THREE ESSAYS IN OPEN ECONOMY MACROECONOMICS

Samih  A. AZAR

This dissertation is composed of three independent essays. The subject of the first essay is whether Purchasing Power Parity (PPP) applies for Lebanon for annual data from 1951 till 1994. Three general tests are carried out: (1) mean reversion of the real exchange rate, (2) short‑run formulations of PPP, and (3) cointegration. The results show that the real exchange rates against three foreign currencies, the US‑dollar, the French franc, and the Syrian pound, have a fast rate of mean reversion, that a partial adjustment of the price level is the correctly specified model, and that cointegration fails to be rejected.

The subject of the second essay is money demand in Lebanon. Three money supplies are considered: currency in circulation (cc), M1, and M3. The results show that (1) the income elasticities for cc and M1 are close to 0.5, consistent with the inventory model, (2) that the income elasticity for M3 is close to or greater than one, (3) that the price elasticities are higher than one, (4) that the inflation semi‑elasticities are higher than in the developad world, and (5) that the real interest rate semi‑elasticities are close to those in the developed world. The optimal inflation rates are all lower than the actual one. However the optimal inflation rates are quite close to the non‑war actual inflation rate.

The third essay evaluates the Dominguez and Frankel (1993) model of exchange market intervention using monthly and daily data on the Canadian float. The models that are statistically estimated include dummies for positive exchange rate changes and for positive intervention. In addition, both a nondynamic and a dynamic version are studied. The results show that whatever the specification and whatever the sample, there are considerable inconsistencies in parameter signs. Almost all specification tests are failed. The conclusion is that the Dominguez and Frankel model is most probably misspecified, and that intervention has perverse effects depending on the sample and the model. Therefore the conclusion that official intervention is effective is not warranted.