Search

You searched for: Content Type Working Paper Remove constraint Content Type: Working Paper Publishing Institution U.S. Government Remove constraint Publishing Institution: U.S. Government Political Geography United States Remove constraint Political Geography: United States Topic Economics Remove constraint Topic: Economics
Number of results to display per page

Search Results

  • Author: Davide Debortoli, Ricardo Nunes
  • Publication Date: 07-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to disentangle and quantify the respective effects of imperfect commitment and political disagreement. Absent political turnover, imperfect commitment drives the long-run level of debt to zero. With political disagreement, debt is a sizeable fraction of GDP and increasing in the degree of polarization among parties, no matter the degree of commitment. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with much of the existing empirical evidence. Finally, we find that in the presence of political disagreement the welfare gains of building commitment are lower.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: United States
  • Author: David M. Arseneau, Sanjay K. Chugh
  • Publication Date: 01-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: A growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics. We investigate whether the existence of such customer relationships has important consequences for the conduct of both long-run and short-run policy. Our central result is that when consumers and firms are engaged in long-term relationships, the optimal rate of price inflation volatility is very low even though all prices are completely flexible. This finding is in contrast to those obtained in first-generation Ramsey models of optimal fiscal and monetary policy, which are based on Walrasian markets. Echoing the basic intuition of models based on sticky prices, unanticipated inflation in our environment causes a type of relative price distortion across markets. Such distortions stem from fundamental trading frictions that give rise to long-lived customer relationships and makes pursuing inflation stability optimal.
  • Topic: Economics, Markets
  • Political Geography: United States
  • Author: Houtan Bastani, Luca Guerrieri
  • Publication Date: 02-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: A key application of automatic differentiation (AD) is to facilitate numerical optimization problems. Such problems are at the core of many estimation techniques, including maximum likelihood. As one of the first applications of AD in the field of economics, we used Tapenade to construct derivatives for the likelihood function of any linear or linearized general equilibrium model solved under the assumption of rational expectations. We view our main contribution as providing an important check on finite-difference (FD) numerical derivatives. We also construct Monte Carlo experiments to compare maximum-likelihood estimates obtained with and without the aid of automatic derivatives. We find that the convergence rate of our optimization algorithm can increase substantially when we use AD derivatives.
  • Topic: Economics, Markets
  • Political Geography: United States
  • Author: Stephanie E. Curcuru, Tomas Dvorak, Francis E. Warnock
  • Publication Date: 02-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, using a monthly dataset on the foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential for portfolio securities is near zero, far smaller than previously reported. Examining all U.S. claims and liabilities (portfolio securities as well as direct investment and banking), we find that previous estimates of large differentials are biased upward. The bias owes to computing implied returns from an internally inconsistent dataset of revised data; original data produce a much smaller differential. We also attempt to reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance. Overall, we find no evidence that the U.S. can count on earning substantially more on its claims than it pays on its liabilities.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Joseph W. Gruber, Steven B. Kamin
  • Publication Date: 03-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper addresses the popular view that differences in financial development explain the pattern of global current account imbalances. One strain of thinking explains the net flow of capital from developing to industrial economies on the basis of the industrial economies' more advanced financial systems and correspondingly more attractive assets. A related view addresses why the United States has attracted the lion's share of capital flows from developing to industrial economies; it stresses the exceptional depth, breadth, and safety of U.S. financial markets.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Ricardo Correa
  • Publication Date: 03-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper uses data on publicly-traded firms in the U.S. to analyze the effect of interstate bank integration on the financial constraints borrowers face. A firm-level investment equation is estimated in order to test if bank integration reduces the sensitivity of capital expenditures to the level of internal funds. The staggered deregulation of cross-state bank acquisitions that took place in the U.S. between 1978 and 1994 helps estimate the model. Integration decreases financing constraints for bank-dependent firms. The change in firms' access to external finance is explained by an increase in the share of locally headquartered geographically diversified banks.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Francis E. Warnock, John Ammer, Sara B. Holland, David C. Smith
  • Publication Date: 05-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper investigates the underlying determinants of home bias using a comprehensive sample of U.S. investor holdings of foreign stocks. We document that U.S. cross-listings are economically important, as U.S. ownership in a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and show that increases in U.S. investment are largest in firms from weak accounting backgrounds and in firms that are otherwise informationally opaque, indicating that U.S. investors value the improvements in disclosure associated with cross-listing. We confirm that relative equity valuations rise for cross-listed stocks, and provide evidence suggesting that valuation increases are due in part to increases in U.S. shareholder demand and in part to the fact that the equities become more attractive to non-U.S. shareholders.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Steven B. Kamin, Carol C. Bertaut, Charles P. Thomas
  • Publication Date: 07-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper addresses three questions about the prospects for the U.S. current account deficit. Is it sustainable in the long term? If not, how long will it take for measures of external debt and debt service to reach levels that could prompt some pullback by global investors? And if and when such levels are breached, how readily would asset prices respond and the current account start to narrow?
  • Topic: Economics, Foreign Exchange, Government, International Political Economy, Political Economy
  • Political Geography: United States
  • Author: Luca Guerrieri, Christopher Gust, David López-Salido
  • Publication Date: 01-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We develop and estimate an open economy New Keynesian Phillips curve (NKPC) in which variable demand elasticities give rise to changes in desired markups in response to changes in competitive pressure from abroad. A parametric restriction on our specification yields the standard NKPC, in which the elasticity is constant, and there is no role for foreign competition to influence domestic inflation. By comparing the unrestricted and restricted specifications, we provide evidence that foreign competition plays an important role in accounting for the behavior of inflation in the traded goods sector. Our estimates suggest that foreign competition has lowered domestic goods inflation about 1 percentage point over the 2000-2006 period. Our results also provide evidence against demand curves with a constant elasticity in the context of models of monopolistic competition.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Charles P. Thomas, Jaime Marquez, Sean Fahle
  • Publication Date: 01-2008
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In this paper we construct a new measure of U.S. prices relative to those of its trading partners and use it to reexamine the behavior of U.S. net exports. Our measure differs from existing measures of the dollar's real effective exchange rate (REER) in that it explicitly incorporates both the difference in price levels between the United States and developing economies and the growing importance of these developing economies in world trade. Unlike existing REERs, our measure shows that relative U.S. prices have increased significantly over the past 15 years. In terms of simple correlations, the relationship between our measure of relative prices and U.S. net exports is much more coherent than that between existing REERs and net exports. To explore this relationship further, we use our measure to construct an index of foreign prices relevant for U.S. export volumes and reexamine several export equations. We find that export equations with the new index dominate those with previous measures in terms of in-sample fit, outof- sample fit, and parameter constancy. In addition, we find that with the new index of foreign prices the estimated elasticity of U.S. exports with respect to foreign income is a good bit higher than the unitary elasticity found in previous studies using other price measures. This has implications for U.S. current account adjustment.
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Beth Anne Wilson, Jane T. Haltmaier, Shaghil Ahmed, Brahima Coulibaly, Ross Knippenberg, Sylvain Leduc, Mario Marazzi
  • Publication Date: 09-2007
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper assesses China's role in Asia as an independent engine of growth, as a conduit of demand from the industrial countries, and as a competitor for export markets. We provide both macroeconomic and microeconomic evidence. The macroeconomic analysis focuses on the impact of U.S. and Chinese demand on the output of the Asian economies by estimating growth comovements and VARs. The results suggest an increasing role of China as an independent source of growth. The microeconomic analysis decomposes trade into basic products, parts and components, and finished goods. We find a large role for parts and components trade consistent with China playing an important and increasing role as a conduit. We also estimate some regressions that show that China's increasing presence in export markets has had a negative effect on exports of some products for some other Asian economies, but not for other products, including those of the important electronic high-technology industry.
  • Topic: Development, Economics, International Trade and Finance, Markets
  • Political Geography: United States, China, Asia
  • Author: Robert Vigfusson, Nathan Sheets, Joseph Gagnon
  • Publication Date: 09-2007
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: A growing body of empirical work has found evidence of a decline in exchange rate pass-through to import prices in a number of industrial countries. Our paper complements this work by examining pass-through from the other side of the transaction; that is, we assess the exchange rate sensitivity of export prices (denominated in the exporter's currency). We first sketch out a streamlined analytical model that highlights some key factors that determine pass-through. Using this model as reference, we find that the prices charged on exports to the United States are more responsive to the exchange rate than is the case for export prices to other destinations, which is consistent with results in the literature suggesting that import price pass-through in the U.S. market is relatively low. We also find that moves in the exchange rate sensitivity of export prices over time have been significantly affected by country and region-specific factors, including the Asian financial crisis (for emerging Asia), deepening integration with the United States (for Canada), and the effects of the 1992 ERM crisis (for the United Kingdom).
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets
  • Political Geography: United States, United Kingdom, Canada, Asia
  • Author: Steven B. Kamin, Trevor A. Reeve
  • Publication Date: 04-2007
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In recent years, a number of studies have analyzed the experiences of a broad range of industrial economies during periods when their current account deficits have narrowed. Such studies identified systematic aspects of external adjustment, but it is unclear how good a guide the experience of other countries may be to the effects of a future narrowing of the U.S. external imbalance. In contrast, this paper focuses in depth on the historical experience of external adjustment in the United States. Using data from the past thirty-five years, we compare economic performance in episodes during which the U.S. trade balance deteriorated and episodes during which it adjusted. We find trade balance adjustment to have been generally benign: U.S. real GDP growth tended to fall, but not to a statistically significant extent; housing construction slumped; inflation generally rose modestly; and although nominal interest rates tended to rise, real interest rates fell. The paper then compares these outcomes to those in foreign industrial economies. We find that the economic performance of the United States during periods of external adjustment is remarkably similar to the foreign experience. Finally, we also examine the performance of the foreign industrial economies during the periods of U.S. deterioration and adjustment. Contrary to concerns that U.S. adjustment will prove injurious to foreign economies, our analysis suggests that the foreign economies fared reasonably well during past periods when the U.S. trade deficit narrowed: the growth of domestic demand and real GDP abroad generally strengthened during such episodes, although inflation and interest rates tended to rise as well.
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, Clara Vega
  • Publication Date: 09-2006
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: John H. Rogers, Charles Engel
  • Publication Date: 04-2006
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which a country's current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries – more modest than the growth over the past 20 years – the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. Two empirical analyses of current account sustainability using actual data suggest that the U.S. is not keeping on a long-run sustainable path. One is a direct test of our model, which finds that the dynamics of the U.S. current account – the increasing deficits over the past decade – are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender – though not the only legitimate contender – for explaining the U.S. current account deficit.
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Jonathan H. Wright, David W. Berger, Alain P. Chaboud, Sergey V. Chernenko, Edward Howorka, Raj S. Iyer, David Liu
  • Publication Date: 04-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices.
  • Topic: Economics, International Trade and Finance, Science and Technology
  • Political Geography: United States
  • Author: John W. Schindler, Dustin H. Beckett
  • Publication Date: 04-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Hong Kong plays a prominent role as a re-exporter of a large percentage of trade bound for or coming from China. Current reporting practices in China and its trading partners do not fully reflect this role and therefore provide a misleading picture of the origin or ultimate destination of Chinese exports and imports. We adjust bilateral trade data for both China and its trading partners to correct for this problem. We also correct for differences due to markups in Hong Kong and different standards for reporting trade (c.i.f. versus f.o.b.). For 2003, we estimate that China's overall trade surplus was between $53 billion and $126 billion, larger than that reported in official Chinese data, but smaller than that reported by China's trading partners. We also provide evidence that, in general, the actual origin of a good that is transshipped through Hong Kong is correctly reported by the importing country, but the final destination of such goods is not correctly reported by the exporting country.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States, China, Hong Kong
  • Author: Jaime Marquez, Mario Marazzi, Nathan Sheets, Joseph Gagnon, Robert J. Vigfusson, Jon Faust, Robert F. Martin, Trevor Reeve, John Rogers
  • Publication Date: 04-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass-through has occurred through this commodity-price channel in recent years. While the source of the decline in passthrough is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the passthrough coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time.
  • Topic: Economics, Industrial Policy, International Trade and Finance
  • Political Geography: United States, China
  • Author: Luca Guerrieri, Dale W. Henderson, Jinill Kim
  • Publication Date: 02-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In the last half of the 1990s, labor productivity growth rose in the U.S. and fell almost everywhere in Europe. We document changes in both capital deepening and multifactor productivity (MFP) growth in both the information and communication technology (ICT) and non-ICT sectors. We view MFP growth in the ICT sector as investment-specific productivity (ISP) growth. We perform simulations suggested by the data using a two-country DGE model with traded and nontraded goods. For ISP, we consider level increases and persistent growth rate increases that are symmetric across countries and allow for costs of adjusting capital-labor ratios that are higher in one country because of structural differences. ISP increases generate investment booms unless adjustment costs are too high. For MFP, we consider persistent growth rate shocks that are asymmetric. When such MFP shocks affect only traded goods (as often assumed), movements in 'international' variables are qualitatively similar to those in the data. However, when they also affect nontraded goods (as suggested by the data), movements in some of the variables are not. To obtain plausible results for the growth rate shocks, it is necessary to assume slow recognition.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States, Europe
  • Author: Steven B. Kamin, Sylvain Leduc, Hilary Croke
  • Publication Date: 02-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Much has been written about prospects for U.S. current account adjustment, including the possibility of what is sometimes referred to as a “disorderly correction”: a sharp fall in the exchange rate that boosts interest rates, depresses stock prices, and weakens economic activity. This paper assesses some of the empirical evidence bearing on the likelihood of the disorderly correction scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during, and after the onset of adjustment, building on the analysis of Freund (2000).
  • Topic: Development, Economics, Industrial Policy, International Trade and Finance
  • Political Geography: United States
  • Author: Sylvain Leduc, Giancarlo Corsetti, Luca Dedola
  • Publication Date: 02-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that a standard international business cycle model with incomplete asset markets augmented with distribution services can account quantitatively for these properties of real exchange rates. Distribution services, intensive in local inputs, drive a wedge between producer and consumer prices, thus lowering the impact of terms-of-trade changes on optimal agents' decisions. This reduces the price elasticity of tradables separately from assumptions on preferences.
  • Topic: Development, Economics, International Trade and Finance, Science and Technology
  • Political Geography: United States
  • Author: Luca Guerrieri, Christopher Gust, Christopher Erceg
  • Publication Date: 01-2005
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.
  • Topic: Conflict Resolution, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Fang Cai, Francis E. Warnock
  • Publication Date: 12-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We analyze foreigners' and domestic institutional investors' positions in U.S. equities. Controlling for many factors, we uncover a common preference for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of 'foreign' equities in investors' portfolios nearly doubles, reducing (but not eliminating) the observed home bias.
  • Topic: International Relations, Development, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Jonathan H. Wright, Alain P. Chaboud, Edward Howorka, David Liu, Sergey Chernenko, Raj S. Krishnasami Iyer
  • Publication Date: 11-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Joseph E. Gagnon
  • Publication Date: 11-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts the standard Armington trade model, which predicts that fast-growing countries can experience rapid export growth only to the extent that they accept declining terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in long-run export growth of many countries in the post-war era.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Mark Carey
  • Publication Date: 10-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This introductory note summarizes and draws together the work reported in eight research papers written by staff economists of the Board's Division of International Finance as part of a project on global financial integration. The eight papers are also International Discussion Finance Discussion Papers (IFDPs), the numbers of which are specified on the table of contents that appears herein. When viewing this introduction online, the paper titles appearing on the table-of-contents page are web links that may be used to navigate directly to each paper's on-line file.
  • Topic: Economics, Globalization, International Trade and Finance
  • Political Geography: United States
  • Author: Gregory P. Nini
  • Publication Date: 09-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Empirical estimates of the benefit of financial intermediation are constructed by examining the role played by local banks in facilitating syndicated loans to borrowers in emerging market countries. Assuming that local banks possess a superior monitoring ability, the market is ideal for studying the value of intermediation since cross-border lending into emerging markets is plagued by particularly high information and agency costs and the supply of local bank capital is in limited short run supply. Using variation in the propensity of local banks to participate in foreign arranged syndicates, there are two economically important results. First, local banks are much more likely to participate in unconditionally riskier loans. Second, after controlling for borrower characteristics, loan characteristics, and the endogeneity of the local bank lending decision, loans with local bank participation have spreads that are 10 percent lower (29 basis points) than otherwise similar loans. Combined, the results support the conclusion that local banks, a particularly special type of financial intermediary, provide value by considerably reducing financing costs, especially for riskier borrowers.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Carol C. Bertaut, Linda S. Kole
  • Publication Date: 09-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States, London
  • Publication Date: 09-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This sixth and annual report required under the Senate Resolution of Advice and Consent of July 31, 1998, examines the progress that parties have made in implementing and enforcing the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Antribribery Convention).
  • Topic: Foreign Policy, Defense Policy, Economics
  • Political Geography: United States
  • Publication Date: 09-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: The Convention was signed by the United States on December 17, 1997 and ratified on November 10, 1998. The U.S. deposited its instrument of ratification with the OECD on December 8, 1998. Congress responded to the signature of the Convention by amending the Foreign Corrupt Practices Act (the “FCPA”) on October 21, 1998. The new legislation, which entered into force on November 10, 1998, extends the FCPA to any person who engages in any act while in the territory of the U.S. and to any U.S. national and company engaged in an act outside the U.S. in furtherance of a proscribed purpose; adds “securing any improper advantage” to the list of improper purposes for payments to foreign officials; expands the term “a foreign official” to include any person acting for or on behalf of “public international organisation”; and allows the U.S. Attorney General to seek injunctive relief against foreign citizens or residents and entities other than “issuers” or “domestic concerns” that have engaged in or are about to engage in a violation of the FCPA.
  • Topic: Foreign Policy, Defense Policy, Economics
  • Political Geography: United States
  • Publication Date: 09-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Since the 1999 edition, the Department of Defense has used its consolidated real property inventory (the Facilities Analysis Database) as the basis for the annual publication of the Base Structure Report. This report contains a comprehensive listing of installations and sites owned and used by the Department. It summarizes the current facilities inventory and provides other basic information, such as information concerning the site locations, names of the nearest city, and, where available, includes personnel authorizations.
  • Topic: Security, Defense Policy, Economics
  • Political Geography: United States
  • Author: Francis E. Warnock, Charles P. Thomas, Jon Wongswan
  • Publication Date: 08-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper evaluates the performance of U.S. investors' portfolios in the equities of over 40 countries over a 25-year period. We find that these portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We uncover three potential reasons for this success. First, U.S. investors abstained from momentum trading and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, the documented preference for cross-listed and well-governed foreign firms appears to have served U.S. investors well. We conclude with a short discussion of the implications of our findings for the home bias literature.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Francis E. Warnock, Karl V. Lins
  • Publication Date: 08-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper uses a sample of 4,410 firms from 29 countries to investigate the relation between corporate governance and the shareholder base. In contrast to previous work, our results strongly support the notion that poor corporate governance, at both the firm and country level, negatively impacts the willingness of foreign investors to hold a firm's equity. Specifically, we find that firms whose managers have sufficiently high control rights that they may reasonably be expected to expropriate minority equity investors attract significantly less U.S. investment, especially in countries with poor external governance. Our findings suggest that the prices U.S. investors are asked to pay for firms with poor governance are not low enough to fully compensate them for expected expropriation or increased estimation risk associated with expected poor disclosure by these firms. Because prior research shows that a smaller shareholder base is associated with a lower firm value, our results are consistent with the notion that the shareholder base represents an important channel through which poor expected corporate governance contributes to a reduction in firm value.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: Francis E. Warnock, John Ammer, Sara B. Holland, David C. Smith
  • Publication Date: 08-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We use a comprehensive 1997 survey to examine U.S. investors' preferences for foreign equities. We document a variety of firm characteristics that can influence U.S. investment, but the most important determinant is whether the stock is cross-listed on a U.S. exchange. Our selection bias-corrected estimates imply that firms that cross-list can increase their U.S. holdings by 8 to 11 percent of their market capitalization, roughly doubling the amount held without cross-listing. All else equal, we find that firms experience smaller increases in U.S. shareholdings upon cross-listing if they are Canadian, from English speaking countries, are members of the MSCI World index, or had higher quality accounting standards prior to crosslisting. We argue that these findings suggest that improvements in information production explain U.S. investors' attraction to foreign stocks that cross-list in the United States.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States, Canada
  • Author: Luis-Felipe Zanna
  • Publication Date: 08-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Governments in emerging economies have pursued real exchange rate targeting through Purchasing Power Parity (PPP) rules that link the nominal depreciation rate to either the deviation of the real exchange rate from its long run level or to the difference between the domestic and the foreign CPI-inflation rates. In this paper we disentangle the conditions under which these rules may lead to endogenous fluctuations due to self-fulfilling expectations in a small open economy that faces nominal rigidities. We find that besides the specification of the rule, structural parameters such as the share of traded goods (that measures the degree of openness of the economy) and the degrees of imperfect competition and price stickiness in the non-traded sector play a crucial role in the determinacy of equilibrium. To evaluate the relevance of the real (in)determinacy results we pursue a learnability (E-stability) analysis for the aforementioned PPP rules. We show that for rules that guarantee a unique equilibrium, the fundamental solution that represents this equilibrium is learnable in the E-stability sense. Similarly we show that for PPP rules that open the possibility of sunspot equilibria, a common factor representation that describes these equilibria is also E-stable. In this sense sunspot equilibria and therefore aggregate instability are more likely to occur due to PPP rules than previously recognized.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: Mark Carey, Gregory P. Nini
  • Publication Date: 08-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home “bias.” This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home “bias” appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States, Europe
  • Author: Sanjay Chugh
  • Publication Date: 07-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon- separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustments in consumption. We also extend our basic model to investigate the effects of capital formation and nominal rigidities on the dynamics of optimal monetary policy. Optimal policy responses continue to be gradual in the presence of capital and sticky prices, with a size and speed that are in line with empirical findings for the U.S. economy. Our results emphasize that gradualism in monetary policy may be needed simply to guide the economy on an optimally smooth path.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: Neil R. Ericsson
  • Publication Date: 07-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This interview for Econometric Theory explores David Hendry's research. Issues discussed include estimation and inference for nonstationary time series; econometric methodology; strategies, concepts, and criteria for empirical modeling; the general-to-specific approach, as implemented in the computer packages PcGive and PcGets; computer-automated model selection procedures; David's textbook Dynamic Econometrics; Monte Carlo techniques (PcNaive); evaluation of these developments in simulation studies and in empirical investigations of consumer expenditure, money demand, inflation, and the housing and mortgage markets; economic forecasting and policy analysis; the history of econometric thought; and the use of computers for live empirical and Monte Carlo econometrics.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: John Ammer, Nathanael Clinton
  • Publication Date: 07-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.
  • Topic: Security, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Jonathan H. Wright, Sergey V. Chernenko, Krista B. Schwarz
  • Publication Date: 06-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Forward and futures rates are frequently used as measures of market expectations. In this paper we apply standard forecast efficiency tests, and some newer exact sign and rank tests, to a wide range of forward and futures rates, and in this way test whether these are in fact rational expectations of future actual prices. The forward and futures rates that we study under a common methodology include foreign exchange forward rates, U.S. and foreign interest rate futures and forward rates, oil futures and natural gas futures. For most, but not all, of these instruments, we find that we can reject the hypothesis that the forward or futures rates are rational expectations of actual future prices. It is well known that foreign exchange forward rates give less accurate forecasts than a random walk, but we show that this is also true for some interest rate futures and forward rates. We conclude that forward and futures prices are not generally pure measures of market expectations: they are also heavily affected by the market price of risk.
  • Topic: Security, Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Athanasios Orphanides, John C. Williams
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, inflation expectations would have remained anchored and the stagflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: Michael Ehrmann, Marcel Fratzscher
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper investigates whether the degree and the nature of economic and monetary policy interdependence between the United States and the euro area have changed with the advent of EMU. Using real-time data, it addresses this issue from the perspective of financial markets by analysing the effects of monetary policy announcements and macroeconomic news on daily interest rates in the United States and the euro area. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, we present evidence that US markets have started reacting also to euro area developments since the onset of EMU. Second, beyond these general linkages, the paper finds that certain macroeconomic news about the US economy has a large and significant effect on euro area money markets, and that these effects have become stronger in recent years. Finally, we show that US macroeconomic news has become good leading indicators for economic developments in the euro area. This indicates that the higher money market interdependence between the United States and the euro area is at least partly explained by the increased real integration of the two economies in recent years.
  • Topic: Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: Fabrice Collard, Harris Dellas
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Was the high inflation of the 1970s mostly due to incomplete information about the structure of the economy (an unavoidable mistake as suggested by Orphanides, 2000)? Or, to weak reaction to expected inflation and/or excessive policy activism that led to indeterminacies (a policy mistake, a scenario suggested by Clarida, Gali and Gertler, 2000)? We study this question within the NNS model with policy commitment and imperfect information, requiring that the model have satisfactory overall empirical performance. We find that both explanations do a good job in accounting for the great inflation. Even with the commonly used specification of the interest policy rule, high and persistent inflation can occur following a significant productivity slowdown if policymakers significantly and persistently underestimate ”core” inflation.
  • Topic: Economics, International Trade and Finance, Political Economy
  • Political Geography: United States
  • Author: Ester Faia, Tommaso Monacelli
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We analyze welfare maximizing monetary policy in a dynamic two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing literature, we remain consistent to a public finance approach by an explicit consideration of all the distortions that are relevant to the Ramsey planner. This strategy entails two main advantages. First, it allows an accurate characterization of optimal policy in an economy that evolves around a steady-state which is not necessarily efficient. Second, it allows to describe a full range of alternative dynamic equilibria when price setters in both countries are completely forward looking and households' preferences are not restricted. In this context, we study optimal policy both in the long-run and along a dynamic path, and we compare optimal commitment policy under Nash competition and under cooperation. By deriving a second order accurate solution to the policy functions, we also characterize the welfare gains from international policy cooperation.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Nicoletta Batini, Paul Levine, Joseph Pearlman
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We examine the performance of forward-looking inflation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology first employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equi-libria. Three key findings emerge: first, indeterminacy occurs for any value of the feedback parameter on inflation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than pro-ducer price inflation.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Dale W. Henderson, Ragna Alstadheim
  • Publication Date: 04-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We consider monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There may also be below-target equilibria (BTE) with inflation always below target and constant, asymptotically approaching or eventually reaching a below-target value, or oscillating. Liquidity traps are neither necessary nor sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary rules that preclude BTE when fiscal policy does not. Plausible fiscal policies preclude BTE for any monetary policy; those policies exclude surpluses and, possibly, balanced budgets.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Francis E. Warnock, John D. Burger
  • Publication Date: 02-2004
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We analyze the development of, and foreign participation in, 49 local bond markets. Countries with stable inflation rates and strong creditor rights have more developed local bond markets and rely less on foreign-currency-denominated bonds. Less developed bond markets have returns characterized by high variance and negative skewness, factors eschewed by U.S. investors. Results based on a three-moment CAPM indicate, however, that it is diversifiable idiosyncratic risk that U.S. investors appear to shun. Taken as a whole our results hint at a virtuous cycle of bond market development: Creditor friendly policies and laws can spark local bond market development that enables the development of derivatives markets and, in turn, attracts foreign participation.
  • Topic: Development, Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Robert J. Vigfusson, Lawrence J. Christiano, Martin Eichenbaum
  • Publication Date: 12-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: We investigate what happens to hours worked after a positive shock to technology, using the aggregate technology series computed in Basu, Fernald and Kimball (1999). We conclude that hours worked rise after such a shock.
  • Topic: Economics, Industrial Policy, Science and Technology
  • Political Geography: United States
  • Author: Robert J. Vigfusson
  • Publication Date: 12-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper studies how much of productivity fluctuations are industry specific versus how much are country specific. Using data on manufacturing industries in Canada and the United States, the paper shows that the correlation between cross-border pairings of the same industry are more often highly correlated than previously thought. In addition, the paper confirms earlier findings that the similarity of input use can help describe the co-movement of productivity fluctuations across industries.
  • Topic: Economics, Industrial Policy, Science and Technology
  • Political Geography: United States, Canada, North America
  • Author: Jon Faust, Brian M. Doyle
  • Publication Date: 12-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper investigates breaks in the variability and co-movement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on co-movement, we test for changes in co-movement allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the members of the euro area in the G-7.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States, Canada, North America