Search

You searched for: Publishing Institution Board of Governors of the Federal Reserve System Remove constraint Publishing Institution: Board of Governors of the Federal Reserve System Topic Economics Remove constraint Topic: Economics
Number of results to display per page

Search Results

  • Author: Jonas E. Arias, Guido Ascari, Nicola Branzoli, Efrem Castelnuovo
  • Publication Date: 01-2015
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.
  • Topic: Economics, Monetary Policy, Economic Theory, Inflation
  • Political Geography: Global Focus
  • Author: Shaghil Ahmed, Brahima Coulibaly, Andrei Zlate
  • Publication Date: 05-2015
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. (3) Controlling for economic fundamentals, we also find that, during the taper tantrum, financial conditions deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) For earlier episodes, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities during EME crises of the 1990s and early 2000s. (5) That said, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode. Differences in economic fundamentals played a role in explaining the heterogeneous EME financial market responses during the global financial crisis of 2008, and the role of fundamentals appeared to progressively increase through the European crisis in 2011 and subsequently the 2013 taper tantrum.
  • Topic: Economics, Emerging Markets, Markets, Exchange Rate Policy, Fiscal Policy, Economic Crisis
  • Political Geography: Global Focus
  • Author: Michiel De Pooter, Patrice Robitaille, Ian Walker, 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, Bonds
  • Political Geography: Brazil, South America, North America, Mexico, Chile
  • Author: Nicholas Coleman, Leo Feler
  • Publication Date: 03-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: While the finance literature often equates government banks with political capture and capital misallocation, these banks can help mitigate financial shocks. This paper examines the role of Brazil's government banks in preventing a recession during the 2008-2010 financial crisis. Government banks in Brazil provided more credit, which offset declines in lending by private banks. Areas in Brazil with a high share of government banks experienced increases in lending, production, and employment during the crisis compared to areas with a low share of these banks. We find no evidence that lending was politically targeted or that it caused productivity to decline in the short-run.
  • Topic: Economics, Financial Crisis, Governance, Local, Lending, Banking
  • Political Geography: Brazil, South America
  • Author: Jonas E. Arias, Juan F. Rubio-Ramirez, Daniel F. Waggoner
  • Publication Date: 03-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Are optimism shocks an important source of business cycle fluctuations? Are deficit-financed tax cuts better than deficit-financed spending to increase output? These questions have been previously studied using SVARs identified with sign and zero restrictions and the answers have been positive and definite in both cases. While the identification of SVARs with sign and zero restrictions is theoretically attractive because it allows the researcher to remain agnostic with respect to the responses of the key variables of interest, we show that current implementation of these techniques does not respect the agnosticism of the theory. These algorithms impose additional sign restrictions on variables that are seemingly unrestricted that bias the results and produce misleading confidence intervals. We provide an alternative and efficient algorithm that does not introduce any additional sign restriction, hence preserving the agnosticism of the theory. Without the additional restrictions, it is hard to support the claim that either optimism shocks are an important source of business cycle fluctuations or deficit-financed tax cuts work best at improving output. Our algorithm is not only correct but also faster than current ones.
  • Topic: Economics, Business , Tax Systems, Economic Theory, Deficit
  • Political Geography: Global Focus
  • Author: John Rogers, Chiara Scotti, Jonathan H. Wright
  • Publication Date: 03-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
  • Topic: Economics, Monetary Policy, Exchange Rate Policy, Banking
  • Political Geography: Japan, Europe, Asia, England
  • Author: Logan T. Lewis
  • Publication Date: 04-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. Using trade flow data, I test models capable of replicating these trade price data. Even with significant pricing frictions, the models still imply a trade response to exchange rates stronger than found in the data. Moreover, using significant cross-sector heterogeneity, comparative statics implied by the model find little to no support in the data. These results suggest that while complementarity in price setting and sticky prices can explain pricing patterns, some other short-run friction is needed to match actual trade flows. Furthermore, the muted response found for sectors with high long-run substitutability implies that simply assuming low elasticities may be inappropriate. Finally, there is evidence of an asymmetric response to exchange rate changes.
  • Topic: Economics, International Trade and Finance, Exchange Rate Policy, Capital Flows
  • Political Geography: North America, United States of America
  • Author: Stephanie E. Curcuru, Charles P. Thomas, Francis E. Warnock, Jon Wongswan
  • Publication Date: 05-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity markets. But we argue that a motive other than reducing currency risk exposure is likely behind this rebalancing. In particular, U.S. investors may be exploiting mean reversion in underlying equity markets, rebalancing away from equity markets that recently performed well and moving into equity markets market just prior to relatively strong performance. Such behavior suggests tactical reallocations to increase returns rather than reduce risk.
  • Topic: Economics, Markets, Risk, International Portfolios, Equity
  • Political Geography: North America, United States of America
  • Author: David Bowman, Juan M. Londono, Horacio Sapriza
  • Publication Date: 06-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We investigate the effects of U.S. unconventional monetary policies on sovereign yields, foreign exchange rates, and stock prices in emerging market economies (EMEs), and we analyze how these effects depend on country-specifc characteristics. We find that, although EME asset prices, mainly those of sovereign bonds, responded strongly to unconventional monetary policy announcements, these responses were not outsized with respect to a model that takes into account each country's time-varying vulnerability to U.S. interest rates affected by monetary policy shocks.
  • Topic: Economics, Emerging Markets, Foreign Exchange, Markets, Monetary Policy, Exchange Rate Policy, Interest Rates, Stock Markets
  • Political Geography: North America, United States of America
  • Author: Matteo Iacoviello
  • Publication Date: 08-2014
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy--borrowers who use their home as collateral--defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.
  • Topic: Economics, Global Recession, GDP, Economic Theory, Fiscal Policy, Banking
  • Political Geography: Global Focus