o Mo is Golds ein and Mohsin Kahn, o pa icipan s in semina s a he Resea ch Depa men o he In e na ional Mone a y Fund, he G adua e Ins i u e o In e na ional S udies, he Kons anz Semina on Mone a y Theo y and Policy, as well as o an anonymous e e ee o help ul commen s on an ea lie d a o his pape . All emaining e o s a e he sole esponsibili y o he au ho s. This pape was begun while Hans Genbe g was a Consul an wi h he Resea ch Depa men o he In e na ional Mone a y Fund. He is cu en ly P o esso o Economics a he G adua e Ins i u e o In e na ional S udies a Gene a, Swi ze - land. Jagdeep S. Bhanda i is an Economis in he Eu opean Depa men o he IMF and was o me ly wi h he Resea ch Depa men . He is also P o esso o Economics a Wes Vi ginia Uni e si y. 1 Indeed, in e es pa i y condi ions a e cen al o he ansmission mechanisms in he majo i y o ecen open economy mac oeconomic models. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 497 I hus seems o in e es o inco po a e equi y p ices in o models o open economies and o s udy empi ically, as well as heo e ically, how na ional s ock ma ke s a e linked and wha ole hey play in he in e na ional ans- mission o shocks. The goal o his pape is o p o ide a con ibu ion o such an analysis.2 Conside Cha s 1 and 2 which show he mo emen s o nominal and eal s ock p ices, espec i ely, in Ge many, Japan, and he Uni ed S a es since 1974.3 The ollowing ques ions come o mind: (1) Is i possible o de ec common ends in hese se ies, and i so, wha ac o s could explain hese ends? (2) Do he se ies exhibi s able sho - o medium- e m ela ionships, and i so, a e hese due o common shocks o o he ansmission o na ion- speci ic shocks? (3) In he la e case, is one coun y dominan in he sense ha i s s ock p ice changes cause mo emen s elsewhe e?, and (4) Is i ue, as he Cha s sugges , ha s ock p ices ha e mo ed qui e closely oge he in spi e o he e y la ge exchange a e changes ha ha e aken place du ing he same pe iod, and i so, why? Cha s 3 and 4 illus a e some addi ional puzzles. They show di e ences in eal s ock p ices be ween Ge many and he Uni ed S a es (Cha 3) and be ween Japan and he Uni ed S a es (Cha 4), oge he wi h he co es- ponding eal exchange a es. The e does no appea o be any s able ela ionship be ween ela i e s ock p ices and eal exchange a es. In some pe iods one can de ec s ong posi i e co-mo emen s, whe eas in o he s, he e appea s o be a nega i e ela ionship be ween he wo a iables. Can hese casual obse a ions be co obo a ed wi h mo e o mal s a is ical me hods, and i so, how can he changing pa e n o co ela ions o e ime be explained? 2 Theo e ical wo k inco po a ing s ock ma ke e ec s in open economy mac- oeconomic models includes Ga in (1986) and Mu phy (1988). The inance li e a u e has o cou se been conce ned wi h linkages be ween na ional s ock ma ke s in s udies o he bene i s o in e na ional po olio di e si ica ion. See, o example, he com- p ehensi e su ey by Adle and Dumas (1983), which also con ains e e ences o empi ical e idence on co ela ion be ween e u ns in a ious ma ke s. And esen (1988) p esen s e idence sugges ing ha common in e na ional ac o s can explain a signi ican po ion o he a ia ion in na ional s ock p ice indexes and, u he mo e, ha he same in e na ional ac o s a e leading indica o s o na ional business cycles. See also Schwe (1988) o an empi ical in es iga ion o s ock ma ke ola ili y. 3 Real s ock p ices a e de ined as he nominal p ice de la ed by he domes ic p ice o goods. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 498 Jagdeep S. Bhanda i and Hans Genbe g CHART 1 NOMINAL STOCK PRICES CHART 2 REAL STOCK PRICES The emainde o he pape add esses some o hese ques ions. In Sec- ion II, o mal s a is ical me hods a e used o es ablish a numbe o empi ical egula i ies ha cha ac e ize he ela ionships ha exis among na ional s ock p ice indices and exchange a es. In Sec ion III we p esen a heo e i- OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 499 AND THE REAL EXCHANGE RATES CHART 3 CHART 4 cal model ha yields p edic ions abou hese same ela ionships. Sec ion IV asks how well he heo e ical model can accoun o he iden i ied empi ical egula i ies, and Sec ion V iden i ies some a eas o u he heo e ical and empi ical esea ch sugges ed by ou analysis. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 500 Jagdeep S. Bhanda i and Hans Genbe g II. Empi ical Regula i ies To mo i a e he heo e ical analysis ha ollows, a numbe o hypo heses in ol ing he ela ionship be ween s ock p ices, exchange a es, and ou pu p ices we e examined. Speci ically, we wan ed o de e mine whe he : (1) Some o m o Pu chasing Powe Pa i y (PPP) holds when he p ices in ol ed a e na ional equi y p ices a he han goods p ices. (2) Real equi y p ices a e ela ed ac oss coun ies. (3) Any coun y appea s o be dominan in he sense ha mo emen s in equi y p ices he e „cause" mo emen s in equi y p ices elsewhe e. (4) Real equi y p ices and eal exchange a es a e co ela ed, and i so, how? Ou da a sample consis ed o mon hly obse a ions om 1973, 6 o 1988, 2 on he ollowing a iables o se en majo indus ial coun ies:4 Ps: an index o he nominal p ice o equi y in he domes ic ma ke (ex- p essed in domes ic cu ency); P: an index o he nominal p ice o goods in he domes ic ma ke (ex- p essed in domes ic cu ency and p oxied by he consume p ice index); sli he spo exchange a e be ween cu encies i and j (uni s o i pe uni o j). Th ee addi ional a iables we e cons uc ed: q = PVP: he eal p ice o equi y in e ms o he domes ic p ice o goods; e j = s j Pj/Pl: he eal exchange a e be ween coun ies i and j. Uni oo es s on he loga i hms o hese a iables e ealed he p esence o non-s a iona i y in all cases.5 Fi s di e ences o he a iables we e he e o e used in mos o he subsequen empi ical analysis. 4 Canada, F ance, he Fede al Republic o Ge many, I aly, Japan, he Uni ed King- dom, and he Uni ed S a es. Da a sou ces we e DRI o all s ock p ice indices and IFS o all o he se ies. 5 See he Appendix o de ails. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 501 1. The Rela ionship Be ween Equi y P ices Ac oss Coun ies a) Does Pu chasing Powe Pa i y Hold? Unde condi ions simila o hose ha would make PPP hold o p ices o goods, one should ind ha i holds also o nominal equi y p ices. I equi y p ices e lec discoun ed alues o u u e e u ns o capi al, i ough o be he case ha exchange a e changes and nominal s ock p ice changes jus o se each o he when he e a e no signi ican ela i e p ice changes o goods and ac o se ices be ween coun ies, i.e., when he eal exchange a e is cons an . In o de o in es iga e he alidi y o he PPP hypo hesis applied o s ock p ices, wo ela ed es s we e pe o med. The i s was a es o s a iona i y o he „ eal equi y exchange a e", de ined by (A) esij = sijPsj/Psi Based on esul s: desc ibed in Sec ion 1 o he Appendix, we could no ejec he hypo hesis ha he eal equi y exchange a es in ou sample ol- low andom walks. This in u n means ha he e is no endency o hese eal a es o con e ge o a cons an , as p edic ed by he PPP hypo hesis. The second es o he PPP hypo hesis was a es o co-in eg a ion be ween Psl, Psj, and slj. Speci ically, we in es iga ed he hypo hesis ha he es i- ma ed esidual in he eg ession (B) In Psi = a + Pi In Psi + p2lnsij + u* is a s a iona y ime se ies.6 Fi een pai s o coun ies de ined by he ollow- ing i, j combina ions we e used. j = US i = (Ge many, Japan, UK, Canada, F ance, I aly) j = Ge many i = (Japan, UK, Canada, F ance, I aly) j = Japan i = (UK, Canada, F ance, I aly) Table 1 e eals ha he hypo hesis o co-in eg a ion could be ejec ed in all bu wo cases, (US, Japan) and (Japan, UK), 7 sugges ing ha in gene al he e is no s able long- un ela ionship be ween nominal s ock p ices and 6 In co-in eg a ion es s, equa ion (B) is e e ed o as he co-in eg a ion eg ession and is in e p e ed as he long- un ela ionship be ween he a iables p o ided ha he esidual in he equa ion is s a iona y. 7 In he i s o hese, he poin es ima e o he coe icien /32 was — .47 as opposed o he heo e ical alue o + 1 unde he null hypo hesis o PPP. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 502 Jagdeep S. Bhanda i and Hans Genbe g exchange a es. As we shall see sho ly, howe e , his does no mean ha s ock p ice mo emen s in di e en coun ies a e un ela ed. Wha i does indica e is ha ela i e s ock p ice mo emen s do no simply o se nominal exchange a e changes. Es ima es o he co-in eg a ion eg essions, equa ion (B), p o ided addi- ional clues abou he ela ionship be ween na ional equi y ma ke s. Whe eas he coe icien Pi is o en in he neighbo hood o 1, he es ima es o p2 a e some imes posi i e and some imes nega i e, depending on which coun y pai was examined.8 This seems o sugges ha nominal s ock p ices mo e oge he independen ly o nominal exchange a e changes, a hypo hesis ha will be examined in he nex subsec ion. Table 1 : Tes s o Co-In eg a ion Be ween Nominal S ock P ices and Nominal Exchange Ra es (Co-in eg a ion eg ession: In Psi = a + Pi In P j + p2 In Sy + u ) Coun y j Coun y i DF ADF ßi ß2 Uni ed S a es Ge many -2.33 Japan - 3.78 Uni ed Kingdom - 2.66 Canada -2.16 F ance - 2.93 I aly - 2.60 Ge many Japan - 1.23 Uni ed Kingdom - 2.08 Canada - 1.58 F ance - 2.64 I aly - 1.84 Japan Uni ed Kingdom -3.01 Canada - 1.87 F ance - 2.43 I aly - 1.71 (Sample: 1973, 6 - 1988, 2) -2.48 1.04 (0.03) 0.03 (0.07) -3.83 1.42 (0.04) - 0.47 (0.07) -2.25 1.60 (0.05) 0.48 (0.09) - 1.92 0.71 (0.06) 1.54 (0.17) -2.51 1.60 (0.05) - 0.83 (0.06) - 1.94 2.13 (0.10) 0.11 (0.09) - 1.72 0.84 (0.07) - 1.41 (0.17) -2.40 1.01 (0.08) 1.11 (0.16) - 1.86 0.67 (0.06) 0.63 (0.10) -2.64 1.02 (0.06) 0.67 (0.11) - 1.77 1.41 (0.12) 0.55 (0.14) - 3.48 0.77 (0.05) 0.56 (0.10) - 1.56 0.58 (0.05) 0.19 (0.10) -2.62 1.08 (0.06) - 0.29 (0.10) - 1.85 1.56 (0.09) - 0.32 (0.11) No es: DF s ands o he s a is ic o </> in he Dickey-Fulle eg ession Au = <pu ~ 1 + e . ADF s ands o he s a is ic o 0 in he Augmen ed Dickey-Fulle eg ession 4 Au = <pu -i + 2 bk Au -k + £ . k = 1 C i ical alues, a he 10 pe cen le el, o DF and ADF a e 3.03 and 2.84, espec i ely. See Engle and G ange (1987), Table II. Numbe s in pa en heses a e s anda d e o s. 8 Gi en he non-s a iona i y o he esidual in he eg ession one mus be ca e ul in d awing o mal in e ences om he es ima ed coe icien s. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 503 b) Nominal S ock P ices Mo e Toge he Independen ly o Nominal Exchange Ra e Changes Since s ock p ices and exchange a es did no appea o be co-in eg a ed, and since indi idually hey ollow andom walks, one migh a gue ha eg essions like equa ion (B) should be es ima ed on i s di e ences o he a iables. Doing so yields he ollowing h ee conclusions (see Table 2): (1) The e a e signi ican common mo emen s o nominal s ock p ices ac oss na ional ma ke s. The coe icien on Psi is signi ican ly g ea e han ze o o e e y coun y pai ing ep esen ed in Table 2. (2) Changes in nominal exchange a es a e no sys ema ically ela ed o changes in s ock p ices. The co esponding coe icien (a2) is mos o en no signi ican ly di e en om ze o. Fu he mo e, while he PPP hypo hesis implies ha his coe icien should be equal o + 1, Table 2 o en con ains nega i e poin es ima es. (3) The p e ious conclusions do no seem o be he esul o he Oc obe 1987 c ash since hey hold o samples excluding ha episode as well. While i is ue ha he i o he equa ion de e io a es when 1987 is excluded om he sample, i is s ill he case ha he coe icien on coun- y j's s ock p ice change is signi ican ly g ea e han ze o a con en- ional le els. No „imp o emen " is no iceable ega ding he coe icien on he nominal exchange a e. c) Real S ock P ices Mo e Toge he The same es s we e applied o eal s ock p ices, q, and eal exchange a es, e. The esul s con i med p e ious conclusions; speci ically, (i) he le el o eal s ock p ices does no seem o be coin eg a ed in gene al ac oss coun- ies, and (ii) he e is a s ong posi i e ela ionship be ween changes in s ock p ices in di e en coun ies. De ailed esul s a e p esen ed in Tables 3 and 4. While he numbe o cases in which co-in eg a ion canno be ejec ed inc eases somewha ela i e o he es s wi h nominal s ock p ices and exchange a es,9 he majo i y o he compa isons in Table 3 s ill indica e an absence o such a ela ionship be ween eal s ock p ices. As be o e, he co- in eg a ion eg essions sugges a one- o -one ela ionship be ween he s ock p ice se ies bu no sys ema ic associa ion in ol ing he eal exchange a es. 9 Speci ically, he numbe o cases inc eased om wo pai s o coun ies o six ( h ee) based on he ADF (DF) s a is ic and a 10% signi icance le el. I is in e es ing o no e ha co-in eg a ion could be ejec ed in all bu one case when one o he wo coun ies was he Uni ed S a es. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 510 Jagdeep S. Bhanda i and Hans Genbe g (3) Real s ock p ices a e posi i ely co ela ed ac oss coun ies. (4) The co ela ion be ween ela i e eal s ock p ices and eal exchange a es a ies o e ime be ween signi ican ly posi i e and signi ican ly nega i e alues. III. The Model This sec ion cons uc s and analyzes a wo-coun y model which is capa- ble o gene a ing pa e ns o adjus men in eal and nominal s ock p ices, exchange a es and ou pu le els in esponse o a ious dis u bances occu - ing in ei he o bo h coun ies.11 1. The Analy ical F amewo k The hypo he ical wo ld o his model consis s o wo coun ies. Each coun y p oduces a single inal commodi y. Bo h goods a e consumed in each coun y. Each coun y supplies bonds denomina ed in i s own cu ency o he wo ld ma ke . These asse s a e assumed o be pe ec subs i u es on an unco e ed basis so ha e ec i ely he e is a single in e na ionally aded bond. Domes ic esiden s (in each coun y) may hold domes ically issued money, he in e na ional bond o sha es o he domes ic s ock ma ke . Fo pu poses o his model, he al e na i e assump ion o pe mi ing equi y sha es o be in e na ionally aded leads o en i ely insubs ancial changes.12 The e is no cu ency subs i u ion and all conside a ions o in e media e p oduc s, capi al o ma ion, and ac o ma ke s a e delibe a ely supp essed. Asse p ices including he exchange a e, in e es yields, and s ock p ices adjus ins an aneously; howe e , commodi y p ices a e "s icky" and adjus only o e ime in esponse o commodi y ma ke disequilib ia. The model con ains a desc ip ion o commodi y, money and s ock ma ke s in each coun y, a speci ica ion o in e es a bi age, a bi age ela ionships be ween s ock ma ke e u ns, and bond yields, along wi h a s a emen o 11 The model o be desc ibed below can be iewed ei he as a wo-coun y ex ension o Ga in (1986), o as a elabo a ion o exis ing wo-coun y models such as Bhanda i (1982) o Tu no sky (1986), sui ably amended o inco po a e s ock ma ke s in each coun y. 12 The eason o his is ha we do no model di e ences in isk cha ac e is ics be- ween s ocks issued in di e en coun ies. This in u n implies ha gi en ce ain con- di ions he a bi age ela ionships which mus hold be ween eal and inancial asse s in he model a e una ec ed by pe mi ing ade in equi y sha es. One condi ion unde which his is so is ha he sha e o domes ic s ocks in he domes ic po olio is equal o he sha e o domes ic goods in he domes ic gene al p ice index. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 511 p ice dynamics in each coun y. All ele an commodi y and asse ma ke pa ame e s in each coun y a e iden ical, i.e., he analysis en isions a wo ld consis ing o wo pa ame e -wise iden ical, symme ic coun ies. This assump ion ela ing o iden ical c oss-coun y pa ame e s pe mi s us o sol e an o he wise high-o de di e en ial equa ion sys em by he use o he a e ages-di e ences echnique sugges ed by Aoki (1981). Agg ega e demand in each coun y is gi en de ini ionally by he sum o consump ion plus he ne ade balance and go e nmen expendi u e (igno - ing o simplici y, he in es men componen o expendi u e). Thus, domes- ic income (in na u al uni s) is (1') Y = C + X - (SP*/P)-IM + G whe e C, X, IM and G espec i ely deno e consump ion, expo s, impo s and go e nmen expendi u e, while S is he nominal exchange a e (numbe o uni s o domes ic cu ency pe uni o eign cu ency) and P and P* e e o na ional p ice le els. In wha ollows, uppe -case le e s deno e na u al le els o a iables while lowe -case le e s indica e loga i hmic alues (un- less o he wise indica ed) and s a ed alues e e o o eign a iables. Since he es o he model is mos con enien ly speci ied in loga i hmic e ms i is necessa y o log-linea ize equa ion (1'). A loga i hmic linea app oxima ion o equa ion (1') is gi en by (1") In Y « (C°/Y°) In C + ^ In X - i2 In E - n2 In IM + (G°/Y°) In G whe e a indica es an a bi a y ini ial alue and whe e E (= SP* /P) is he eal exchange a e and /¿i and /¿2 a e he sha es o expo s and impo s o income espec i ely, i.e., ii = (X°/Y°) and i2 = (E - IM/Y)°. We nex hypo- hesize he ollowing unc ional o ms o consump ion, expo s and impo s. lnC = c = Ciy + c2q In X = x = Xi (s + p* - p) + x2 y* In IM = im = mi V ~ m2 (s + p* - p) whe e q is he eal s ock p ice (in e ms o domes ic ou pu ) and all pa a- me e s a e de ined posi i ely. The p esence o a s ock ma ke e ec upon eal consump ion can be explained by appealing o weal h- ype conside a ions. The educed o m o he loga i hm o domes ic ou pu can be shown o be gi en by OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 512 (1) Jagdeep S. Bhanda i and Hans Genbe g y = di y* + d2q + d3 (s + p* - p) + d4 g whe e ox 2 j (C7Y°)-C2 di = ; a2 = D D -Xi* i2(m2-l) J (G7Y°) a3 = ; d4 = D D D = [1 -c^CVY0*^"!!)] I is assumed ha he Ma shall-Le ne condi ion is sa is ied, i.e., (xi + m2 - 1) > 0 so ha d, > 0 o all i.13 The analogous exp ession o o eign agg ega e demand is (2) y* = di y + d2 q* - d3 (s + p* - p) + d4 g* Money ma ke equilib ium in he wo coun ies is desc ibed by (3a) m-h= iy- 2i (3b) m* - h* = i y* - 2i* when i and i* a e nominal in e es yields in he wo coun ies while h and h* a e p ice indices gi en by14 (4a) h = dp + (1 - 6) (s + p*) (4b) h* = dp* + (1 - 6){p-s) 0 < 6 < 1 I is s aigh o wa d o show ha (1 - 6), he sha e o impo ed goods in home consump ion is ela ed o o he s uc u al pa ame e s o he model ia (l-<5) = m2/(C/Y)°. Nominal in e es yields a e linked ia he unco e ed in e es pa i y condi- ion (5) i = i* + se whe e se is he expec ed a e o dep ecia ion o he exchange a e. We posi ha expec ed dep ecia ion is go e ned by he expec a ional scheme 13 In addi ion, D > 0 is he usual s abili y condi ion which is also assumed sa is ied. 14 These p ice indices a e exac i he unde lying u ili y unc ion is Cobb-Douglas in na u e. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 513 (6) se = - d{s- s) 6 > 0 whe e 6 is he speed o adjus men o expec a ions owa ds he long- un alue o he exchange a e s. I will u n ou subsequen ly ha his expec a- ional scheme is consis en wi h pe ec o esigh o a p ope ly cons ained alue o 6. The nex se o ela ions equa es he expec ed eal e u n on sha es, which consis s o bo h capi al gains and p o i s (JT, J *), o he eal e u n on domes- ic bonds in each coun y.15 Thus, (7a') q/q + J /q = (i - p) = (7b') q*/q* + n*/q* = {i* - p*) = * Equa ion (7a') - (7b') can be linea ized a ound he ini ial s eady-s a e as (7a) q + j = q + q -q (7b) q* + JC* = * q* + q* * - q* * I may be no ed ha equa ion (7a) and (7b) when sol ed o wa d wi h he app op ia e ans e sali y condi ions yield an exp ession o he eal s ock p ice as he p esen alue o an icipa ed u u e p o i s when discoun ed a he eal in e es a e, T } ~ l ( )d q = I ^ (T) Exp. d o Finally, eal p o i s a e ela ed p ocyclically o he de ia ion o ou pu om i s ull capaci y le el, (8a) n = b0 + bl (y - y) (8b) = b0 + {y* - y*) Simila exp essions a e also used in Ga in (1986). And, as also no ed by he la e , when bi = 0, he "s ock" is exac ly like an indexed pe pe ui y so ha he model educes o he s anda d ype wi hou s ock ma ke e ec s. Thus, bi measu es he ex en o depa u e o he p esen model om he usual amewo k whe ein s ock ma ke e ec s a e excluded. Finally, he pa ame e bQ measu es he "na u al" a e o p o i in he s eady-s a e. 15 These equa ions ep esen a bi age ela ionships be ween bonds and s ocks in each economy. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 514 Jagdeep S. Bhanda i and Hans Genbe g The inal equa ions o he model speci y p ice dynamics. We assume ha p ice adjus men occu s acco ding o (9a) (9b) P* = (y -y) P* = y{y* - y*) i.e., p ices espond posi i ely o he s a e o excess demand. 2. Solu ion o he Model This subsec ion discusses he solu ion o he model desc ibed abo e. Inspec ion o he model immedia ely e eals ha he model as desc ibed in ol es ou h-o de dynamics wi h equa ions in ol ing p, p*, q and q*.16 Because such a sys em is analy ically in ac able we p oceed ins ead o u ilize he me hod o a e ages and di e ences p oposed by Aoki (1981). Essen ially, his echnique pe mi s us o decouple he dynamic sys em in o wo sub-sys ems, one in ol ing a e ages o a iables and he o he in ol - ing di e ences (ac oss coun ies) in he same a iables. Each o hese wo sub-sys ems is second-o de in na u e and is he e o e, analy ically ac a- ble.17 I is con enien o begin wi h he s eadys a e solu ion o he model. Following ha , we discuss he dynamics o he wo sub-sys ems and hen he saddle poin pa hs which yield us he impac e ec s o a ious dis u - bances. In he s eady s a e o he model s = se = p = p* = q = q* = 0.18 F om he in e es pa i y condi ion equa ion (5), along wi h he de ini ion o eal in e es a es, i ollows ha nominal and eal in e es a es a e equalized ac oss coun ies in he s eady s a e, Nex , s eady-s a e p o i s a e ( om equa ion (8)) 16 An addi ional dynamic equa ion in ol ing s would o dina ily ha e been in ol ed had we imposed pe ec o esigh di ec ly ins ead o u ilizing he expec a ional scheme desc ibed in (6). 17 The a e ages-di e ences echnique can also be u ilized i pa ame e s a e no coun y-wise iden ical; howe e , addi ional app oxima ions a e in ol ed in his a ea. See Aoki (1981) o de ails. 18 I is s aigh o wa d howe e , o inco po a e ongoing in la ion in he s eady s a e. a) The S eady S a e (10) i = z*, = * and i = , i OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 515 (11) ji — i * = b0 and equa ion (7) yields (12) q = q* i.e., s eady-s a e eal s ock p ices a e also equalized. Explici solu ions o he exchange a e, p ice le els, and s ock p ices may now be ob ained by using he goods ma ke and money ma ke condi ions. These a e (13) q = q* = ^-^-(g + g*) 2 a2 . . b0 (14) i = i* = = * = <7 d4 (15) (s + p*-p) = K2 - —(9-9*) 2 d3 (1 - 6) d4 2 b0 (16) p = m + (g - g*) + + K4 2 d3 K3-(d4/2d2)(s + g*) (1 - d) d4 2 b0 (17) p* = m* [g - g*) + + K6 2 d3 K5-(di/2d2)(g + g*) d4 (i - 2 6) i ] (18) s = Ki + (m — m*) 4- I — J | g - g* J whe e he K s e e o cons an s ha a e unnecessa y o wha ollows. Equa ions (13) - (18) indica e ha a mone a y expansion in one coun y, say he domes ic coun y, inc eases ha coun y's p ice le el and nominal exchange a e equip opo iona ely. The e is no ansmission o he o eign coun y's p ice le el in he s eady-s a e. A he same ime eal s ock p ices and he eal exchange a e emain una ec ed. By con as , an inc ease in domes ic go e nmen expendi u e educes eal s ock p ices and inc eases nominal and eal in e es yields. I is also seen ha while domes ic p ices inc ease ollowing domes ic iscal expansion, he e ec upon o eign p ices is unce ain, i.e., ei he posi i e o nega i e ansmission could occu . Finally, while he eal exchange a e app ecia es in s anda d ashion, he e ec upon he nominal exchange a e is con ingen upon he p opo ions o domes ic e sus o eign goods in he p ice index. Speci ically, he usual esul o nominal app ecia ion occu s only i he sha e o domes ic goods in he domes ic p ice index is less han one hal . OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 516 Jagdeep S. Bhanda i and Hans Genbe g b) Dynamics and Impac E ec s The solu ion o he dynamics and impac e ec in he model is ob ained by decomposing he model in o wo sub-sys ems in ol ing a e ages and di e - ences espec i ely. De ining a e age and di e ence a iables espec i ely as Ba = (B + B*) / 2; Bd = {B - B*) whe e B and B* a e any domes ic and o eign a iable, he model can be w i en in a e age o m as (19a) ma - ha = xya - 2ia (19b) pa = y(ya-ya) (19c) qa + 7ia = qa + q a - q (19d) J 1 = b0 + (ya - ya) This subsys em in ol es second-o de dynamics which can be exp essed as V 0 yd2/(l - do "(p* (20) = d2 (9V1 q" g/ 2 1 qy - öl 1 (qa -qa) _ L l-di V 2 /_ _ (qa -qa) The oo s o equa ion (20) a e gi en by C = ± V*2+ {4qyd2/ 2(l - d^}] / 2 whe e I". d2 (q 1 I is clea ha a saddle poin exis s i espec i e o whe he x ^ 0, i.e., one oo is posi i e and he o he nega i e. The di e ence model may be w i en as (21a) (1 + dx) (yd - yd) = d2 (qd - qd) + 2 d3 (s - S) - 2 d3 (pd - pd) (21b) [2 (1 - 6) + 2 6] (s - s) = - (2 6 - 1) (pd - pd) - , (yd - yd) (21c) md - (gd - gd) = x (yd - yd) + 2 d(s - s) (2Id) (gd -gd) = (2 6- 1) (pd - pd) + 2 (1 - S) (s - s) (21e) pd = y(yd-yd) OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 517 (2 I ) qd + 7id = (qd-qd) + q d (21g) ji* = bi (yd - yd) A e conside able e-a angemen he dynamics o his sub-sys em may be shown o be gi en by (22) • an «21 <*12 Û22 (Pd ~ Pd) (qd~qd) whe e 2 d3 y (1 + 2 9) an = —? T- > 0 {(1 + dO [2 (1 - Ô) + 2 0] + 2 d3 x ) yd2 [2 (1-0) + 20] a 12 = "T T- > 0 {(1 + dx) [2 (1- Ô) + 2 6] + 2d3 Vi} ^21 <*21 _ an {b1 + q(2ó- 1) y} _ g (2 ó - 1) 6 { Vl an - y (2 6 - 1) } 1 ~ L y y {2 (i — ô) + 2 0} J I". q(2ô- l)g i li2 _ Q12 { + q (2 ó — 1) y} 1 " y { 2 (1 - <5) + 2 0} y J Saddle poin s abili y equi es ha - [an a22 + ^12 <*2i] < 0. As is e i- den his condi ion is no me wi hou addi ional es ic ions. Su icien condi ions o saddle poin s abili y a e a21, a22 > 0. I may be eadily e - i ied ha wi h a alue o la ge enough, bo h a22 and a21 a e posi i e. Assuming ha saddle poin s abili y does exis , he s able solu ions o equa- ions (20) and (22) a e gi en by (Pa~Pa) = iPo-pa) Exp.ç (Pd~Pd) = iPdo-pd) Exp.u whe e Ç, À < 0 a e he s able oo s. The saddle poin pa hs co esponding o hese sub-sys ems a e S(1 -di) (23) (qa0 - qa) = (pj - p°) yd2 (24) (qj - qd) = ( H^iL j (pd _ pd)19 a12 / 19 Recall ha q = q* = < and qd = 0. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 518 Jagdeep S. Bhanda i and Hans Genbe g along wi h I" y (2 <5 — 1) + i A 1 (25) (s0 - s) = - —j— -Y- [pd 0 - pd] L y (2 (1-6) + 2e} J I is s aigh o wa d o show ha he pe ec o esigh alue o he expec a - ional pa ame e 6 is 6* = - A. Finally, he impac e ec s upon ou pu (a e age and di e ence o ms) a e gi en by (26) (1 - dx) (ya 0 - ya) = d2 (qa 0 - qa) (27) („- - - ( - + (.. - „ - (p- - The long- un e ec s o any dis u bance a e ob ained om equa ions (10) - (18). The impac e ec s upon a e age and di e ence a iables is hus gi en om equa ions (23) - (27), keeping in mind ha pa 0 and pd 0 a e no "jump" a iables and e ol e only o e ime. Once he impac e ec s upon a e age and di e ence a iables is known, he e ec s upon o iginal a iables a e easily ob ained as ollows: (28a) B0 = (Bq + 2Ba 0)/2 (28b) B* = (2 Ba 0 - Bd 0)/2 whe e B0 = (P0, q0, Vo) and B $ = (P*01q*0iy*0) 3. E ec s o Nominal and Real Dis u bances a) Mone a y Expansion Conside i s he e ec s o a domes ic mone a y expansions as ep- esen ed by dm > 0. As indica ed p e iously, such a dis u bance p oduces no s eady-s a e e ec s upon q ( eal s ock p ices in ei he coun y), p* ( o - eign p ice le el), e ( eal exchange a e) and ei he in e es a e. I leads how- e e , o equip opo iona e inc eases in he domes ic p ice le el (dp/dm = 1) and he nominal exchange a e (ds/dm = 1). The impac e ec upon he nominal (and eal) exchange a e o a domes ic mone a y expansion is gi en by equa ion (25) and is ds0 (29) — = (1 + Z) dm I" y(25-l)+ 1A ] whe e Z = —? - L { 2 (1 - «5) + 2 0} J OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 519 I is clea om equa ion (29) ha i £ > 0, we ha e exchange a e "o e - shoo ing" and con e sely o £ < 0. I will u n ou ha he e will always be nominal exchange a e o e shoo ing o ei he mone a y o eal dis u - bances bu no bo h. This will become appa en sho ly. The e ec s upon eal s ock p ices in he wo coun ies ollowing domes ic mone a y expan- sion a e (A + aii) _ 2g(l-d1) a 12 2 yd2 ^ 0 2 2£(l-d0 (A + an) + 2yd2 a 12 ^ 0 2 i.e., e ec s upon s ock p ices a e a p io i unclea .20 Exac ly symme ic e ec s o cou se, occu o an inc ease in o eign money supply. Finally, ou - pu e ec s a e ob ained om equa ions (26) - (27). Addi ional insigh in o he quali a i e and quan i a i e e ec s in ol ed will be ob ained om he nume ical simula ions conside ed below. The ansi ional e ec s o he dis u bance upon hese a iables can be de e mined by e e ence o he s eady-s a e and impac e ec s and by i ue o he ac ha adjus men along he s able pa h mus occu in acco dance wi h a second-o de exponen ial pa h.21 Speci ically, o eign p ices ini ially 20 I may be shown ha he a e age le el o s ock p ices inc eases ollowing an inc ease in domes ic money, while he e ec upon he di e ence le el is unclea , i.e., C(l-d0 . (A + an) (dqa0/dm) = > 0; (dqd0/dm) = ^ 0. 2yd2 a 12 21 No e ha while he di e ence and a e age a iables adjus along i s -o de pa hs, o iginal a iables such as p , p*, q and q* in ol e each o he s able oo s o he a e age-di e ence subsys em and he e o e ollow second-o de pa hs. By con- as , he nominal exchange a e pa h is i s -o de . Fo example, he comple e solu- ions o domes ic and o eign p ices a e P = {pd + (Po " Pd) Exp. A + 2 [pa + (pi - pa) Exp. } /2 P* = {2[pa + (p2-p°)Exp. *<] - [pd + (Vd0 - pd) Exp. A ]}/2 i. e., second-o de pa hs wi h he s able oo s A and ? a e in ol ed. A simila s a emen is ue o s ock p ices q and The nominal exchange a e, on he o he hand, is gi en by he ollowing i s -o de pa h (see (25)). [y(2 <5- 1) + i A 1 , jn l— [pd0 - pd Exp. A y{2 (1 - <5) + 2 0} J (30a) dq0 dm (30b) dq *o dm OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 526 Jagdeep S. Bhanda i and Hans Genbe g ansmi ed o o eign ou pu excep in h ee cases (cases 3, 4 and 8) and is posi i ely ansmi ed o o eign s ock p ices (al hough in damped ashion) in e e y case. Finally, domes ic eal expendi u e expansion always causes exchange a e o e shoo ing, an inc ease in domes ic ou pu and a decline in o eign s ock p ices in e e y ins ance. In i e cases (cases 2, 4, 6, 8 and 9) domes ic s ock p ices inc ease ini ially while in he o he cases, hey egis e a decline. Finally, excep in h ee cases (cases 2, 6, and 9), he dis u bance is again nega i ely ansmi ed o o eign ou pu . IV. Reconciling he Theo y and he S ylized Fac s As a i s a emp o judge he empi ical ele ance o he heo e ical model, we shall now examine o wha ex en he s ylized ac s o Sec ion II can be in e p e ed wi hin ha amewo k. A his s age we o ego o mal empi ical es s o he model in a o o a modes and pa ial econcilia ion o he heo y and he ac s. Fi s , we no e ha he lack o co-in eg a ion be ween s ock p ices and exchange a es p esumably s ems om he exis ence o pe manen eal shocks ha ha e di e en ial e ec s on he coun ies in ou sample. S icky p ices do o cou se ende he e ec s o pu ely mone a y dis u bances pe - sis en , bu in p inciple some long- un ela ionship be ween he a iables should exis in he da a i only such shocks we e p esen .30 The ac ha sho - un mo emen s in s ock p ices a e posi i ely co e- la ed ac oss coun ies can be used ei he o place es ic ions on he pa a- me e s o he heo e ical model o o d aw in e ences abou he na u e o shocks. Shocks ha a e posi i ely co ela ed ac oss coun ies will ob iously gi e ise o simila mo emen s in he endogenous a iables. Posi i e co ela- ion o shocks can be he esul ei he o ac i e coo dina ion o policies o o common dis u bances such as wo ldwide p oduc i i y shocks. In ei he case ou pe ec ly symme ical heo e ical economies will espond in an iden ical ashion. Mino asymme ies in he eal wo ld could accoun o less han pe ec co-mo emen s in he da a e en in esponse o such shocks. Common mo emen s in s ock p ices could also come abou in esponse o coun y-speci ic shocks p o ided ha he ansmission mechanism is app o- p ia ely speci ied. In e ms o he a ious cases examined in he p e ious sec ion we see ha no all o hem can gene a e he posi i e co ela ion o 30 I is o cou se possible ha he es s ca ied ou a e no sensi i e enough o dis- c imina e be ween he possibili y o comple e lack o long- un ela ionships and a high deg ee o pe sis ence. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 527 s ock p ices ound in he da a. Fo iscal shocks in pa icula , he only ones ha do a e hose in which domes ic s ock p ices all as a esul o a domes ic iscal expansion. In esponse o mone a y shocks i is ue ha posi i e ansmission is he ule, bu i should be no ed ha o se e al combina ions o pa ame e s he in e na ional spill-o e e ec s a e quan i a i ely a he small. I appea s hen ha ei he some deg ee o explici coo dina ion o economic policies o a ce ain commonness o shocks is necessa y o explain he pe asi e posi i e co ela ion o s ock p ice mo emen s. A p ominen ea u e o he empi ical esul s o Sec ion II was ha exchange a e changes do no ha e a s able ela ionship wi h mo emen s o s ock p ices. This inding can eadily be econciled wi h he heo e ical model and he judgmen conce ning he sou ces o shocks gi en in he p e i- ous pa ag aph. Suppose he posi i e c oss-coun y co ela ion be ween s ock p ices is mainly he esul o common shocks o coo dina ed policies, bu ha occasional coun y-speci ic dis u bances gi e ise o exchange a e mo emen s. Depending on he ype and loca ion o he la e , i would be possible o obse e changes in he exchange a e in ei he di ec ion in associa ion wi h common upwa d o downwa d mo emen s in s ock p ices.31 The inding ha coinciden s ock p ice mo emen s a e mos common should no be aken o sugges ha he e a e no di e ences be ween coun- ies a all. Bo h he cha s in he In oduc ion and he e idence p esen ed in Sec ion II.4 indica e ha ela i ely pe sis en de ia ions do occu . Fu he - mo e, i was ound ha hese de ia ions could be ela ed o mo emen s in he eal exchange a e be ween coun ies bu ha he co ela ion be ween a ia ions in ela i e s ock p ices and he eal exchange a e is some imes posi i e and some imes nega i e. The esul s o he heo e ical model a e in con o mi y wi h hese esul s, p o ided he p edominan shocks a e some- imes o mone a y and some imes o eal o igin. An expansiona y domes ic mone a y policy will dep ecia e he domes ic cu ency and lead o a ela i e inc ease o domes ic s ock p ices, accoun ing o a posi i e co ela ion be- ween (q - q*) and e. A con ac iona y domes ic iscal policy, on he o he hand, will again lead o a eal cu ency dep ecia ion on impac , bu also o a ela i e dec ease in domes ic s ock p ices. A nega i e co ela ion be ween (q - q *) and e would hen eme ge. 31 I he common mo emen in s ock p ices is he esul o ' ansmission' o pu ely coun y-speci ic shocks, he weak and uns able ela ionships be ween hese mo e- men s and exchange a e changes can occu i he shocks al e na e be ween coun ies. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 528 Jagdeep S. Bhanda i and Hans Genbe g V. Conclusions and Sugges ions Fo Fu he Resea ch In his pape we ha e documen ed a numbe o empi ical egula i ies go - e ning he ela ionship be ween s ock p ices in di e en coun ies and exchange a es. In pa icula , we ha e ound a s ong con empo aneous co - ela ion be ween na ional s ock p ice indexes in di e en coun ies, and a weake and ime- a ying ela ionship be ween ela i e s ock p ice mo e- men s and eal exchange a es. A ela i ely s anda d wo-coun y mac o- economic model was cons uc ed and shown o be compa ible wi h he empi ical indings. In he model common shocks o coo dina ion o economic policies accoun o he co-mo emen s o s ock p ices be ween coun ies. The dis inc ion be ween eal and mone a y shocks can explain ime- a ia ion in he ela ionship be ween eal exchange a es and ela i e s ock p ices. The analysis in his pape can be ex ended in a numbe o di ec ions in o de o examine he obus ness o ou conclusions wi h espec o changes in heo e ical speci ica ion and empi ical me hodology. A he heo e ical le el i would be use ul o expand he ole o s ock p ices by including hem as an a gumen in he demand o money and as a de e minan o in es men . F iedman (1988) shows ha he eal alue o he s ock ma ke has a signi ican posi i e weal h e ec in he demand o money in he Uni ed S a es. Inco po a ing such e ec s could al e he dynamics o ou model in impo an ways, especially wi h espec o he exchange a e. The eal alue o s ock p ices is likely o in luence in es men decisions by i ms and he e o e he capi al s ock and po en ial ou pu le el o he econ- omy. This impo an ole o he s ock ma ke was excluded om ou model in o de o p ese e some deg ee o analy ical ac abili y. I would be use ul o in es iga e how s ock ma ke linkages in luence na ional in es men a es and, he eby, he synch oniza ion o medium- o long- e m g ow h pe o mance ac oss coun ies.32 In o de o make he heo e ical esul s con o m mo e closely o s a is ical hypo heses, i would be use ul o in oduce s ochas ic elemen s explici ly in o he model. I , in addi ion, his we e combined wi h mo e s uc u al de ail, i would be possible o in es iga e he e ec s o a g ea e a ie y o shocks and o al e na i e speci ica ions o he co a iance s uc u e o hese shocks. Fu he mo e one could, in p inciple, also explo e he di e en 32 And esen (1988) con ains an in o mal bu sugges i e discussion o an in e na- ional q- heo y o in es men . OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 529 implica ions o pe manen e sus ansi o y shocks. Since he solu ion o ou ela i ely simple s uc u e al eady p esen s some echnical di icul ies, i is o cou se likely ha he complica ions sugges ed abo e will make analy ical esul s impossible o come by and necessi a e he use o nume ical me hods. As a as empi ical wo k is conce ned, wo main di ec ions o esea ch appea p omising. The i s would be o design and implemen mo e sophis- ica ed me hods o measu e he ypes, sou ces and magni udes o shocks ha a e hough o be impo an o s ock p ice and exchange a e mo emen s.33 This would allow a mo e o mal es o ou conjec u e ha he ime- a ying co ela ion be ween ela i e s ock p ices and eal exchange a es is due o he occu ence o di e en ypes o shocks a di e en imes. A second and mo e ambi ious di ec ion o esea ch is o ex end he wo k o Cu le , Po e ba and Summe s (1988) o an in e na ional se ing. As shown in Sec ion III, common componen s o s ock p ice mo emen s in di e en ma ke s a e essen ially con empo aneous. This implies, as ou heo y also sugges s, ha he ele an o cing a iables o any one coun y could, and should, include inno a ions in o eign a iables. A lo could po en ially be lea ned abou economic in e dependence by es ablishing exac ly how and which o eign a iables e ec domes ic s ock p ices. Appendix In his appendix we p o ide some de ail conce ning he empi ical es s conduc ed in Sec ion II o he main ex . Time Se ies P ope ies o he Da a Se ies In o de o es o he p esence o uni oo s in he ime se ies ep esen a- ion o each da a se ies, he ollowing eg essions we e es ima ed: (Al) Ax = -0iXi_i + u (A2) A2x = - 4>2Ax - i + x = {Ps,P,s^,q,eij} I is no signi ican ly di e en om ze o and is, a uni oo is p e- sen in he le el o x bu no in i s i s di e ence. In o he wo ds, x is in e- 33 App op ia ely modi ied, he me hod used in Bhanda i, Flood, and Home (1989) seems o be a good candida e. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 530 Jagdeep S. Bhanda i and Hans Genbe g g a ed o o de 1. Using he app op ia e c i ical alues o he es (i.e., hose p esen ed in Dickey and Fulle ) i was ound, no su p isingly pe haps, ha o all a iables and o all coun ies i was no possible o ejec he p esence o one uni oo in each se ies.34 Re e ences Adle , M. and Dumas, B.: "In e na ional Po olio Choice and Co po a e Finance: A Syn hesis," Jou nal o Finance, Vol. 38, No. 3 (June 1983), pp. 925 - 84. - And esen, S.: "In eg a ed Equi y Ma ke s and In e na ional Business Cycles," (unpublished PhD disse a ion, G adua e Ins i u e o In e na ional S udies, Gene a, Swi ze land, 1988). - Aoki, M.: Dynamic Analysis o Open Economies, (Academic P ess: New Yo k, 1981). - Bhanda i, Jagdeep S.: Exchange Ra e De e mina ion and Adjus men , (P aege : New Yo k, 1982). - Bhanda i, Jagdeep S., Flood, Robe P., and Home, Joce- lyn P.: "E olu ion o Exchange Ra e Regimes." (Fo hcoming, S a Pape s, In e na- ional Mone a y Fund, 1989). - Cu le , D., Po e ba, J., and Summe s, L.: "Wha Mo es S ock P ices?", NBER Wo king Pape No. 2538 (Camb idge, Massachuse s: Na ional Bu eau o Economic Resea ch, Ma ch 1988). -Engle, R. F., and G ange , C. W. J.: "Co- In eg a ion and E o Co ec ion: Rep esen a ion, Es ima ion and Tes ing," Econome ica, Vol. 55, (1987), pp. 251 - 76. - F iedman, M.: "Money and S ock P ices," Jou nal o Poli ical Economy, Vol. 96, No. 2, (Ap il 1988), pp. 221 - 45. - Ga in, M.: "The S ock Ma ke and Exchange Ra e Dynamics," In e na ional Finance Discussion Pape , No. 278, Boa d o Go e no s o he Fede al Rese e Sys em (1986). -In e na ional Mone a y Fund: Wo ld Economic Ou look, 1988. -Mu phy, R.: "S ock P ices, Real Exchange Ra es, and Op imal Capi al Accumula ion," In e na ional Mone a y Fund Wo king Pape , WP/88/31, (Washing on: 1988). - Schwe , G. W.: "Why Does S ock Ma ke Vola ili y Change o e Time?" Wo king Pape No. 2798, Na ional Bu eau o Economic Resea ch, (1988). - Tu no sky, S. J.: "Mone a y and Fiscal Policy unde Pe ec Fo esigh : A Symme ic Two-Coun y Analysis," Economica, Vol. 53 (1986), pp. 139 - 157. Zusammen assung De isenku sbewegungen und in e na ionale Inde dependenz on Ak ienmä k en In diesem Bei ag we den Ve bindungen zwischen Ak ien- und De isenku sbewe- gungen un e such . Im e s en Teil zeig eine empi ische Un e suchung ü sieben Indus ielände au de G undlage on Da en ab 1974 eine Reihe on Regelmäßigkei- en au . Danach schein sich de Nennwe de Ak ien in diesen Lände n in bedeu en- dem Maße zu en sp echen. Au ähnliche Weise ko elie en da übe hinaus auch die 34 To economize on space, de ails o he esul s a e no p esen ed he e. They may be ob ained om he au ho s. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s 531 E ek i we e de Ak ien. Gleichzei ig schein jedoch keine s abile Rela ion zwischen dem Nennwe de Ak ien und dem de De isen zu bes ehen. In de zwei en Häl e des Bei ags wi d ein heo e isches Modell kons uie und un e such , mi dem Mus e ü E ek i - und Nennwe anpassungen bei Ak ien und De isen gescha en we den können, welche den bei den Da en es ges ell en ähnlich sind. Die Ta sache, daß - wie empi isch es ges ell - ku z is ige Bewegungen bei den Ak ienku sen übe Lände g enzen hinweg posi i ko elie en, kann en wede ü eine Res ik ion de Pa ame e des heo e ischen Modells ode ü den Beweis de Exis enz on gegensä zlichen g undlegenden S ö ungen he angezogen we den. Bei unse em Modell lassen zum Beispiel übe Lände g enzen hinweg posi i ko elie ende S ö un- gen ähnliche Bewegungen bei den endogenen Va iablen wie den Ak ienku sen en s e- hen. Umgekeh können posi i ko elie ende S ö ungen das E gebnis en wede ak i- e Poli ikkoo dinie ung ode on gewöhnlichen S ö ungen, wie zum Beispiel wel - wei en P oduk i i ä ss ö ungen, sein. Gewöhnliche Ak ienku sbewegungen könn en sich auch aus lände spezi ischen S ö ungen e geben, so e n de T ansmissionsmecha- nismus au geeigne e Weise spezi izie wi d. Schließlich is das Modell auch in de Lage, die empi ische E kenn nis zu be ücksich igen, daß eine s abile Rela ion on Ak ienwe en und nominellen De isenku sen ehl . De Bei ag schließ mi Beobach- ungen zu den wei e en Fo schungsa bei en in diesem Be eich. Summa y Exchange Ra e Mo emen s and In e na ional In e dependence o S ock Ma ke s This pape examines linkages be ween mo emen s o s ock p ices and mo emen s o exchange a es. In he i s pa , an empi ical analysis using pos -1974 da a o se en indus ialized coun ies es ablishes a numbe o egula i ies. Thus, nominal s ock p ices in hese coun ies appea o be signi ican ly co ela ed. In addi ion, eal s ock p ices a e also simila ly co ela ed. A he same ime, howe e , he e appea s o be no s able long- un ela ionship be ween nominal s ock p ices and nominal exchange a es. The second hal o he pape cons uc s and analyzes a heo e ical model which is capable o gene a ing pa e ns o adjus men in eal and nominal s ock p ices and exchange a es ha a e simila o hose ound in he da a. The ac ha sho - un mo emen s in s ock p ices a e empi ically posi i ely co ela ed ac oss coun ies can be used ei he o place es ic ions on he pa ame e o he heo e ical model o o show in e ences abou he na u e o he unde lying shocks. Fo example, in ou model, shocks ha a e posi i ely co ela ed ac oss coun ies gi e ise o simila mo emen s in endogenous a iables such as s ock p ices. In u n, posi i e co ela ion o shocks can be he esul o ei he ac i e coo dina ion o policies o o common dis u bances such as wo ldwide p oduc i i y shocks. Common mo emen s in s ock p ices could also come abou in esponse o coun y-speci ic shocks p o ided ha he ansmission mechanism is app op ia ely speci ied. Finally, he model is also able o accommoda e he empi ical inding pe aining o he lack o a s able ela ionship be ween s ock p ices and nominal exchange a es. The pape concludes wi h some obse a ions ela ing o u he esea ch in his a ea. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52 532 Jagdeep S. Bhanda i and Hans Genbe g Résumé Les mou emen s des cou s de change e l'in e dépendance in e na ionale des ma chés des i es Ce a icle examine les appo s en e les mou emen s des cou s de bou se e ceux des aux de change. Dans la p emiè e pa ie, une analyse empi ique, u ilisan des don- nées pos 1974 de sep pays indus ialisés é abli un nomb e de égula i és. Les cou s de bou se nominaux dans ces pays semblen ê e en ela ion é oi e. En plus, les cou s de bou se éels son aussi co élés similai emen . En même emps, pou an , il ne semble pas exis e de ela ion s able à long e me en e les cou s de bou se nomi- naux e les aux de change nominaux. Dans la seconde pa ie de ce a ail, les au eu s cons uisen e analysen un modèle héo ique, capable de p odui e des modèles d'ajus emen des cou s de bou se éels e nominaux e des aux de change, qui son similai es à ceux ou és dans ces données. Le ai que des mou emen s à cou e me des cou s de bou se son co élés empi i- quemen de açon posi i e à a e s les pays, peu ê e u ilisé, soi pou pose des es ic ions au pa amè e du modèle héo ique, soi pou i e des conclusions su la na u e des chocs sous-jacen s. Pa exemple, dans no e modèle, des chocs qui son co - élés posi i emen à a e s les pays en aînen des mou emen s similai es de a ia- bles endogènes, comme des cou s de bou se. A son ou , une co éla ion posi i e de chocs peu ésul e soi d'une coo dina ion ac i e des poli iques, soi de oubles communs, comme pa exemple des chocs de p oduc i i é mondiaux. Des mou e- men s communs dans les cou s de bou se pou aien aussi ê e la éponse à des chocs spéci iques au pays, à condi ion que le mécanisme de ansmission soi spéci ié de açon app op iée. Finalemen , le modèle es aussi capable d'ajus e la cons a a ion empi ique conce nan le manque de ela ion s able en e les cou s de bou se e les aux de change nominaux. Dans leu conclusion, les au eu s on quelques obse a- ions su d'au es eche ches dans ce domaine. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.23.4.496 | Gene a ed on 2023-01-16 12:59:52