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  • Author: Eric M. Leeper, Jennifer E. Roush
  • Publication Date: 04-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Money demand and the stock of money have all but disappeared from monetary policy analyses. Remarkably, it is more common for empirical work on monetary policy to include commodity prices than to include money. This paper establishes and explores the empirical fact that whether money enters a model and how it enters matters for inferences about policy impacts. The way money is modeled significantly changes the size of output and inflation effects and the degree of inertia that inflation exhibits following a policy shock. We offer a simple and conventional economic interpretation of these empirical facts.
  • Topic: Conflict Resolution, International Relations, Economics, International Trade and Finance
  • Author: Carlos Ó. Arteta
  • Publication Date: 03-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In view of the role of liability dollarization in recent financial crises, whether or not the widespread presence of foreign-currency-denominated deposits and credits in developing-country banking systems leads to greater financial fragility is an open and pressing question. Using a comprehensive dataset on deposit and credit dollarization for a large number of developing and transition economies, I find little evidence that high dollarization heightens the probability of banking crises or currency crashes. Furthermore, while empirical results suggest that banking crises and currency crashes are contractionary, there is no robust evidence that they are more costly in highly dollarized countries than in countries where dollarization is low. This extensive empirical search highlights that macroeconomic and exchange rate policies are far more important than bank dollarization in determining crisis risks and costs.
  • Topic: Conflict Resolution, International Relations, Economics, International Trade and Finance
  • Author: Brian M. Doyle, David Bowman
  • Publication Date: 03-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • 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, Monetary Policy
  • Author: J. Benson Durham
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: In contrast to the empirical literature's focus on foreign direct investment (FDI), this study examines the effects of foreign portfolio investment (FPI) and “other” foreign investment (OFI) on economic growth using data on 88 countries from 1977 through 2000. Most measures suggest that FPI has no effect, and some results indicate that OFI has a negative impact on growth that is somewhat mitigated by initial financial and/or legal development. However, these results are questionable due to possible simultaneity bias. The empirical analyses also examine whether non-FDI foreign investment affects growth indirectly. FPI does not correlate positively with macroeconomic volatility, but the results indicate that the negative indirect effect of OFI through macroeconomic volatility comprises a substantial portion of the gross negative effect of OFI on growth.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Fang Cai
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper uses a unique dataset of audit trail transactions to examine the trading behavior of market makers in the Treasury bond futures market when Long-Term Capital Management (LTCM) faced binding margin constraints in 1998. Although identities are concealed in the dataset, I find strong evidence that during the crisis market makers in the aggregate engaged in front running against customer orders from a particular clearing firm (coded “PI7”) that closely match various features of LTCM's trades through Bear Stearns. That is, market makers traded on their own accounts in the same direction as PI7 customers did, but one or two minutes beforehand. Furthermore, a significant percentage of market makers made abnormal profits on most of the trading days during the crisis. Their aggregate abnormal profits, however, were more than offset by abnormal losses realized after the private sector recapitalization of LTCM. Moreover, I show that before the rescue, a market maker's cumulative abnormal profit was positively correlated both to her tie as contra party with PI7 and to the intensity of her front running, but these relationships turned negative after the rescue. The overall evidence suggests that the recapitalization plan effectively relaxed LTCM's binding constraints and therefore reversed the profitability of front running.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Jon Wongswan
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper provides evidence of transmission of information from the U.S. and Japan to Korean and Thai equity markets during the period from 1995 through 2000. Information is defined as important macroeconomic announcements in the U.S., Japan, Korea, and Thailand. Using high-frequency intraday data, I focus the study on return volatility and trading volume because the implications of new information are much clearer than for returns. I find a large and significant association between emerging-economy equity volatility and trading volume and developed-economy macroeconomic announcements at short-time horizons. This is the first strong evidence of this sort of international information transmission. Previous studies' findings of at most weak evidence may be due to their use of lower frequency data and their focus on developed-economy financial market innovations as the measure of information.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States, Japan, Asia, Korea, Thailand
  • Author: John H. Rogers, James M. Nason
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the “usual suspects” of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We con firm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a “canonical” RBC model moves closest to the data when it features exogenous world real interest rate shocks.
  • Topic: Conflict Resolution, International Relations, Economics, International Trade and Finance
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: The terrorist attacks of September 11, 2001, in Washington, D.C., New York City, and Pennsylvania were acts of war against the United States of America and its allies, and against the very idea of civilized society. No cause justifies terrorism. The world must respond and fight this evil that is intent on threatening and destroying our basic freedoms and our way of life. Freedom and fear are at war.
  • Topic: Security, Defense Policy, Terrorism
  • Political Geography: United States, Washington, Pennsylvania
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: For this study, we built upon Secretary Rumsfeld's six operational goals for transformation, requirements from Joint Vision 2020, lessons learned from Operation Enduring Freedom, and previous industrial base studies. We drew on recommendations from experts in the Department of Defense, industry, and the investment community to create a compendium of representative emerging defense suppliers with transformational technologies and products. We identified 24 companies' key technologies, products, and best business practices in case studies. We also surveyed legacy defense suppliers and the Defense Advanced Research Projects Agency (DARPA) to capture key characteristics associated with programs and products judged to be among the organizations' most successful, most important and innovative, and fastest to field. Finally, we spoke with five prominent companies who have substantially exited the defense business.
  • Topic: Defense Policy, Economics, Industrial Policy, Science and Technology
  • Publication Date: 02-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Section 2504 of title 10, United States Code, requires that the Secretary of Defense submit an annual report to the Committee on Armed Services of the Senate and the Committee on Armed Services of the House of Representatives, by March 1st of each year.
  • Topic: Defense Policy, Economics, Industrial Policy, Science and Technology
  • Political Geography: United States