Why real interest rates, cost of capital and price/earnings ratios vary across countries

Article Abstract:

This paper examines how productivity changes affect real rates of return and price/earnings ratios in a small open economy. The model provides conditions under which increased productivity in a country's traded goods sector causes prices of non-traded goods to increase relative to the price of traded goods. Under these conditions, real rates of interest decline and the production of certain non-traded durable goods (such as capital equipment and housing) immediately increase. This `overconstruction' has two effects. First, the increase in capital relative to labor in these sectors increases the marginal product of labor and hence immediately causes an increase in wages and the prices of non-traded goods. Second, an `oversupply' of capital goods and housing depresses their rental rates in the current period, thereby increasing their price to rental ratios or equivalently, their price/earnings ratios. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: E4; E44 Keywords: Real interest rates; Cost of capital; Price/earning ratios; Purchasing power parity; Real exchange rates; Productivity shocks

United States, Research, Economic research

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A comparison of alternative covariance matrices for models with over-lapping observations

Article Abstract:

The Generalized Method of Moments (GMM) estimators of Hansen, and Andrews and Monahan showed the best performance for highly correlated explanatory variables. However, they performed worse than the non-overlapping regressions. This study which seeks to examine the performance of alternative estimation methods for models with overlapping data, has shown the impact of method and bandwidth selection on the decision rule.

Models, Economic aspects, Analysis of covariance, Covariance analysis, Matrices, Matrices (Mathematics)

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