In this paper we re-examine the purchasing power parity concept using data from the recent experience with floating exchange rates. In particular, we utilise the recently developed multivariate cointegration methodology to test for a long-run relationship between exchange rates and relative prices and also to test for the proportionality of the exchange rate with respect to relative prices. In contrast to much other research, we demonstrate that there is a long-run relationship between a number of bilateral U.S. dollar exchange rates and their corresponding relative prices. The proportionality of the exchange rate to relative prices does not, however, receive support from the data. This finding may be attributable to the use of measured price series rather than the "true" series.

Using an expanded version of the purchasing-power-parity condition we construct simultaneous equation models for three key exchange rates which incorporate meaningful long-run equilibrium relationships and complex short-run dynamics. We show that fully dynamic out-of-sample forecasts from these models are capable of significantly outperforming those of a random walk model over horizons as short as 3 months, and that they are also more accurate than the vast majority of professional forecasts.

We analyze the degree of policy convergence of EMS member countries relative to that of some non-EMS countries. Interestingly, we find convergence for the nominal and real exchange rates and money supplies of the EMS members but not for the non-EMS countries. We also provide some evidence to support the "German leadership hypothesis" in the context of intra-EMS monetary policy convergence.

This paper analyses the impact of policy initiatives co-ordinated by Asian national governments on firms' composition of external finance. Using a unique firm-level database of eight Asian countries- Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand over the period of 1996–2012 and a difference-in-differences approach, the results show a significant response of the debt composition to the policy change. We find that firms increased their uptake of long-term debt, while decreased their short-term debt. We also document that less risky and more profitable firms are more significantly affected by the policy change than riskier and less profitable firms. Finally, we show that the improved access to external finance after the policy initiative helped firms to raise their investment spending.

This paper examines the response of US stock returns to Federal Funds rate (FFR) surprises between 1989 and 2012, focusing on the impact of the recent financial crisis. We find that outside the crisis period, stock prices increased as a response to unexpected FFR cuts. State dependence is identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear markets, and tightening credit conditions. However, an important structural shift occurred during the crisis, changing the stocks’ response to FFR shocks and the nature of state dependence. Throughout the crisis period, stocks did not react positively to unexpected FFR cuts, which were interpreted as signals of worsening future economic conditions. This triggered a rebalancing of investment portfolios away from falling equities and towards safe-haven assets. Our results highlight the severity of the crisis and the ineffectiveness of conventional monetary policy close to the zero lower bound.