bluuebunny/crossref_metadata_2025 huggingface dataset:
Financial Policies in Open Economies
Authors: Henderson Dale W.
Published: August 2019

In analyzing the extent to which alternative financial stabilization policies can be expected to dampen the effects of shocks to macro-economic equilibrium in a single open economy, it has often been assumed that the authorities must choose between fixing the exchange rate and allowing it to fluctuate freely. Which of these two pure intervention policies is better usually depends not only on the source of the shocks to the economy (see Robery Mundell, Jerome Stein, and Edward Tower and Thomas Willet), but also on the specification of monetary policy. The nature of the truly optimal financial policy is a determined by the kind of information available to the authorities about the structure of the ecnomy and about the shocks to which it is subjected. Under plausible assumptions it is not optimal for a single open economy to adopt either pure intervention policy. However, interations in two-country world economy must be considered when choosing financial policies, and an agreement to pursue a pure intervention policy may lead to better outcomes than those implied by noncooperative behavior.
The Impact of Changes in the Federal Reserve's Discount Rate on the Dollar's Foreign Exchange Value
Authors: Brown Kathleen H.
Published: August 2019

This paper attempts to analyze the effects of changes in the Federal Reserve's discount rate on the dollar's foreign exchange value. It a discount rate increase were to signal a subsequent general increase in market interest rates, one would expect U.S. dollar-donominated assets to become relatively more attractive, and the ensuing increase demand for dollar assets to tend to raise the dollar's exchange value. The reverse would be true for discount rate decreases. However, the Federal Reserve's policy of moving the discount rate with a lag behind the Federal funds rate means that market participants generally have sufficient information to anticipate changes in the discount rate. When this is a case, announcement effects -- immediate and dinsernable market responses to discount rate changes -- do not occur. Under special circumstatnes in 1978, however, announcement effects could and did occur. By increasing the discount rate when the Federal funds-discount rate by a larger amount than the market anticipated, the Federal Reserve used the discount rate as a signal to market participants that it would use other operating instruments to bring about changes in market interest rates and teh monetary base.
U.S. Banks: The Slowdown in International Lending
Authors: Mills Rodney H.
Published: August 2019

A recent article in Euromoney focused attention on the share of U.S. banks in international lending, defining "U.S. banks" as banking offices located in the United States. The use of lcoation as the criterion of nationality for a group of banks is appropriate in teh context of the balance of payments, which measures flows of funds across national borders. Un a comparison of the international lending activity of different nationalities of banks, howecer, it is meaningful to examine banks on the basis of where they are headquartered, i.e., where they received their charter, or where financial control lies. And to use the location basis as a substitute for the charter or financial control basis will lead to inaccurate conclusions.
Wealth Effects in the New Neoclassical Models
Authors: Canzoneri Matthew B.
Published: August 2019

In a model incorporating "rational" expectations and the "natural rate" hypothesis, Sargent and Wallace (1975) demonstrated three familiar propositions: (I) There is no stabilization role for monetary policy since fluctuations in output are not affected by systematic policy rules. (II) There is no growth role for monetary policy since the real rate of interest is not affected by systematic policy rules either. (III) Peffing the interest rate is destabilizing in the sense that it results do not carry over to this new generaion of models. The implication of these three propositions would seem to be that the monetary authorities should only be concerned with controlling inflation.
Stability in Financial and Labor Markets: Is There a Tradeoff?
Authors: Canzoneri Matthew B.
Published: August 2019

Does the FED have to choose between stability in financial markets and stability in labor markets? Some recent econometric simulations would seem to suggest that it does. The very existence of such as trade off implies that policy making is more than a technical exercise. It is a political process; one constituency is jhurt by instability in financial markets, while largely different constituency is hurt by instability in labor markets.
The Implications of the Internationalization of Banking for the Definition and Measurement of U. S. Credit and Monetary Aggregates
Authors: Dooley Michael P.
Published: August 2019

Macroeconomic analysts often assume that a "closed economy" model of a country or region captures almost all important economic relationships. They presume taht a "foreign" sector can be added to the model but that, at least for a large country such as the United States, qualitative results are unchanged and quantitative results are only slightly affected. The use of national monies and other political, geographical, and technological barriers to trade in goods and financial assets provide some basis for this fundamental simplification.
The Role of the Current Account in Exchange Rate Determination: A Comment on Rodriguez
Authors: Dooley Michael P. , Isard Peter
Published: August 2019

In recent contribution ot the JPE, Rodriguez analyzes the role of trade flows in exchange rate determination based on a rational expectations formulation of the portfolio balance framework. The purpose of this comment is to extend the Rodriguez analysis by relaxing the restrictive asumption that domestic holdings of foreign currency can only accumulate or decumulate through trade surpluses or deficits, or more generally, thorugh currency account imbalances. We derive a modified version of the Rodriguez solution form using assumptions that better reflect the high degree of development of international credit markets, under which current account imbalances transfer wealth between domestic and foreign portfolios but may have little to do with changing the stocks and currency mix of the (outside) assets that public sectors impose (at market clearing prices) upon private portfolios. In addition, we interpret a key parameter in the Rodriguez solution form which raises an important issue about the role of the current account in the limiting case of perfect asset substitutability.
Cooperative Policies Among the North, the South, and OPEC: An Optimal Control Approach
Authors: Marquez Jaime R. , Pauly Peter
Published: August 2019

While benefits of a global policy coordination effort are known in theory, empirical estimates of the gains of such a move are difficult to come by casting doubts on whether global policy coordination will ever occur. In this paper we assess, empicially, the viability of cooperative policies among the North, the South, and OPEC. To this end we apply stochastic optimal control to a nonlinear stochastic dynamic econometric model of a three region world economy that highlights the channels of international transmission of oil price effects and the feedback effects of policy responses to oil price changes. Even if cooperative policies exist, and are implemented, not all the parties involved will benefit to the same extent. Thus we also examine the sensitivity of the distribution of income gains (or losses) between the North, the South and OPEN to alternative specifications of the welfare function.
The Macroeconomic Implications of Labor Contracting with Asymmetric Information
Authors: Canzoneri Matthew B. , Sibert Anne C.
Published: August 2019

Monetary models of the business cycles are designed to explain certain sytlized facts and to make a case for a particular view about the nature of employemtn fluctuations and optimal monetary policy. Two popular paradigms are the "islands models" of Lucas and Barro and the "disequilibrium contract models" of Gray and Fischer. Both paradigms have been developed extenesively, and their macroeconomic implications are widely known.
Some Implications of the President's Tax Proposals for U.S. Banks with Claims on Developing Countries
Authors: Frankel Allen B.
Published: August 2019

This paper examines some implications of the President's 1985 tax reform plan for U.S. banks with claims on developing countries. An assessment is presented of how the plan would modify, or eliminate, a variety of mechanisms by which banks shelter income from taxation. A particular focus of the paper is an analysis of the consequences for large U.S. banks of the proposed change in the computation of the U.S. tax credit for taxes paid to foreign countries.
The U.K. Sector of the Federal Reserve's Multicountry Model: The Effects of Monetary and Fiscal Policies
Authors: Edison Hali J.
Published: August 2019

The purpose of this paper is to describe and to analyze in some detail the U.K. sector of the Federal Reserve's Multicountry Model (MCM). The analysis focuses on the effects of shifts in U.K. monetary and fiscal policies at three levels: 1) within the unlinked U.K. sector, 2) within the linked MCM framework, and 3) within the linked MCM under the assumption that U.K. policy shifts are coordinated with those in other countries. In comparing the unlinked MCM U.K. sector with other U.K. models such as the LBS and National Institute it is found that all the models have similar government expenditure multipliers but the components of GNP respond quite differently. The contrast between linked and unlinked simulation illustrates the importance of international feedback effects.
A Model of Exchange Rate Pass-Through
Authors: Fisher Eric
Published: August 2019

Exchange rate pass-through is the phenomenon whereby changes in the value of foreign exchange are reflected in changes in import prices. This paper presents a model in which firms are price setters who anticipate exchange rate changes. In equilibrium, firms' strategies incorporate expectations about the exchange rate consistently and are best responses to the strategies of all others in the world market. It is shown that exchange rate changes give rise to import price changes, but the degree of exchange rate pass-through depends upon domestic and foreign market structures and the exchange rate regime. In general, exchange rate pass-through is higher if the home market is monopolistic or if the foreign market is competitive. The paper concludes with an examination of disaggregated Japanese manufacturing price indices, and it shows that the degree of exchange rate pass-through was indeed correlated with industry concentration during the most recent period of the yen's depreciation against the dollar.
An Analogue Model of Phase-Averaging Procedures
Authors: Campos Julia , Ericsson Neil R. , Hendry David F.
Published: August 2019

This paper considers the statistical and econometric effect that fixed n-period phase-averaging has on time series generated by some simple dynamic processes. We focus on the variance and autocorrelation of the data series and of the disturbance term for levels and difference equations involving the phase-average data. Further, we examine the effect of phase-averaging on the erogeneity of variables in those equations and the implications phase-averaging has for conducting statistical inference.To illustrate our analytical results, we investigate claims by Friedman and Schwartz in their 1982 book Monetary Trends in the United States and the United Kingdom about what the properties of phase-average data and the relationships between those data ought to be. We present certain features of the observed series on velocity, examine how well our analytical model captures them, and contrast them with Friedman and Schwartz's predictions. While our model is an extremely simplified characterization of the phase-averaging adopted by Friedman and Schwartz, it does offer several insights into the likely consequences of their approach.
Modeling Investment Income and Other Services in the U.S. International Transactions Accounts
Authors: Stekler Lois E. , Helkie William L.
Published: August 2019

This paper presents the services account sector of a model of U.S. international transactions (the USIT model) that is maintained in the Division of International Finance of the Federal Reserve Board. Part I present the models for payments and receipts on direct investment, other investment income, and non-investment services. Part II reports on simulations that indicate the sensitivity of the model's forecast to changes in its predetermined variables such as interest rates and exchange rates. In particular, we explore the implications of large current account deficits and the resulting accumulation of net claims by foreigners on the United States for the services balance.
Money, Interest, and Capital in a Cash-In-Advance Economy
Authors: Coleman Wilbur John
Published: August 2019

A cash-in-advance constraint on consumption is incorporated into a standard model of consumption and capital accumulation. Monetary policy consists of lump-sum cash transfers. Methods are developed for establishing the existence and uniqueness of an equilibrium. and for explicitly constructing this equilibrium. The model economy's dependence on monetary policy is explored.
Domestic and Cross-Border Consequences of U.S. Macroeconomic Policies
Authors: Bryant Ralph C. , Helliwell John F. , Hooper Peter
Published: August 2019

This paper reviews empirical evidence about the effects of changes in U.S. monetary policy and fiscal policy that has been accumulated during recent years in a series of collaborative research projects involving a variety of global macroeconometric models. The paper also considers, in particular, the consequences over the next five to six years for key U.S. and foreign economic variables of a significant U.S. fiscal contraction. The quantitative implications of both alternative fiscal spending and tax actions, and alternative treatments of expectations (adaptive versus rational) are analyzed.The results suggest that a phased-in fiscal contraction could reduce the level of output for up to several years, as well as the levels of interest rates, the dollar and the U.S. external deficit. The decline in the external deficit would be significantly smaller than the decline in the budget deficit, however. The negative effects on output would be mitigated to the extent that the phased-in contraction were anticipated (i.e., announced credibly in advance), to the extent that monetary policy were eased, or to the extent that the fiscal package emphasized spending cuts and personal taxes rather than corporate and excise taxes.
Financial Intergration in the European Community
Authors: Key Sydney J.
Published: August 2019

The EC program to complete the internal market is designed to allow the free movement of goods, persons, services, and capital within the Community by the target date of December 31, 1992. This paper provides a comprehensive description and analysis of the EC program for the financial sector, with emphasis on the relationship of this program to overall issues regarding international trade in financial services.The first section of the paper presents a brief historical survey of the origins of the internal market program. The second section provides an overview of the EC program for creation of a "European Financial Area," a term used by the EC Commission to refer to both the removal of barriers to capital movements and the establishment of a framework for a Community-wide market for financial services. The third section, which is the main focus of the paper, is a conceptual analysis of the internal and external dimensions of the EC program for financial services and markets; the section analyzes the EC approach of mutual recognition as a means of achieving integration of the Community's financial sector and also sets forth a general framework for considering approaches to market access for third-country firms. The fourth section presents the conclusions. A series of appendices provide detailed explanations of the EC programs for banking, investment services, securities markets, and insurance.
Computers and the Trade Deficit: The Case of the Falling Prices
Authors: Meade Ellen E.
Published: August 2019

This paper investigates two issues related to international trade in computers: measurement and prediction. Because of the rapid technological advancement in the computer industry, the Bureau of Economic Analysis (BEA) measures computer prices using techniques that adjust for quality change. The constructed hedonic index is essentially a domestic price measure, but the BEA uses it for the deflation of international sales and purchases of computers. This paper begins with a review of the theory behind hedonic price indexes, and then proceeds to discuss the concerns that arise when a domestic index is used to deflate international transactions.If the computer industry is sufficiently different from other industries, separate treatment of computers in empirical models of international trade may be necessary to capture historical developments and predict future outcomes. This paper examines the simulation performance of a conventional aggregate trade model, a modified aggregate trade model, and a model that disaggregates computers. The model with computers disaggregated is shown to out-perform the other models.
Market Segmentation and 1992: Toward a Theory of Trade in Financial Services
Authors: Montgomery John D.
Published: August 2019

The effect of the unification of the European banking market on the efficiency of the allocation of capital across Europe depends on the economic forces behind banking structure. Such forces are not well understood. The paper discusses a conceptual framework for analyzing financial services (especially bank loans and deposits), in which a key distinction is between services offered across borders and those services where location of the intermediary matters. Empirical evidence from Italy is examined that suggests that banking markets are geographically fragmented, possibly because of natural, as opposed to regulatory, barriers to capital mobility. In the light of this conceptual framework and the empirical results, the likely effect of European integration on real capital mobility and efficiency of banking markets is discussed.
The Statistical Discrepancy in the U. S. International Transactions Accounts: Sources and Suggested Remedies
Authors: Stekler Lois E.
Published: August 2019

The statistical discrepancy in the U.S. international transactions accounts has tended to be both large and positive over the last decade and a half. In 1990 the statistical discrepancy rose by $45 billion to a record $64 billion and brought the cumulative discrepancy since 1960 to almost $250 billion. The size and persistence of this discrepancy has called into question the accuracy of the data on the U.S. current and capital accounts.This paper attempts to find clues to the sources of the statistical discrepancy by 1) reviewing past history, 2) examining the data sources for each major component of the U.S. international transactions accounts, and 3) using regression analysis. The paper concludes with a list of recommendations for data improvements.While inadequacies are evident in the data for a wide variety of international transactions, both current and capital account, the search for sources of the big increase in the discrepancy between 1989 and 1990 probably can be narrowed largely to the capital account. It seems unlikely that net exports of goods, services, or investment income increased by an additional $45 billion in 1990. On the capital account side, increases in foreign holdings of U.S. currency probably played a significant role, but the bulk of the increase in the statistical discrepancy in 1990 remains a mystery.
Did the Debt Crisis Cause the Investment Crisis?
Authors: Warner Andrew M.
Published: August 2019

There is now a large literature which attributes the investment decline in heavily indebted developing countries to the effects of the international debt crisis which began in 1982. However, these theories have not been tested against the alternative that declining terms of trade and high world real interest rates in the early 1980s directly caused the investment declines. This paper is based on the idea that if the debt theories are true, then forecasts of investment in the 1980s which do not use debt variables should not perform very well. This paper points out that such forecasts perform surprisingly well, and in many cases go against the predictions of the debt theories, casting doubt on the validity of the debt theories.
Growth, Political Instability, and the Defense Burden
Authors: Blomberg S. Brock
Published: August 2019

This paper develops a model to examine the economic effects of political instability and military expenditure. In the model, "kleptocracies" use defense as "imperfect" insurance against the probability of being overthrown. Increasing defense has a secondary effect of augmenting the human capital stock (a spin-off effect). However, defense investment comes at the expense of consuming scarce resources (a crowding out effect). The paper's central contribution is to model each of these effects and their relationship to one another. The resulting theory predicts that the equilibrium is Pareto inefficient and that increased political instability and increased defense can inhibit economic growth. Empirically, increases in political instability are found to decrease growth while increases in defense are found to decrease political instability. The paper also finds that increases in defense have a direct negative effect on growth, although the relation is weak. The weak relation implies the aforementioned crowding out effect is largely mitigated by the spin-off effect.
Life Expectancy of International Cartels: An Empirical Analysis
Authors: Marquez Jaime R.
Published: August 2019

This paper examines the empirical relation between market structure and life expectancy for cartels that were active in international commodity markets throughout this century. I consider two alternative empirical formulations and estimate their parameters recognizing that durability cannot take negative values. Both formulations predict that increases in either market shares or intercartel concentration prolong life expectancy but disagree in the relative importance of these two factors. The application of tests to discriminate among the two formulations does not support constant-elasticity models.
Exchange Rates and Foreign Direct Investment: A Note
Authors: Stevens Guy V. G.
Published: August 2019

In "Exchange Rates and Direct Investment: An Imperfect Capital Markets Approach," Kenneth Froot and Jeremy Stein [1991] develop a new finance-based theory to answer an old question--the relationship, if any, between the flow of foreign direct investment and the exchange rate. Their theory, based on the possibility that a foreign firm's borrowing opportunities for financing a U.S. acquisition may be a function of its net worth in dollars, implies a negative relationship between a dollar appreciation and direct investment inflows into the United States. Empirically, the authors find statistically significant evidence of the implied negative relationship for quarterly and annual time series regressions, over the period 1973-88.The major purpose of this note is to show that this empirical support for the theory is weak. The authors' regressions show evidence of serious instability, and the significant negative relationship between direct investment inflows and the value of the dollar disappears for important subperiods of the 1973-88 period and for the sample period extended through 1991.
Real Exchange Rate Targeting and Macroeconomic Instability
Authors: Uribe Martin
Published: August 2019

This paper introduces a real exchange rate rule of the type analyzed by Dornbusch (1982) in an optimizing, two-sector, monetary model of a small open economy. By this rule the government increases the devaluation rate when the real exchange rate is below its long-run level and reduces it when the real exchange rate is above its long-run level. I show that the mere existence of such a rule can give room for extrinsic uncertainty to have real effects, that is, it can generate economic fluctuations due to self-fulfilling expectations. I also analyze the stabilizing role of these PPP rules when fluctuations are driven by shocks to fundamentals. I show that the volatility of real variables decreases with tighter rules when shocks to the supply of home goods or to the real rate of return are the main source of uncertainty, and increases when fluctuations are mainly due to shocks to the supply of traded goods. In all cases, PPP rules increase the volatility of nominal variables. Finally, PPP rules help stabilize both real and nominal variables when fluctuations originate from random but persistent deviations from the PPP rule itself.
Central Bank Independence, Inflation and Growth in Transition Economies
Authors: Loungani Prakash , Sheets D. Nathan
Published: August 2019

In this paper, we document two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies from command systems to market-based systems. First, increased central bank independence has tended to improve inflation performance. Second, high inflation has adversely affected real activity. More specifically, in the first section of this paper, we develop indices of central bank independence (CBI) for twelve transition economies and examine the relationship between CBI and inflation performance across these countries. Statistical evidence suggests that the transition economies with more independent central banks have achieved lower inflation than their counterparts. The second section of this paper studies the relationship between inflation and growth in twenty-six transition economies. We present econometric evidence indicating that reducing inflation helps stabilize economic activity, following the sharp output declines that occur during the initial stages of transition. The paper conc1udes that establishing an independent central bank is a concrete institutional reform that may reduce inflation and thus facilitate economic growth.
Eastern European Export Performance during the Transition
Authors: Sheets D. Nathan , Boata Simona
Published: August 2019

During the past decade, Eastern European exports have undergone a deep transformation, as communist bloc trading relationships have collapsed and trade with the West has increased. The extent of this geographical re-orientation has generally exceeded the predictions of equilibrium models developed by Hamilton and Winters (1992) and Collins and Rodrik (1991), suggesting the prospect for increased export activity among the transition economies as aggregate demand in these countries strengthens and payment systems mature. Significant changes in the product composition of Eastern European exports have accompanied the geographical reorientation. Exports of manufacturing goods to former communist countries have declined sharply, but exports to the EC across an array of goods -- including heavy machinery -- have grown robustly. Evidence suggests that the observed changes in export composition reflect the redirection of physical goods through price competition and the emergence of market-determined comparative advantage.
Theoretical Confidence Level Problems with Confidence Intervals for the Spectrum of a Time Series
Authors: Faust Jon
Published: August 2019

Textbook approaches to forming asymptotically justified confidence intervals for the spectrum under very general assumptions were developed by the mid-1970s. This paper shows that under the textbook assumptions, the true confidence level for these intervals does not converge to the asymptotic level, and instead is fixed at zero in all sample sizes. The paper explores necessary conditions for solving this problem, most notably showing that under weak conditions, forming valid confidence intervals requires that one limit consideration to a finite-dimensional time series model.
Money, Sticky Wages, and the Great Depression
Authors: Erceg Christopher J. , Evans Carolyn L. , Bordo M.
Published: August 2019

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.
Was China the First Domino? Assessing Links between China and the Rest of Emerging Asia
Authors: Fernald John G. , Edison Hali J. , Loungani Prakash
Published: August 2019

We assess links between China and the rest of emerging Asia. Some commentators have argued that Chinaâ s apparent devaluation in 1994 may have contributed to the Asian financial crisis. We argue that the devaluation was not economically important: The more-relevant exchange rate was a floating rate that was not devalued, and high Chinese inflation has led to a very sharp real appreciation of the currency. Although in principle, export competition with China could nevertheless have placed pressure on other Asian exporters, we argue that the striking feature of the data is the common movement between export growth from China and from other developing Asian economies. To the extent there is evidence of export competition, it is the period from about 1989 to 1993: Chinaâ s exchange rate depreciated sharply, Chinese export growth exceeded export growth of other Asian economies, and the composition of Asian exports (measured by export shares of various goods to the United States and other industrial economies) changed substantially. Finally, we speculate on the effects of the Asian crisis on Chinaâ s prospects. Chinaâ s economic growth is likely to slow because of increased trade competition as a result of the devaluation of other Asian currencies, and because of reduced capital inflows. In addition, these reduced inflows are likely to reduce job creation in the non-state sector, and hence make enterprise restructuring more difficult in China.
Equilibrium Liquidity Premia
Authors: Yu Dahai
Published: August 2019

This paper studies in a general framework the relative prices of perpetuities with identical dividends and different bid-ask spreads. It establishes four sets of conditions under which the liquidity premium is always positive (i.e., an asset with smaller spread always commands a higher price). To show that the liquidity premium is not necessarily positive, the paper presents two examples of general equilibrium in which the liquidity premium is sometimes negative. The paper also establishes four sets of conditions under which the price-spread relation is convex and uses results on asset price bubbles to establish liquidity premium bounds.
Rational Bubbles under Diverse Information
Authors: Yu Dahai
Published: August 2019

This paper uses a set of post-extraction information trees to generally model diverse information and agent specific state price processes to define present and fundamental values. It shows that there can be no negative or finite bubbles and that, if agents are impatient and the aggregate endowment has a finite present value under some state price process of some agent, then there can be no bubble under this state price process for any asset with positive supply.
Why is Productivity Procyclical? Why Do We Care?
Authors: Fernald John G. , Basu Susanto
Published: August 2019

Productivity rises in booms and falls in recessions. There are four main explanations for procyclical productivity: (i) procyclical technology shocks, (ii) widespread imperfect competition and increasing returns, (iii) variable utilization of inputs over the cycle, and (iv) resource reallocations. Each of these explanations has important implications for macroeconomic modeling. In this paper, we discuss empirical methods for assessing the importance of these explanations. We provide microfoundations for our preferred approach of estimating a first-order approximation to the production function, using a theoretically motivated proxy for utilization. When we implement this approach, we find that variable utilization and resource reallocations are particularly important in explaining procyclical productivity. We argue that the reallocation effects that we identify are not "biases" - instead, they reflect changes in an economy's ability to produce goods and services for final consumption from given primary inputs of capital and labor. Thus, from a normative viewpoint, reallocations are significant for welfare, and from a positive viewpoint, they constitute potentially important amplification and propagation mechanisms for macroeconomic modeling.
The Contributions of Domestic and External Factors to Latin American Devaluation Crises: An Early Warning Systems Approach
Authors: Kamin Steven , Babson Oliver D.
Published: August 2019

In this paper we develop a modified "early warning system" (EWS) approach to identifying the roles of domestic and external factors in Latin America's crises. Several probit models of balance-of-payments crises, based on different identified sets of crisis dates, were estimated for six Latin American countries. These models were then used to identify the separate contributions to the probabilities of crisis of domestic and external variables. Our basic finding is that, when the effect of adverse external shocks is removed from the simulated probabilities of devaluation in Latin America, the resultant simulated devaluation probabilities are still high. Taken at face value, these results indicate that devaluation crises in Latin America primarily have been a function of domestic policy and economic imbalances, with exogenous external factors playing only a secondary role. All else equal, this suggests that the adoption of strongly fixed exchange rate regimes in the region may not be too costly in terms of diminished ability to respond to exogenous external shocks.
Deviations from Purchasing Power Parity: Causes and Welfare Costs
Authors: Engel Charles , Rogers John Harold
Published: August 2019

We explore deviations from short-run purchasing power parity across European cities, attempting to move beyond a "first-generation" of papers that document very large border effects. We document two very distinct types of border effects embedded in relative prices. The first is a "real barriers effect," caused by various barriers to market integration. The second is a sticky-consumer-price cum volatile exchange-rate effect. Both are shown to be important empirically, the second type especially so. We argue that the two effects are very different from each other. For the first type of effect, it is clear that border effects imply deadweight welfare losses. We argue that while the second type of border effect could be eliminated with fixed exchange rates, welfare is not necessarily increased.
Equity Prices, Household Wealth, and Consumption Growth in Foreign Industrial Countries: Wealth Effects in the 1990s
Authors: Bertaut Carol C.
Published: August 2019

Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.
Identifying the Role of Moral Hazard in International Financial Markets
Authors: Kamin Steven
Published: August 2019

Considerable attention has been paid to the possibility that large-scale IMF-led financing packages may have distorted incentives in international financial markets, leading private investors to provide more credit to emerging market countries, and at lower interest rates, than might otherwise have been the case. Yet, prior attempts to identify such distortions have yielded mixed evidence, at best. This paper makes three contributions to our ability to assess the empirical importance of moral hazard in international financial markets. First, it is argued that because large international "bailouts" did not commence until the 1995 Mexican crisis, financial indicators prior to that time could not have reflected a significant degree of this type of moral hazard. Therefore, one test for the existence of moral hazard is that the access of emerging markets to international credit is significantly easier than it was prior to 1995. Second, the paper argues that because private investors expect large-scale IMF-led packages to be extended primarily to economically or geo-politically important countries, moral hazard, if it exists, should lead these countries to have easier terms of access to credit than smaller, non-systemically important countries. Finally, in addition to looking at bond spreads, the focus of earlier empirical analyses of moral hazard, the paper also examines trends in capital flows to gauge the access of emerging market countries to external finance. Looking at the evidence in light of these considerations, the paper concludes that there is little support for the view that moral hazard is significantly distorting international capital markets at the present time.
A Guide to Choosing Absolute Bank Capital Requirements
Authors: Carey Mark S.
Published: August 2019

Resampling implementation of a stress-scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk. Estimates are presented for stress scenarios of varying severity. Implications of use of different analysis time horizons are analyzed. Results for a numeraire portfolio are quite sensitive to such variations. Although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks, the arguments and results are also relevant for bankers making capital structure decisions.
Sticky Prices, No Menu Costs
Authors: Bowman David
Published: August 2019

A model that contains no costs to changing prices but in which prices do not respond to nominal shocks is presented. In models that do not feature superneutrality of money flexible price equilibria will allow certain types of monetary shocks to affect the real economy. Sticky price behavior may in fact be better at protecting the real economy from the effects of monetary shocks in such environments. This point is demonstrated in a standard monetary model with liquidity effects. An equilibrium in which sticky prices are supported without menu costs is then constructed. In equilibrium firms choose to keep prices fixed in response to nominal shocks because doing so provides a service to their customers, increasing profits by expanding the customer base.
Diversification, Original Sin, and International Bond Portfolios
Authors: Burger John D. , Warnock Francis E.
Published: August 2019

While there is a severe home bias in U.S. investors' foreign bond portfolios, we find that portfolio weights are greater for countries with more open capital accounts and whose bond returns are less correlated with U.S. returns. Positions in local-currency-denominated bonds are particularly sensitive to past and prospective returns volatility. An analysis of changes in portfolio weights over time indicates that U.S. investors have recently moved out of smaller markets and those with low and declining credit ratings. Our data also allow for an analysis of the size and currency composition of international bond markets. We find that countries with stronger institutions and better inflation performance have larger local currency bond markets. An implication for developing countries is that creditor friendly policies, such as vigilance on the inflation front and the development of strong institutions, can enable local bond market development and may in turn attract global investors.
Putting 'M' Back in Monetary Policy
Authors: Leeper Eric Michael , Roush Jennifer E.
Published: August 2019

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.
An Empirical Analysis of Inflation in OECD Countries
Authors: Ihrig Jane , Marquez Jaime R.
Published: August 2019

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.
Precautionary Savings and the Wealth Distribution with Illiquid Durables
Authors: Gruber Joseph W. , Martin Robert F.
Published: August 2019

We study the role an illiquid durable consumption good plays in determining the level of precautionary savings and the distribution of wealth in a standard Aiyagari model (i.e. a model with heterogeneous agents, idiosyncratic uncertainty, and borrowing constraints). Transactions costs induce an inaction region over which the durable stock and the associated user cost are not adjusted in response to changes in income, increasing, on average, the volatility of non-durable consumption. The volatility of total consumption is then a function of the share of the durable good in the utility function and the width of the inaction region. We are particularly interested in parameterizations which increase the precautionary motive for saving through an increase in "committed expenditure risk." We find, for an empirically relevant share of durable consumption and for all transaction costs below an upper threshold, that the level of precautionary savings is increasing in the transaction costs. Transaction costs have only a modest impact on the degree of wealth dispersion, as measured by the Gini index, as the associated increase in savings is close to linear in wealth. While we are unable to match the dispersion of wealth in the data, we increase the dispersion over a single asset model (Gini index of .71 for financial assets and .37 for total wealth) and we are able to match the relative dispersion of financial to durable assets, i.e. we find financial assets much more unequal than durable assets. We also match the ratio of housing wealth to total wealth for the median agent. We calibrate the model to data from the PSID, the CES, and the SCF.
News or Noise? An Analysis of Brazilian GDP Announcements
Authors: Palis Rebeca de la Rocque , Ramos Roberto Luis Olinto , Robitaille Patrice T.
Published: August 2019

Revisions to GDP announcements in many countries are often large, and Faust, Rogers, and Wright (2003) have found that G-7 GDP revisions are predictable to varying degrees. In this paper, we extend FRW to study revisions to Brazilian GDP announcements. We document that revisions to Brazilian GDP are large relative to those of G-7 countries. Brazilian GDP revisions are also predictable, which is consistent with the view that GDP revisions correct errors in preliminary GDP rather than reflect news. However, GDP revisions are far from being entirely predictable. Although GDP revisions are largest only one year following the initial GDP release, those revisions are nearly unpredictable.
Capital Controls and the International Transmission of U.S. Money Shocks
Authors: Miniane Jacques , Rogers John Harold
Published: August 2019

In this paper we assess whether capital controls effectively insulate countries from U.S. monetary shocks, looking simultaneously at a large range of country experiences in a unified estimation framework. We estimate the effect of identified U.S. monetary shocks on the exchange rate and foreign country interest rates, and test whether countries with less open capital accounts exhibit systematically smaller responses. We find essentially no evidence in favor of this notion. Other country factors such as the exchange rate regime or degree of dollarization explain more of the cross-country differences in responses. The significant differences in responses we do find are more pronounced at short horizons.