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1. Risk, Financial Development and Firm Dynamics

Author:
Bernardo Morias
Publication Date:
05-2015
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows the model to better explain the relation between financial and economic development.
Topic:
Development, Economic Theory, Risk, Fiscal Policy, Models, and Productivity
Political Geography:
Global Focus

2. Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico?

Author:
Michiel De Pooter, Patrice Robitaille, Ian Walker, and Michael Zdinak
Publication Date:
03-2014
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financial market-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better anchored over the past decade in all three countries, as a testament to the improved credibility of the central banks in these countries when it comes to keeping inflation low. That said, one-year inflation compensation in the far future displays some sensitivity to at least one macroeconomic data release per country. However, the impact of these releases is small and it does not appear that investors systematically alter their expectations for inflation as a result of surprises in monetary policy, consumer prices, or real activity variables. Finally, long-run inflation expectations in Brazil appear to have been less well anchored than in Chile and Mexico.
Topic:
Development, Economics, Inflation, and Bonds
Political Geography:
Brazil, South America, North America, Mexico, and Chile

3. Global Financial Conditions, Country Spreads and Macroeconomic Fluctuations in Emerging Countries

Author:
Ozge Akinci
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) Global financial risk shocks explain about 20 percent of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies.
Topic:
Development, Emerging Markets, International Cooperation, Financial Crisis, and Global Financial Crisis
Political Geography:
Global Focus

4. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Author:
Samir Jahjah, Bin Wei, and Vivian Zhanwei Yue
Publication Date:
06-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.
Topic:
Development, Exchange Rate Policy, Fiscal Policy, and Bonds
Political Geography:
Global Focus

5. International Relative Price Levels: A Look Under the Hood

Author:
Jaime Marquez, Charles Thomas, and Corinne Land
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank’s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.
Topic:
Development, International Trade and Finance, Exchange Rate Policy, Strategic Competition, and Price
Political Geography:
Global Focus

6. A State-Dependent Model for Inflation Forecasting

Author:
Andrea Stella and James H. Stock
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and in the non-accelerating inflation rate of unemployment. The model, which consists of five unobserved components including the trends) with stochastic volatility, implies a time-varying vector autoregression model for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the the non-accelerating inflation rate of unemployment has increased.
Topic:
Development, Labor Issues, Inflation, State Building, and Unemployment
Political Geography:
Global Focus

7. Explaining the Energy Consumption Portfolio in a Cross-Section of Countries: Are the BRICs Different?

Author:
David M. Arseneau
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses disaggregated data from a broad cross-section of countries to empirically assess differences in energy consumption profiles across countries. We find empirical support for the energy ladder hypothesis, which contends that as an economy develops it transits away from a heavier reliance on traditional fuel sources towards an increase in the use of modern commercial energy sources. We also find empirical support for the hypothesis that structural transformation--the idea that as an economy matures, it transforms away from agriculture-based activity into industrial activity and, finally, fully matures into a service-oriented economy--is an important driver for the distribution of end-use energy consumption. However, even when these two hypotheses are taken into account, we continue to find evidence suggesting that the patterns of energy consumption in the BRIC economies are importantly different from those of other economies.
Topic:
Development, Energy Policy, Infrastructure, Services, and BRIC
Political Geography:
Russia, China, Europe, India, Asia, Brazil, South America, and Global Focus

8. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

Author:
Malin Adolfson, Stefan Laseen, Jesper Linde, and Lars E.O. Svensson
Publication Date:
07-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
Topic:
Development, Economics, Monetary Policy, and Finance
Political Geography:
Global Focus

9. Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles

Author:
Lee E. Ohanian and Andrea Raffo
Publication Date:
12-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We build a dataset of quarterly hours worked for 14 OECD countries. We document that hours are as volatile as output, that a large fraction of labor adjustment takes place along the intensive margin, and that the volatility of hours relative to output has increased over time. We use these data to reassess the Great Recession and prior recessions. The Great Recession in many countries is a puzzle in that labor wedges are small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger.
Topic:
Development, International Cooperation, Labor Issues, Business, and Labor Policies
Political Geography:
Global Focus

10. India's Future: It's About Jobs

Author:
Geoffrey N. Keim and Beth Anne Wilson
Publication Date:
11-2007
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Projections of sustained strong growth in India depend importantly on the utilization of the huge increase in India's working-age population projected over the next two decades. To date, however, India's economic growth has been concentrated in high-skill and capital-intensive sectors, and has not generated strong employment growth. In this paper, we highlight the tension between India's performance in output and employment, describe the characteristics of India's demographic dividend, and discuss impediments to India's shift away from agriculture.
Topic:
Development, Economics, and Markets
Political Geography:
South Asia and India

11. The Role of China in Asia: Engine, Conduit, or Steamroller?

Author:
Beth Anne Wilson, Jane T. Haltmaier, Shaghil Ahmed, Brahima Coulibaly, Ross Knippenberg, Sylvain Leduc, and Mario Marazzi
Publication Date:
09-2007
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
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, and Markets
Political Geography:
United States, China, and Asia

12. Flying Geese or Sitting Ducks: China's Impact on the Trading Fortunes of other Asian Economies

Author:
Alan J. Ahearne, John G. Fernald, John W. Schindler, and Prakash Loungani
Publication Date:
12-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper updates our earlier work (Ahearne, Fernald, Loungani and Schindler, 2003) on whether China, with its huge pool of labor and an allegedly undervalued exchange rate, is hurting the export performance of other emerging market economies in Asia. We continue to find that while exchange rates matter for export performance, the income growth of trading partners matters far more. This suggests the potential for exports of all Asian economies to grow in harmony as long as global growth is strong. We also examine changes in export shares of Asian economies to the U.S. market and find evidence that dramatic changes in shares are taking place. Many of these changes are consistent with a 'flying geese' pattern in which China moves into the product space vacated by the Asian NIEs or with greater integration of trade across Asia in the production of final goods. Nevertheless, China's dramatic gains in recent years do increase the pressure on Asian economies, particularly in ASEAN and South Asia, to seek areas of comparative advantage.
Topic:
Development, Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
China, South Asia, and Asia

13. A Flexible Finite-Horizon Identification of Technology Shocks

Author:
Neville Francis, Michael T. Owyang, and Jennifer T. Roush
Publication Date:
04-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Recent empirical studies using infinite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long run restrictions in Monte Carlo experiments. We propose a alternative identification that maximizes the contribution of technology shocks to the forecast error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its infinite horizon counterpart by producing less biased impulse responses and technology shocks that are more highly correlated with the technology shocks from the underlying model. For U.S. data, we show that the negative hours response is not robust to allowing a greater role for non-technology shocks in the forecast error variance share at a ten year horizon.
Topic:
Development, Industrial Policy, International Trade and Finance, and Science and Technology
Political Geography:
United States

14. Working for Women, Worldwide

Author:
Paula J. Dobriansky
Publication Date:
02-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In 1995, at one of the largest international conferences ever held, women from around the world, representing both governments and the private sector, gathered in Beijing to set forth a platform for the political, economic, and social empowerment of women.
Topic:
International Relations, Development, and Gender Issues
Political Geography:
United States and Beijing

15. Financial Market Developments and Economic Activity during Current Account Adjustments in Industrial Economies

Author:
Steven B. Kamin, Sylvain Leduc, and Hilary Croke
Publication Date:
02-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
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, and International Trade and Finance
Political Geography:
United States

16. International Risk-Sharing and the Transmission of Productivity Shocks

Author:
Sylvain Leduc, Giancarlo Corsetti, and Luca Dedola
Publication Date:
02-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
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, and Science and Technology
Political Geography:
United States

17. An Assessment of the Impact of Japanese Foreign Exchange Intervention: 1991-2004

Author:
Alain P. Chaboud and Owen Humpage
Publication Date:
01-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We analyze the short-term price impact of Japanese foreign exchange intervention operations between 1991 and 2004, using official data from Japan's Ministry of Finance. Over the period as a whole, we find some evidence of a modest "against the wind" effect, but interventions do not have value as a forecast that the exchange rate will move in a direction consistent with the operations. Interventions conducted between 1995 and 2002, which were large and infrequent, met with a much higher degree of success. For the most recent episode of intervention, in 2003 and 2004, despite the record size and frequency of the overall episode, it is difficult to statistically distinguish the pattern of exchange rate movements on intervention days from that of all the days in that particular subperiod, showing little effectiveness. Still, while the evidence of Japanese intervention effectiveness is modest overall, it appears to be stronger than that found using similar techniques for U.S. intervention operations conducted in the 1980s and 1990s.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
Japan and Israel

18. Going the Distance: The U.S. Tsunami Relief Effort

Publication Date:
01-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
On December 26, 2004, a magnitude 9.0 earthquake off the west coast of Northern Sumatra, Indonesia, triggered a tsunami—a series of giant waves—that inundated coastal areas of Indonesia, Thailand, Sri Lanka, India, and Malaysia, as well as Indian Ocean islands and parts of East Africa.
Topic:
International Relations, Development, Economics, and International Cooperation
Political Geography:
Indonesia, Malaysia, India, Sri Lanka, Thailand, and East Africa

19. International Diversification at Home and Abroad

Author:
Fang Cai and Francis E. Warnock
Publication Date:
12-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
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, and International Trade and Finance
Political Geography:
United States

20. Foreign Participation in Local-Currency Bond Markets

Author:
Francis E. Warnock and John D. Burger
Publication Date:
02-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
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, and International Trade and Finance
Political Geography:
United States

21. Business Combinations Desk Book

Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Department of Defense (DoD) research, development, and acquisition policies, funding and program decisions, have a major impact on competition and industry transformation. DoD assessments of proposed business combinations (generally, domestic and foreign firm mergers, acquisitions, and joint ventures) must complement such policies and decisions to sustain credible competition in an evolving industrial environment.
Topic:
Defense Policy, Development, Industrial Policy, and Science and Technology

22. Report of the Defense Science Board Task Force on Joint Experimentation, Phase 1

Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Defense Science Board (DSB) Task Force on Joint Experimentation was established to examine the joint experimentation programs and activities at the Joint Forces Command (JFCOM) and to recommend ways to enhance the contributions of joint experimentation to transformation. The Task Force assessed the goals, process, and substance of JFCOM's experimentation program. The Task Force also provided an external review of the Millennium Challenge 02 (MC02) experiment.
Topic:
Security, Defense Policy, and Development
Political Geography:
United States

23. Report of the Defense Science Board Task Force on Sea Basing

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Sea basing is a critical capability for the United States in a world where flexible, quick-response military action will be required in areas far from fixed bases available or suitable for American military use. The seabase replaces or augments the fixed, in-theater airports and seaports, on which past military operations have focused and depended, with a maneuverability facility at sea - a mobile base of operations, command center, logistics node and transportation hub. A commander can place a seabase where and when he chooses to exploit enemy weaknesses and employ the element of surprise, confusing enemy defensive preparations. A seabase can be a center for reconstitution and redeployment of forces in succeeding stages of complex operations.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

24. Report of the Defense Science Board Task Force on Enabliing Joint Force Capabilities

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
U.S. national security leaders face a complex, dynamic set of demands in protecting the interests of the United States and its allies. Three key trends shape the nature and capability of the military forces required to meet these demands: 1. The limited ability to predict when, where, and under what conditions we will need to commit U.S. military forces, particularly for smaller-scale contingencies; 2. The need for forces that enjoy dominant superiority over potential adversaries, not simply an incremental advantage over an aggregate set of threats; and 3. The rapid development and global availability of information technology (IT). Taken together, these trends underscore the need for enhanced joint capabilities.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

25. Training for Future Conflicts

Publication Date:
06-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This is the second 21st century Defense Science Board report on military training. The report itself has a training goal: instruct and convince the acquisition and personnel communities to recognize instinctively that (1) military proficiency is as dependent on the warriors who operate weapon systems as it is on the weapon system technology, and (2) a superb way to waste personnel or system acquisition money is to ignore training, or to tacitly allow training to pay the bills for acquisition or personnel system flaws in those more measurable arenas.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

26. Afghanistan: Seeds of Hope

Author:
David Johnson
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In 2000, an overwhelming 97 percent of Afghan girls did not attend school, and today only about 20 percent are literate. Tens of thousands of Afghan girls are now attending school for the first time in years.
Topic:
International Relations, Democratization, and Development
Political Geography:
Afghanistan and Middle East

27. Net Foreign Assets and Imperfect Pass-through: The Consumption Real Exchange Rate Anomaly

Author:
Jorge D. Selaive and Vicente Tuesta
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
An unresolved issue in international macroeconomics is the apparent lack of risk-sharing across countries, which contradicts the prediction of models based on the assumption of complete markets. We assess the importance of financial frictions in this issue by constructing an incomplete market model with stationary net foreign assets (NFA) and imperfect pass-through (IPT). In this paper, there is a cost of bond holdings that allows us to incorporate the dynamics of NFA into the risk-sharing condition. On theoretical grounds, our results suggest that the dynamics of NFA may account for the lack of risk-sharing across countries. In addition, the IPT mechanism, by closing the current account channel, does not help to explain this feature of the data. On empirical grounds, we test the risk-sharing condition derived in the paper, and we find that growth factors of consumption and real exchange rates behave in a manner that may be consistent with a significant role for the net foreign asset position.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States

28. An Empirical Analysis of Inflation in OECD Countries

Author:
Jaime Marquez and Jane Ihrig
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the relationship between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU), and productivity developments on inflation. In line with previous work on the United States, we find that productivity advancements were the main structural factor reducing inflation in the United States. For foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation. This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment rate was declining.
Topic:
International Relations, Development, Economics, and International Trade and Finance
Political Geography:
United States

29. New Keynesian, Open-Economy Models and Their Implications for Monetary Policy

Author:
Brian M. Doyle and David Bowman
Publication Date:
03-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The considerable amount of research in recent years on New Keynesian, open-economy models -- models with nominal price rigidities and intertemporally maximizing agents -- has yielded fresh insights for what Alan Blinder has called the “dark art” of making monetary policy. The literature has made its greatest contributions in understanding the transmission of shocks across countries, exchange rate pass-through and the effects of different pricing rules, and how these impact optimal monetary policy rules and international policy coordination. While the literature has by no means solved the great mysteries of open-economy macroeconomics, it has laid out a framework where we can ask normative questions of monetary policy, such as how much a central bank should react to movements in the exchange rate. However, monetary policy remains an empirical endeavour, and would be helped by further work which empirically estimates or calibrates these new models.
Topic:
International Relations, Development, Economics, International Trade and Finance, and Monetary Policy

30. Inflation Persistence and Optimal Monetary Policy in the Euro Area

Author:
Pierpaolo Benigno and J. David Lopez-Salido
Publication Date:
12-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper we first present supporting evidence of the existence of heterogeneity in inflation dynamics across euro area countries. Based on the estimation of New Phillips Curves for five major countries of the euro area, we find that there is significant inertial (backward looking) behavior in inflation in four of them, while inflation in Germany has a dominant forward looking component. In the second part of the paper we present an optimizing agent model for the euro area emphasizing the heterogeneity in inflation persistence across regions. Allowing for such a backward looking component will affect the evaluation of the degree of nominal rigidities relevant for the monetary policy design. We explore the welfare implications of this circumstance by comparing the adjustment of the economies and the area as a whole in response to terms-of-trade shocks under four monetary policy rules: fully optimal, optimal inflation targeting, HICP targeting and output gap stabilization.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
Europe

31. Monetary Policy and the Financial Accelerator in a Monetary Union

Author:
Simon Gilchrist, Jean-Olivier Hairault, and Hubert Kempf
Publication Date:
12-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States

32. Regional Inflation in a Currency Union: Fiscal Policy vs. Fundamentals

Author:
Margarida Duarte and Alexandar L. Wolman
Publication Date:
07-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We develop a general equilibrium model of a two-region currency union. There are two types of goods: non-trade goods, and traded goods for which markets are segmented. Monetary policy is set by a central monetary authority and is non-neutral due to nominal price rigidities. Fiscal policy is determined at the regional level by each region's government. We find that productivity shocks alone generate significant variation in inflation across the two countries. Government spending shocks, in contrast, do not account for a significant portion of inflation variation. Varying relative country size, we find that smaller countries experience higher variability of their inflation differential in response to shocks to productivity growth. Moreover, we show that regional governments can suppress incipient inflation differentials associated with shocks to productivity growth by letting the income tax rate respond negatively to inflation differentials.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States

33. An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules

Author:
John H. Rogers, Jonathan H. Wright, and Jon Faust
Publication Date:
08-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States

34. Monetary Policy and Exchange Rate Pass-Through

Author:
Jane Ihrig and Joseph E. Gagon
Publication Date:
07-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on twenty industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behavior may be a factor in the declining rate of pass-through.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States

35. Russia in the International System

Publication Date:
06-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Russia's Foreign Policy Russian foreign policy in the coming years will be characterized by weakness; frustration--primarily with the United States as the world's preeminent power--over Russia's diminished status; generally cautious international behavior; and a drive to resubjugate, though not reintegrate, the other former Soviet states. The international situation affords Russia time to concentrate on domestic reforms because, for the first time in its history, it does not face significant external threats. But rather than use the breathing space for domestic reforms, Putin is as much--if not more--focused on restoring Russia's self-defined rightful role abroad and seeking to mold the CIS into a counterweight to NATO and the European Union. The Outside World's Views of Russia Russia does not have any genuine allies. Some countries are interested in good relations with Russia, but only as a means to another end. For example, China sees Russia as a counterweight to the United States but values more highly its ties with the United States. Some countries see Russia as a vital arms supplier but resent Russia also selling arms to their rivals (China-India, Iran-Iraq). Pro-Russia business lobbies exist in Germany, Italy, Turkey, and Israel (one-fifth of whose population now consists of Soviet émigres), but they do not single-handedly determine national policies. Europe is the only region that would like to integrate Russia into a security system, but it is divided over national priorities and institutional arrangements as well as put off by some Russian behavior. Most CIS governments do not trust their colossal neighbor, which continues to show an unsettling readiness to intervene in their internal affairs, though they know Russia well and are to a considerable degree comfortable in dealing with it. Turkey has developed an improved dialogue and an unprecedented number of economic ties with Russia during the post-Cold War period, but this more positive pattern of relations has not fully taken root, and Ankara remains suspicious of Moscow's intentions. Since the collapse of the Soviet Union, Moscow's role in the Middle East has been reduced, but Israel, Syria, Egypt, Libya, and Iraq all favor good relations with Russia. Mutual interests also override disagreements in Russian-Iranian relations, but Tehran is wary of Russian behavior, particularly toward Saddam Hussein. India still trusts Russia--a sentiment that is perhaps a residue of the genuine friendship of Cold War days--but clearly not in the same way it once did, and New Delhi fears that weakness will propel Russia into doing things that could drive India further away. In East Asia, the most substantial breakthrough has been the resurrected relationship between Russia and China, one that entails significant longer-term risk for Russia. Other countries in the region value their links with Moscow as a means to balance a more powerful China, or as a useful component of their larger political and economic strategies, but Russia's role in East Asia--as elsewhere--remains constrained by the decline in its political, military, and economic power over the last decade. Russia's Weakness Russia's weakness stems from long-term secular trends and from its domestic structure. In essence, the old nomenklatura and a few newcomers have transformed power into property on the basis of personal networks and created an equilibrium resting on insider dealings. These insiders may jockey for position but have a vested interest in preserving the system. The public does not like the system but is resigned to it and gives priority to the preservation of order. As for the economy, it is divided into a profitable, internationally integrated sector run by oligarchs and a much larger, insulated, low-productivity, old-style paternalistic sector that locks Russia into low growth. No solace will be forthcoming from the international business and energy worlds. They do not expect the poor commercial climate to improve greatly and will not increase investments much beyond current levels until it does. Militarily, Russia will also remain weak. Its nuclear arsenal is of little utility, and Moscow has neither the will nor the means to reform and strengthen its conventional forces. Hope for the Future? The best hope for change in Russia lies with the younger generation. Several participants reported that under-25 Russians have much more in common with their US counterparts, including use of the Internet, than with older Soviet generations. But there was some question over whether the new generation would change the system or adapt to it. Others placed some hope in international institutions, for instance the World Trade Organization, eventually forcing Russia to adapt to the modern world. Dissenting Views Some participants dissented from the overall forecast of depressing continuity. The keynote speaker, James Billington, stated that Russia would not be forever weak and that the current confusion would end in a few years either through the adoption of authoritarian nationalism or federated democracy. One scholar felt the Chechen war was feeding ethnic discord in other areas of the Federation to which Moscow would respond with increased authoritarianism, not necessarily successfully. Finally, a historian observed that the patience of Russians is legendary but not infinite, meaning that we should not be overly deterministic.
Topic:
International Relations, Foreign Policy, and Development
Political Geography:
Russia, United States, China, Middle East, and Israel

36. Report of the Defense Science Board Task Force on High Energy Laser Weapon Systems Applications

Publication Date:
06-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Several decades of science and technology, concept development, and engineering development have provided the underpinnings for a significant contribution by high-energy lasers (HELs) to national security needs. The potential for speed-of-light response with a wide variety of effects to support a variety of missions suggests a new level of flexibility and adaptability-attributes that are particularly valuable in the complex national security environment currently existing and unfolding. As in the case of most important new technologies, we are just beginning to understand and exploit the potential of high-energy lasers. It is nonetheless important to realize the extent of this potential. Directed-energy weapons can add a new dimension to a wide range of missions.
Topic:
Defense Policy, Development, Energy Policy, and Science and Technology

37. Permanent and Transitory Components of Business Cycles: Their Relative Importance and Dynamic Relationship

Author:
Chang-Jin Kim, Jeremy Piger, and Richard Startz
Publication Date:
05-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper investigates the relationship between permanent and transitory components of U.S. recessions in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession for the permanent component to be correlated with switches from boom to recession in the transitory component. The parameter estimates suggest a specific pattern of recessions: switches in the permanent component lead switches in the transitory component both when entering and leaving recessions.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States and Mexico

38. Report of the Defense Science Board Task Force on Future DoD Airborne High-Frequency Radar Needs/Resources

Publication Date:
04-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Defense Science Board Task Force was formed to address questions related to the development of X-band, active, electronically steered arrays (AESAs) for airborne platforms. Areas focused on were advanced radar capabilities for ground targets and air targets.The airborne radar inventory can be divided into three broad categories:(1) Air target surveillance and cueing radars mounted in rotodomes (e.g., AWACS,-2C).(2) Nose- mounted fighter radars for air and ground targets (e.g., F-15, F-16, F-22, JSF).(3) Side-looking radars for ground reconnaissance, surveillance, and cueing (e.g., U-2, JSTARS, Global Hawk). Categories (2) and (3) are dominated by X-band radars; the insertion of AESA technology into category (3) was the primary subject for this task force.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

39. Report of the Defense Science Board Task Force on Options for Acquisition of the Advanced Targeting Pod and Advanced Targeting FLIR Pod

Publication Date:
02-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Under Secretary of Defense (AT) requested that the DSB form a brief study of ongoing Navy and Air Force programs aimed at developing advanced laser guided weapon targeting pods for their tactical aircraft. This request for a DSB Task Force was occasioned by Congressional interest in the possibilities of a Joint development and production program for these pods.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

40. Protecting the Homeland: Report of the Defense Science Board Task Force on Defensive Information Operations 2000 Summer Study Volume I

Publication Date:
02-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The task forces see a spectrum of threats to the homeland emerging. The 2000 summer study begins a series of studies byt he Defense Science Board aimed at assisting the Department of Defense and the Intelligence Community in defining their roles in protecting the nation from unconventional attacks on the United States. Other studies now planned as part of this series of studies include Defense Against Chemical Warfare Attack: Countering the Strategic Nuclear Threat in the 21st century; a follow-up study on Intelligence on Threats to the Homeland; and a second study on the issues associated with Defense Against Biological Warfare Attack. The focus of all these DSB studies is on identifying the technology and operational capability needed to protect the homeland. It is not on the assignment of roles and missions for employing said capabilities. Significant recommendations are made in these reports including suggestions for implementation.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

41. Report of the Defense Science Board Task Force on Training Superiority Training Surprise

Author:
Ralph Chatham and Joe Braddock
Publication Date:
01-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In late 1998 the Undersecretary of Defense (Personnel Readiness), the Director, Defense Research and Engineering, and the Joint Chiefs of Staff requested the Defense Science Board to create a task force on training and education. Drs. Joe Braddock and Ralph Chatham were appointed co-chairmen. The task force met periodically throughout 1999 and early 2000. This document is the report of our deliberations.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

42. Russia's Physical and Social Infrastructure: Implications for Future Development

Publication Date:
12-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
During the past two years, the National Intelligence Council and the Bureau of Intelligence and Research of the US Department of State sponsored a working group and four seminars with experts from outside the Intelligence Community to examine the impact of societal and infrastructural factors on Russia's future over the next two decades. The factors identified--demography, health, intellectual capital, and physical infrastructure--all pose great challenges to Russia. The purpose of the project was to begin to think through in systematic fashion the difficulties and opportunities confronting Russia's leadership in these four specific areas.
Topic:
Demographics, Development, and Government
Political Geography:
Russia and United States

43. Report of the Defense Science Board Task Force on DoD Frequency Spectrum Issues

Publication Date:
11-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Imagine trying to win an overseas air war where target intelligence can be gathered only part of the day, where aerial refueling is hampered by inability to fly in close formation under prevailing weather conditions, and where many newly developed radio systems for air, sea, and land forces don't work the way they did back in the U.S. Sound unlikely? It isn't - these constraints limited the U.S. forces' ability to operate to maximum efficiency during the Kosovo campaign. These restrictions on U.S. military equipment did not arise from sabotage, maintenance failures, or enemy countermeasures - they resulted from the Department of Defense (DoD) acquisition system's failure to insist on qualifying spectrum allocations for new systems that depend on access to the radio frequency spectrum. Without such qualification, systems that function well in the U.S. may not be usable abroad. Unless new systems' use of radio frequencies is qualified, they may interfere with other military users or with critical civilian users of the radio spectrum, even at home.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

44. Report of the Defense Science Board Task Force on Defense Software

Publication Date:
11-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Defense Science Board (DSB) Task Force on Defense Software was formed in September 1999 and tasked to: Review the findings and recommendations of previous Department of Defense (DoD) -wide studies on software development and acquisition Assess the current environment to identify changes since previous studies Assess the current state of software development programs – both DoD and Commercial Identify focused recommendations to improve performance on DoD software intensive programs.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

45. Central Asia and the South Caucasus: Reorientations, Internal Transitions, and Strategic Dynamics

Publication Date:
12-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In April 2000, the National Intelligence Council sponsored a conference that examined the strategic dynamics of the Central Asian countries of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, and the South Caucasus countries of Armenia, Azerbaijan, and Georgia. The conference brought together approximately 100 government and outside experts, including officials and scholars from the countries concerned. It consisted of six panels with presentations from more than 30 academic and regional experts, followed by question-and-answer sessions. The purpose of the conference was not to arrive at a consensus but to deepen understanding of the region.
Topic:
Development and Government
Political Geography:
Central Asia, Eastern Europe, and Georgia

46. Report of the Defense Science Board Task Force on the Technology Capabilities of Non-DoD Providers

Publication Date:
06-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In the years since WWII, the global private sector has come to dominate the development of technology and the manufacturing capabilities for a number of technologies of critical importance to the Defense Department of the Military Services. Examples include information systems, propulsion systems such as gas turbines and logistics systems.
Topic:
Defense Policy, Development, and Science and Technology
Political Geography:
United States

47. Prospects for WTO Trade Negotiations After Seattle: Foreign Strategies and Perspectives

Publication Date:
05-2000
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In a recent conference, trade experts identified three primary reasons the World Trade Organization (WTO) failed to launch a new trade Round at its December 1999 Ministerial. First, leading members were unable to resolve differences on critical issues prior to the gathering. In addition, many developing countries and nongovernmental organizations were more assertive than they had been at previous conferences. Finally, in recent years, the WTO has expanded the range of issues it addresses, which has made efforts to reach a consensus on any point more difficult. According to the speakers, as a result of the acrimonious Ministerial, the WTO has suffered a substantial loss of credibility, which will impair efforts to launch a new Round in the near term. There is no immediate alternative to strong US leadership, and WTO negotiations will be more complicated because developing countries and nongovernmental organizations will be more inclined to resist trade liberalization efforts that they believe do not advance their interests. Experts at the conference offered a variety of assessments regarding the course the WTO might choose to follow this year. The majority argued that if the trade body is seeking to rebuild confidence, it could continue with scheduled meetings on agriculture and services and use the time to rebuild confidence. A minority, however, held that the forum is too fractured to make progress, thus talks would only undermine the already declining prestige of the trade body. The experts identified several long-run challenges that the WTO will probably need to address to be an effective decisionmaking institution, including: Bridging the developed-developing country gap Costa Rica, Mexico, and South Africa generally support trade liberalization and have credibility among developed and developing states; thus they are in a position to meld the interests of the two sides. Enacting institutional reforms The organization's expansive agenda and large membership require that it adopt policies that facilitate decisionmaking, especially before new members such as China and Russia join. The trade body may try to increase transparency to promote greater trust in its procedures. Also, to avoid protracted and bitter selections such as the forum suffered last year, the WTO could review its procedures for electing a new director general. Managing the backlash against globalization Supporters of freer trade could launch a massive educational program to highlight the gains for all countries from expanded trade and to counter the dire assertions made by nongovernmental organizations (NGOs).
Topic:
Foreign Policy, Development, Economics, and International Trade and Finance
Political Geography:
Russia and China

48. Ukraine: Challenges of the Continuing Transition

Publication Date:
08-1999
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The views expressed are those of individuals and do not represent official US intelligence or policy positions. The NIC routinely sponsors such unclassified conferences with outside experts to gain knowledge and insight to sharpen the level of debate on critical issues.
Topic:
Development, Economics, and Politics
Political Geography:
United States, Ukraine, and Eastern Europe

49. Regime Switching in the Dynamic Relationship between the Federal Funds Rate and Innovations in Nonborrowed Reserves

Author:
Chan Huh
Publication Date:
01-1996
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the dynamic relationship between changes in the finds rate and nonborrowed reserves within a reduced form framework that allows the relationship to have WO distinct patterns over time. A regime switching model a la Hamilton (1989) is estimated. On average, CPI inflation has been significantly higher in the regime and volatile changes in funds rate. Innovations in money growth are characterized by large associated with a strong anticipated inflation effect in this high inflation regime, and a moderate liquidity effect in the low inflation regime. Furthermore, an identical money innovation generates a much bigger increase in the interest rate during a transition period from the low to high inflation regime than during a steady high inflation period. This accords well with economic intuition since the transition period is when the anticipated inflation effect initially gets incorporated into the interest rate. The converse also holds. That is, the liquidity effect becomes stronger when the economy leaves a high inflation regime period and enters a low inflation regime period.
Topic:
International Relations, Development, Economics, and International Trade and Finance