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  • 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: 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