This paper uses a two-regime vector error-correction with a single cointegrating vector and a threshold in the error-correction term introduced by Hansen and Seo(2002). We propose a SupLM test for the presence of a threshold. We derive the asymptotic distribution and show how to simulate asymptotic critical region. Applying our methods to the 90-days and 180-days Commercial Paper rate, we find that there are an apparent threshold effect and inconsistent behaviors in the long-run equilibrium process.

Given the role electricity and natural gas sectors play in the North American economy, an understanding of how markets for these commodities interact is important. This dissertation independently characterizes the price dynamics of major electricity and natural gas spot markets in North America by combining directed acyclic graphs with time series analyses. Furthermore, the dissertation explores a generalization of price difference bands associated with the law of one price. Interdependencies among 11 major electricity spot markets are examined in Chapter II using a vector autoregression model. Results suggest that the relationships between the markets vary by time. Western markets are separated from the eastern markets and the Electricity Reliability Council of Texas. At longer time horizons these separations disappear. Palo Verde is the important spot market in the west for price discovery. Southwest Power Pool is the dominant market in Eastern Interconnected System for price discovery. Interdependencies among eight major natural gas spot markets are investigated using a vector error correction model and the Greedy Equivalence Search Algorithm in Chapter III. Findings suggest that the eight price series are tied together through sixlong-run cointegration relationships, supporting the argument that the natural gas market has developed into a single integrated market in North America since deregulation. Results indicate that price discovery tends to occur in the excess consuming regions and move to the excess producing regions. Across North America, the U.S. Midwest region, represented by the Chicago spot market, is the most important for price discovery. The Ellisburg-Leidy Hub in Pennsylvania and Malin Hub in Oregon are important for eastern and western markets. In Chapter IV, a threshold vector error correction model is applied to the natural gas markets to examine nonlinearities in adjustments to the law of one price. Results show that there are nonlinear adjustments to the law of one price in seven pair-wise markets. Four alternative cases for the law of one price are presented as a theoretical background. A methodology is developed for finding a threshold cointegration model that accounts for seasonality in the threshold levels. Results indicate that dynamic threshold effects vary depending on geographical location and whether the markets are excess producing or excess consuming markets.

In the purpose of this study we examine the long run relationship between the flower wholesale markets in Taiwan by the theory of Park (2007). The market integration is analyzed from the viewpoint of the Law of One Price (LOP). The LOP means that the products flow from the lower price markets to the higher price ones without transaction cost utill everywhere have the same price. However, in a situation that the transaction cost exists, the assumption of LOP is questionable. When the price difference between two markets exceeds the transaction cost, there is an arbitrage opportunity. This study examine the relationship between the flower wholesale markets in Taiwan by threshold cointegration theory. The result is that there indeed exists long run relationship and threshold effects. In addition, we consider a time-varing threshold cointegration model in Park (2007), to see whether there are different arbitrage behavious depending on the season between the flower wholesale markets. Finally, we have a result that the same price gap between markets in different season will be in different regime because of the change of the value of threshold. And it causes the seasonal arbitrage behavious.

The paper describes an attempt to gain insight into the relationship between cash and futures markets for US lean hogs and EU live pigs, and the opportunity of arbitrage hedging. In doing so, the authors use newer methods of threshold cointegration analysis for time series from 1999 until 2008. Besides the existence of a long-run equilibrium, asymmetric price adjustments can be demonstrated. This is especially the case for the EU live pigs, where price variations of the basis are higher and exhibit lower standard deviation. The results also perfectly show that cash prices follow the futures market more than the other way round. Furthermore, a grid search has revealed that the residual-based threshold in either market is near zero and therefore coherent with economic interpretation. Thus, at least theoretically, arbitrageurs in those markets are able to exploit the price differences between the two markets and reap no-risk monetary benefit. Hence, the results are in line with the statement that "speculating the basis" generates a better return. (authors' abstract)

Doctor of Philosophy / Department of Economics / Steven P. Cassou / This essay empirically investigates the dynamics between government debt and budget deficits in the United States during a recession as opposed to an expansion. We use four different budget deficits definitions to develop a more comprehensive insight. We estimate a threshold VAR model on quarterly data from 1947: Q1 to 2016: Q3 on debt to GDP and budget deficits to GDP ratio for the United States. Specification test using LR test rejects the null for a linear VAR against nonlinear VAR. The nonlinear impulse responses indicate, with an increase to budget deficits to GDP ratio, government debt to GDP ratio rise faster during a recession as opposed to an expansion, and tend to move in a counter-cyclical manner with an increase in the output gap. We can thus infer that governments chose economic stability over fiscal balance during recessions. With an increase in government debt to GDP ratio, nonlinear impulse response show budget deficits to GDP ratio grow faster during an expansion as opposed to a recession and exhibit counter-cyclicality with an increase in the output gap. All four budget defi cits definitions depict similar pattern. Robustness check, using cyclically adjusted primary budget deficit published by the congressional Budget Office, also con rm the above findings. In this essay, we explore the presence of a long run relationship between the monetary base and the government debt using monthly data from 1942:1 to 2015:12. We apply formal statistical methods including cointegration and threshold cointegration tests to investigate the presence of a long-run relationship and estimate a threshold vector error-correction model (TVECM henceforth) to analyze the short-run dynamics. We find the presence of a threshold cointegration between the monetary base and government debt. As for the short-run dynamics, TVECM estimates show that the speed of adjustment is significant for the growth in debt equation in both regimes with the signs indicating government adjusting the debt in the short-run. But the U.S. Fed does not change the monetary base, hence we do not find any evidence of debt monetization in the U.S. We evaluate our findings over two sub-samples: 1946 to 2015 and 1946 to 2007 for robustness purposes. Findings from both sub-samples conform to our findings from the full sample. In this essay, we investigate the impacts of growth in the budget deficit and money supply on real interest rate are integral to contemporary macroeconomic policy. We employ threshold VAR and nonlinear impulse responses using quarterly data from 1959 to 2015. We find that growth in money supply and budget deficits have an asymmetric impact on inflation, short-term interest rate, and real interest rates. Growth in money supply and budget deficit tend to make the real interest rate negative in a bad state. In a good state, on the other hand, growth in money supply tend to increase the real interest rate but growth in budget deficits tend to decrease the real interest rate over the forecast horizon.

The money demand function has been regarded as a fundamental building block in macroeconomic modelling, as it represents the link between the monetary policy and rest of the economy. The extensive literature on money demand function is concerned with the existence of a stable money demand function, which ensures adequate prediction of impact of a given change in money supply on other economic variables such as, inflation, interest rates, national income, private investment and other policy variables. This thesis employs both linear and nonlinear estimation methods to investigate the relationship between money demand, GDP, inflation and interest rates for the Euro Area over the period 1980-2010. The aim of this thesis is to compare the European money demand in linear and nonlinear framework. First a vector autoregression (VAR) model has been estimated. Then a threshold cointegration model has been employed and nonlinearity properties of the money demand relationship has been investigated. In contrast to the existing empirical literature, linear VEC model can find evidence of stability, however it has some conflicting results which can be explained by the nonlinearity of the model. Empirical results of MTAR type threshold cointegration specification verifies the nonlinearity in European money demand. The adjustment coefficient of lower regime suggests faster adjustment towards long run equilibrium compared to upper regime in nonlinear model. Moreover, the nonlinear model presents better fit to economic literature than linear model for European money demand.

With the liberalization of financial market, the prevalence of international trade and the prosperity of foreign exchange markets ,investors could hedge,speculate or interest arbitrage in markets. Therefore, market efficiency is worthy of investigation and analysis on the international finance extensively. According to simple market efficiency hypothesis, there would be a long-run relationship between spot exchange rate and forward exchange rate if the foreign exchange market is efficient. Under the circumstance, this study firstly tries to examine whether there is a long-run relationship or not between spot exchange rate and forward exchange rate by Linear Cointegration Theory. At the same time, the study tests Simple Market Efficiency Hypothesis is correct or not in practice. Next,in a non-linear threshold cointegrational way, it looks into whether there is an apparent threshold effect or not among variables, and the adjusting behavior in the long-run equilibrium process. The result of the study proves that there are an apparent threshold effect and inconsistent behaviors in the long-run equilibrium process.

This thesis develops a new methodological approach to test for threshold cointegration. It determines the threshold locations, the number of thresholds, and tests the null hypothesis of a unit root against the alternative of a stationary threshold process using p-values based on a residual-based block bootstrap for the nonlinear threshold autoregressive specification (TAR). Chapter 2 describes the methodological approach which combines Gonzalo and Pitarakis (2002) and Seo (2008). Chapter 3 employs Monte Carlo analysis to investigate the properties of the new approach. The results indicate that the methodology performs well and is suited for application to real world time series. Chapter 4 applies the new approach in combination with a threshold error correction model (ECM) to determine the spatial relationships among three crude oil prices: WTI, Brent, and Oman, from 2008 through 2011. The results indicate that the crude oil benchmarks are tied together by a long run relationship; however, the recent reversal in price premium between the two main crude oil benchmarks, WTI and Brent, is an anomaly that has resulted in a time period in which the series do not have a tendency to move back toward their long run relationship. Chapter 5 applies the new approach, in combination with threshold ECMs, with regime switches being triggered by the upstream markup margin to determine the vertical relationships between the crude oil, rack, and retail gasoline prices for six cities across North America. The results using both daily and weekly data between 2008 and 2011 suggest that upstream and downstream prices are cointegrated. There is evidence of band-TAR in which the crude, rack, and retail prices are free to diverge until the markup margin is squeezed or stretched beyond a lower or upper threshold. This suggests that abnormally high margins cannot be sustained indefinitely. The threshold ECMs indicate that there is no systematic relationship between the speed of adjustment and the markup margin; however, the residuals exhibit a leverage effect in which volatility and price changes are negatively correlated. Chapter 6 concludes with a summary of Chapters 2 through 5 and makes suggestions for future research. / Thesis (Ph.D, Management) -- Queen's University, 2012-06-17 22:53:24.922

Doctor of Philosophy / Department of Economics / Steven P. Cassou / This dissertation consists of three essays in asymmetric empirical macroeconomics. Making macroeconomic policies has become increasingly difficult because of intricate relationships among macroeconomic variables. In this dissertation, we apply state-of-the-art macroeconometric techniques to investigate asymmetric relationships between key macroeconomic aggregates. Our findings have important macroeconomic policy implications. An analogue to the Phillips curve shows a positive relationship between inflation and capacity utilization. Some recent empirical work has shown that this relationship has broken down when using data after the mid-1980s and several popular explanations for this changing relationship, including advancements in technology and globalization, were put forward as possible explanations. In the first essay, we empirically investigate this issue using several threshold error correction models. We find, in the long run, a 1% increase in the rate of inflation leads to approximately a 0.0046% increase in capacity utilization. The asymmetric error correction structure shows that changes in capacity utilization show significant corrective measures only during booms while changes in inflation correct during both phases of the business cycle with the corrections being stronger during recessions. We also find that, in the short run, changes in the inflation rate do Granger cause capacity utilization while changes in capacity utilization do not Granger cause inflation. The Granger causality from inflation to capacity utilization can be interpreted as supporting recent calls made in the popular press by some economists that it may be desirable for the Federal Reserve Bank to try to induce some inflation in an effort to stimulate the economy. In the second essay, we examine the role of consumer confidence on economic activities like households’ consumption in good and bad economic times. We consider the “news” versus “animal spirit” approach interpretation of consumer confidence. In the wake of the Great Recession of 2008-09, many have called for confidence-boosting policies to help speed up the recovery. A recent study has reinforced these policy calls by showing that the Michigan Consumer Confidence Index contains important information about “news” on future productivity that has long-lasting effects on economic activities like aggregate consumption. Using US data, we show this conclusion is more nuanced when considering an economy that has different potential states. We investigate regime-switching models which use the National Bureau of Economic Research US business cycle expansion and contraction data to create an indicator series that distinguishes bad and good economic times and use this series to investigate impulse responses and variance decompositions. We show the connection between consumer confidence to some types of consumer purchases is important during good economic times but is relatively unimportant during bad economic times. We also use this type of model to investigate the connection between news and consumer confidence and this connection is also shown to be state dependent. In the context of the animal spirits versus news debate, our findings show that during economic expansions, consumer confidence shocks likely reflect news, while during economic contractions, consumer confidence shocks are consistent with animal spirits. These findings also have important implications for recent policy debates which consider whether confidence boosting policies, like raising inflation expectations on big-ticket items such as automobiles or business equipment, would lead to a faster recovery. The third essay investigates expectation shocks and their effect on the economy. For instance, this essay investigates whether the economy responds to expectation shocks in an importantly asymmetric way. A growing literature shows that agents' expectation about the future can lead to boom-bust cycles. These studies so far ignore the transmission effects of expectations on current economic activities across the policy regimes. Using the Survey of Professional Forecasters and Livingstone Survey data, this study empirically investigates the effects of expectation shocks on macroeconomic activities when policy regimes shift. Identifying a structural shock to expectations by using the timing of information in the forecast surveys and actual data releases, we show that the effects of agents' expectations about the future on current macroeconomic activities are asymmetric across the policy regimes. In particular, we find that a perception of good times ahead typically leads to a significant rise in current measures of economic activity in a hawkish regime relative to a dovish regime. We also find that monetary policy's reactions to agents' expectations are asymmetric across the policy regimes. Our findings do not support the views of critics of the central banks, who argued that keeping monetary policy too easy for too long is responsible for fueling the booms. Instead, our findings support the traditional view that a positive (negative) expectation about the future coincides with an anticipatory tightening (easing) of monetary policy.

This study investigates the interest rate pass through from the money market rate to the lending rate by utilizing monthly data of fifteen countries, grouped as high income, upper middle income and lower middle income, over the period 1999:01-2011:09. Taking the linear cointegration test of Engle-Granger as benchmark, we employ threshold cointegration tests of Enders and Siklos (2001) in order to account for the possible nonlinearities in the pass-through process. Empirical results reveal that the pass through process is complete in three countries / Republic of Korea, Latvia and Malaysia and the adjustment of the lending rate is symmetric in two countries / Armenia and Republic of Korea. Moreover, it is observed that the adjustment of the lending rate is upward sticky in six countries / Bolivia, Philippines, Malaysia, Dominican Republic, Thailand and Croatia, whereas it is downward sticky in seven countries / Ukraine, Sri Lanka, Latvia, Peru, Kuwait, Hong Kong and Czech Republic. Furthermore, our estimation results suggest that heterogeneities in the pass-through mechanism across countries can be mainly explained by income level, inflation, market power, financial sector development and market volatility.