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  • Publication Date: 11-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: The United States faces stealthy adversaries who have demonstrated both motives and means to inflict grave damage on the U.S. homeland. The nation's strategy in response to this type of adversary is clear: engage the threat as far as possible from the U.S. homeland, on its turf. This approach requires a multi-agency governmental effort, with the Department of Defense playing a major role.
  • Topic: Defense Policy, Science and Technology
  • Political Geography: United States
  • Author: John H. Rogers, Jonathan H. Wright, Jon Faust, Shing-Yi B. Wang
  • Publication Date: 10-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.
  • Topic: International Relations, Economics, Government, International Trade and Finance
  • Political Geography: United States
  • Author: David Bowman
  • Publication Date: 10-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: This paper examines the extent to which a decline in market power could have contributed to the general decline in inflation rates experienced in developed countries during the 1990s.
  • Topic: International Relations, Economics, Government, International Trade and Finance
  • Author: Joseph E. Gagnon
  • Publication Date: 10-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Most macroeconomic models imply that faster output growth tends to lower a country's trade balance by raising its imports with little change to its exports. Krugman (1989) proposed a model in which countries grow by producing new varieties of goods. In his model, faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of U.S. imports from different source countries and finds strong support for Krugman's model.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Two years ago, we responded to attacks on America by launching a global war against terrorism that has removed gathering threats to America and our allies and has liberated the Iraqi and Afghan people from oppression and fear.
  • Topic: Security, Defense Policy, Economics
  • Political Geography: Afghanistan, Iraq, America, Middle East
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • 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, Science and Technology
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • 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, Development
  • Political Geography: United States
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: The Task Force was charged to examine the use of red teams in the Department of Defense and recommend ways that such teams could be of greater value to the department. Our Terms of Reference and task force membership are provided in Appendices 1 and 2.
  • Topic: International Relations, Security, Defense Policy
  • Political Geography: United States
  • Author: Jonathan H. Wright
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Recent empirical work has considered the prediction of inflation by combining the information in a large number of time series. One such method that has been found to give consistently good results consists of simple equal weighted averaging of the forecasts over a large number of different models, each of which is a linear regression model that relates inflation to a single predictor and a lagged dependent variable. In this paper, I consider using Bayesian Model Averaging for pseudo out-of-sample prediction of US inflation, and find that it gives more accurate forecasts than simple equal weighted averaging. This superior performance is consistent across subsamples and inflation measures. Meanwhile, both methods substantially outperform a naive time series benchmark of predicting inflation by an autoregression.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Jonathan H. Wright
  • Publication Date: 09-2003
  • Content Type: Working Paper
  • Institution: U.S. Government
  • Abstract: Exchange rate forecasting is hard and the seminal result of Meese and Rogoff (1983) that the exchange rate is well approximated by a driftless random walk, at least for prediction purposes, has never really been overturned despite much effort at constructing other forecasting models. However, in several other macro and financial forecasting applications, researchers in recent years have considered methods for forecasting that combine the information in a large number of time series. One method that has been found to be remarkably useful for out-of-sample prediction is simple averaging of the forecasts of different models. This often seems to work better than the forecasts from any one model. Bayesian Model Averaging is a closely related method that has also been found to be useful for out-of-sample prediction. This starts out with many possible models and prior beliefs about the probability that each model is the true one. It then involves computing the posterior probability that each model is the true one, and averages the forecasts from the different models, weighting them by these posterior probabilities. This is effectively a shrinkage methodology, but with shrinkage over models not just over parameters. I apply this Bayesian Model Averaging approach to pseudo-out-of-sample exchange rate forecasting over the last ten years. I find that it compares quite favorably to a driftless random walk forecast. Depending on the currency-horizon pair, the Bayesian Model Averaging forecasts sometimes do quite a bit better than the random walk benchmark (in terms of mean square prediction error), while they never do much worse. The forecasts generated by this model averaging methodology are however very close to (but not identical to) those from the random walk forecast.
  • Topic: International Relations, Economics, International Trade and Finance
  • Political Geography: United States