| The purpose of this dissertation is to determine whether the adjustment speed between macro variables, such as the quantity of money, output, price level, and interest rate is somewhat related to globalization and openness, wage-price controls, exchange rate flexibility and controls on capital. Of equal importance is focusing on any factors that may foster or may hinder the speed with which these macro variables adjust toward their long-run equilibrium values. Theoretically, I argue that more openness and trade, more wage-price flexibility, more exchange rate flexibility, and less controls on capital flows foster the speed with which the above mentioned variables adjust toward their long-run equilibrium values.;This dissertation applies cointegration analysis to annual data for 32 countries over the period of 1975–2005 to establish cointegration among money supply, income, inflation rate, and the exchange rate. The application of error-correction modeling technique provides an estimate of the speed of adjustment among the macro variables of money demand in each country. These 32 cross-sectional observations are then used in a cross-sectional model of determinants of the speed of adjustment in which the dependent variable is the speed of adjustment and the independent variables are a measure of openness, a measure of wage-price flexibility, a measure of exchange rate flexibility, and the black market premium, as a measure of capital controls.;From the cross-sectional estimates of the different variants of the model, we arrive at some major conclusions. First, no matter which of the three different definitions of openness we considered, openness is the only variable that carries its expected positive and highly significant coefficient. Second, it appears that in developing countries more openness and restriction on capital outflow are two main determinants of the speed of adjustment among macro variables. More openness allows these countries easy access to technology, machinery, and factors of production that are used in the production process to speed up the adjustment process. More restrictions on capital outflow that results in a higher black market premium leaves capital at home that could be used for domestic investment, again, speeding up the adjustment process. |
