bluuebunny/crossref_metadata_2025 huggingface dataset:
The GATT's Contribution to Economic Recovery in Post-War Western Europe
Authors: Irwin Douglas A.
Published: August 2019

By freeing Europe's regional and international trade from tariffs and other trade barriers, the General Agreement on Tariffs and Trade (GATT) has often been hailed as a key factor in promoting the post-war economic recovery in Western Europe and in preventing a return to the disaster of the interwar period. This paper describes and assesses the contribution of the GATT in supporting economic recovery in Western Europe in the decade after 1947. The formation of the GATT by itself does not appear to have stimulated a particularly rapid liberalization of world trade during this period. It is therefore difficult to attribute much of a role to the GATT in the dramatic economic recovery during the immediate post-war period beyond that of an effective supporting actor. The principal contribution of the GATT during its first decade of operation rests more in securing binding agreements on early tariff reductions, thereby preventing countries from instituting higher tariffs as import quotas and foreign exchange controls were being phased out during the 1950s under the auspices of other international institutions. Yet despite the GATT's weaknesses on several fronts, the institution succeeded in establishing among major countries a fairly credible commitment to an open and stable environment for world trade that fostered the post-war rise in trade and income.
Is there a World Real Interest Rate?
Authors: Gagnon Joseph E. , Unferth Mark D.
Published: August 2019

This study uses panel data techniques to estimate a common component to the ex post real interest rates of nine countries with liberal capital markets over the past 15 years. We show that the residuals from such a regression have almost no serial correlation, and that each country's real interest rate is highly correlated with the estimated world real interest rate. The primary exception to these findings is the behavior of the U.S. real interest rate, which exhibits large and persistent deviations from the estimated world real interest rate.
Dollarization in Argentina
Authors: Kamin Steven , Ericsson Neil R.
Published: August 2019

Argentina became highly "dollarized" during its hyperinflations of 1989 and early 1990. Although inflation has returned to very low rates, a high degree of dollarization has persisted during the early 1990s, counter to what the currency substitution hypothesis predicts. This paper provides new evidence that explains the continued dollarization of the Argentine economy.First, we develop a new measure of dollar currency circulating in foreign countries. This measure improves our ability to analyze dollarization and currency substitution by distinguishing between dollar currency holdings and dollar deposits, and thereby represents an important advance over previous studies that focused on dollar deposit holdings only. Empirically, these components of dollar assets for Argentina have responded differently to recent macroeconomic shocks.Second, cointegration analysis of peso money demand in Argentina finds a negative "ratchet effect" from inflation on the demand for pesos. The reduction in peso money demand attributable to the ratchet effect is similar in magnitude to the estimated stock of all dollar assets held domestically by Argentine residents, consistent with the hypothesis of irreversible dollarization.
When Do Long-run Identifying Restrictions Give Reliable Results?
Authors: Faust Jon , Leeper Eric Michael
Published: August 2019

Many recent papers have tried to identify behavioral disturbances in vector autoregressions (VAR's) by imposing restrictions on the long-run effects of shocks. This paper argues that this approach will support reliable strucÂ­tured inferences only if the underlying economy satisfies strong restrictions. Absent restrictions linking long-run and short-run dynamics, every decompoÂ­sition of a VAR is essentially equally consistent with any long-run restriction. Further, dynamic common factor restrictions must hold if the scheme is to work properly in small models estimated using time-aggregated data. The paper illustrates possible consequences of failure of these assumptions using bivariate models to identify aggregate supply and demand disturbances.
The Federal Funds Rate and the Implementation of Monetary Policy: Estimating the Federal Reserve's Reaction Function
Authors: Brunner Allan D.
Published: August 2019

Several recent studies have reached quite different conclusions about which variable is the best indicator of the stance of monetary policy. These differences likely reflect varying assumptions about bank and Federal Reserve behavior. This paper takes a detailed and comprehensive look at the implementation of monetary policy and the identification of monetary policy shocks. The paper first outlines a general analytical model for studying and evaluating monetary policy procedures. The model is then used to estimate both the Fed's operational policy objectives and its intermediate objectives. The results can be summarized as follows: First, monetary policy shocks over the past several years have primarily affected the federal funds rate, even during periods when the Fed was reportedly targeting reserves. In addition, the paper finds a statistically-significant liquidity effect in all periods examined, although the effect is quite small. Finally, there is statistical evidence that suggests that the Fed's intermediate objectives have not been stable over time, and these differences appear to be economically important. Taken together, these results indicate that while monetary policy shocks can be uncovered by regressing the funds rate on appropriate variables in the Fed's information set, the reaction function should be estimated over subperiods rather than over the entire 1959-1993 period.
International Economic Implications of the End of the Soviet Union
Authors: Helkie William L. , Howard David H. , Marquez Jaime R.
Published: August 2019

This paper quantifies roughly some potential economic developments in the former Soviet Union (FSU), if substantive economic reforms go forward, and assesses the likely implications of these developments for the rest of the world. It is assumed that a move to world prices for energy and other economic reforms result in a significant increase in FSU net oil exports. This paper develops and analyzes several alternative scenarios, including cases in which the FSU is specified to cooperate with OPEC. The simulations reported in this paper indicate that the FSU countries would be major beneficiaries of market reforms, regardless of what happens on the world oil market. However, only in the case in which the world price of oil declines markedly would the countries outside of OPEC notice to any significant extent the macroeconomic consequences of events in the FSU.
The Constancy of Illusions or the Illusion of Constancies: Income and Price Elasticities for U.S. Imports, 1890-1992
Authors: Marquez Jaime R.
Published: August 2019

Virtually all we know about the behavior of U.S. imports rests on studies estimating income and price elasticities with postwar data. But anyone examining the evolution of U.S. trade cannot avoid asking whether the postwar period provides enough information to characterize that behavior. From 1890 to 1940, the United States became an increasingly closed economy and experienced the most pronounced fluctuations in income and prices of this century. Is our current understanding of the behavior of U.S. imports consistent with those features of the U.S. economy? Being consistent with the distant past might not appear as relevant for forecasting, but the literature ignoring that past offers a range of elasticity estimates wide enough to suggest that the role of income and prices in determining imports is not known with any precision. This paper offers the first analysis of that role using data since 1890. Estimating the elasticities of the most popular model in the literature with 1890-1992 data, I find that income and prices do not affect imports whereas the opposite conclusion arises with postwar data. The difference in results stems from differences in the time-series properties of the data in the two samples. As an alternative, I consider several models consistent with both optimization and the time-series properties of the data. These models predict substantial secular changes in income and price elasticities and confirm the importance of optimization for characterizing the behavior of U.S. imports. What is new about the results is that only through optimization can one recognize the implications of the evolution of U.S. trade for estimating elasticities.
On Risk, Rational Expectations, and Efficient Asset Markets
Authors: Stevens Guy V. G. , Akbarian Dara
Published: August 2019

The notion of asset market efficiency -- that market prices "fully reflect" all available information -- requires the operation of mechanisms that rapidly incorporate new information into asset prices. Particularly problematic -- both theoretically and empirically -- has been the case where new information is not widely shared, so-called "strong-form" efficiency. This paper examines the relevance of a mechanism for attaining strong-form efficiency based on knowledgeable investors being willing to take large positions in order to eliminate unexploited profit opportunities. We examine theoretically and empirically, the latter using daily stock market data, the impact of a number of factors on the efficacy of this mechanism: the portfolio size and degree of risk aversion of potential investors, the ability to borrow, and the hedging opportunities provided by the stock market.
Constant Returns and Small Markups in U.S. Manufacturing
Authors: Basu Susanto , Fernald John G.
Published: August 2019

We estimate that returns to scale are close to constant in two-digit gross output data. Value-added data appear instead to give significant increasing returns. We show why, with imperfect competition, value-added estimates are in general meaningless. We use data on intermediate inputs to correct the value-added estimates, and find that returns to scale again appear close to constant. Given that profits are small, our results imply that markups of price over marginal cost are also small.
Are Banks Market Timers or Market Makers? Explaining Foreign Exchange Trading Profits
Authors: Ammer John , Brunner Allan D.
Published: August 2019

We analyze the foreign exchange trading earnings of large U.S commercial banks over the past several years. In particular, we use several approaches to try to determine to what extent these profits can be attributed either to position-taking by banks or to the provision of intermediation services to bank customers. The results can be summarized as follows. First, banks appear to generate a substantial portion of their foreign exchange earnings from making markets in conventional spot and forward foreign exchange contracts. In addition, some indirect evidence supports anecdotal reports that intermediation in volatility-related products (e.g., options contracts) has been a significantly profitable activity. Finally, on average, positions in currencies do not appear to contribute to profits. Tests applied to monthly and daily data on banks' portfolio positions suggest that banks cannot accurately forecast changes in exchange rates, and that these currency positions account for only a small fraction (if any) of the banks' foreign exchange earnings.
Technological Progress and Endogenous Capital Depreciation: Evidence from the U.S. and Japan
Authors: Dekle Robert
Published: August 2019

Japanese government planners use the average age of the manufacturing capital stock as one measure of their country's international "competitiveness." Compared to the U.S., the data show that Japanese depreciation rates are higher and that capital stocks are younger.In much of economic analysis, higher rates of depreciation are assumed to result in poorer economic performance. A high depreciation rate lowers the net capital stock, and decreases the level of output.In this paper, we argue that Japan's high depreciation rate is caused by that country's high rate of technological progress. Hiqh depreciation rates may be a symptom of a rapidly growing economy.Our results have implications for the international comparison of investment rates. Many economists have compared U.S. and Japanese investment rates net of the depreciation of capital. Presumably, economists are interested in investment rates because of the belief that high rates are positively correlated with a high level of economic performance.If technological progress causes depreciation rates to be high, however, net investment rates may not be informative about a nation's welfare. Two countries with the same net investment rate can have different rates of per capita output growth if their rates of technological progress are different. We show that the investment rate gross of depreciation may be a better indicator of welfare.
Politics, Economics, and Investment: Explaining Plant and Equipment Spending by U.S. Direct Investors in Argentina, Brazil, and Mexico
Authors: Stevens Guy V. G.
Published: August 2019

Few economists or laymen would deny that political events can have an important, sometimes even overwhelming, impact on economic decisions in general, and investment decisions in particular. The first goal of this paper was to integrate a number of political and non-traditional economic variables into the standard theory of investment based on the maximization of the expected value of the firm. The second goal was to test this generalized investment theory on a particularly fertile field for gauging the interaction of political and economic factors: the plant and equipment spending of foreign manufacturing affiliates of U.S. multinationals in Argentina, Brazil, and Mexico. The results of these tests show that the generalized theory is far superior to the traditional alternatives in explaining the real investment of the sample for the 1958-89 period.
Terms-of-Trade Uncertainty and Economic Growth: Are Risk Indicators Significant in Growth Regressions?
Authors: Mendoza Enrique G.
Published: August 2019

This paper examines a neoclassical stochastic endogenous growth model in which terms-of-trade uncertainty affects savings and consumption growth. The model explains the positive link between growth and the average rate of change of terms of trade found in recent empirical studies. In addition, terms-of-trade variability, as an indicator of risk, is found to be a key determinant of growth. This implies that welfare costs of uncertainty are much larger than conventional measures of costs of consumption instability. The model's key predictions are strongly supported by results of panel regressions.
Loss Aversion in a Consumption/Savings Model
Authors: Bowman David , Minehart Deborah , Rabin Matthew
Published: August 2019

Psychological evidence indicates that a person's well-being depends not only on his current consumption of goods, but on a reference level determined by his past consumption. According to Kahneman and Tversky's (1979) prospect theory, people care much more about losses relative to their reference points than about gains, are riskÂ­-averse over gains, and risk-loving over losses. We define these characteristics as loss aversion. We incorporate an extended form of loss aversion into a simple two-period savings model. Our main conclusion is that, when there is sufficient income uncertainty, a person resists lowering consumption in response to bad news about future income, and this resistance is greater than the resistance to increasing consumption in response to good news. We discuss some recent empirical research that confirms this predicted asymmetry in behavior, which seems inconsistent with other models of consumption.
Convertibility Risk, Default Risk, and the Mexdollar Anomaly
Authors: Rogers John Harold
Published: August 2019

In Rogers (l992a,b) I put forth the convertibility risk hypothesis in order to explain the anomalous negative relationship between the expected rate of Mexican peso depreciation and the ratio of Mexdollars to peso denominated demand deposits. Recently, Gruben and Welch (1994) examine the effect of deteriorating bank loan quality on the variables I consider. Using a cointegration framework, the authors find (i) a negative relationship between non-performing loans and the dollarization ratio and (ii) the conventional positive relationship between expected peso depreciation and dollarization. The first result suggests an additional factor influencing money demand in Mexico. The second result is evidence against my convertibility risk hypothesis. Further analysis indicates that there is some evidence in favor of Gruben and Welch's first result, but that the preponderance of evidence runs counter to their second result.
How Wide is the Border?
Authors: Engel Charles , Rogers John Harold
Published: August 2019

Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the volatility of prices as adding 2500 miles between cities.
The Lucas Critique in Practice: Theory Without Measurement
Authors: Ericsson Neil R. , Irons John S.
Published: August 2019

This paper investigates the empirical relevance of the Lucas critique. A database is constructed of all articles in the Social Science Citation Index that cite Lucas (1976). Those articles are characterized by the nature of the article, the context in which Lucas (1976) is cited, and the evidence presented on the Lucas critique. Virtually no evidence exists that empirically substantiates the Lucas critique. Empirical refutation of the Lucas critique by using tests of super exogeneity is illustrated with U.K. money demand. Numerous other studies similarly refute the Lucas critique for various empirical macro-economic relations.
Evidence of Nominal Wage Rigidity From a Panel of U.S. Manufacturing Industries
Authors: Ghosal Vivek , Loungani Prakash
Published: August 2019

Using annual data for 450 manufacturing industries over the period 1958 to 1989, we establish the following stylized facts on the response of industry nominal wage growth to aggregate and industry influences:1. We find support for the canonical wage contracts model outlined in Blanchard and Fischer (1989). The elasticity of response of nominal wage growth to expected inflation is 0.7. The dasticity of nominal wage growth with respect to changes in unexpected inflation is 0.1.2. These elasticity estimates are robust to splitting the sample along various dimensions: level of unionization, durability of the product, and industry contract length. The elasticity of nominal wage growth to expected inflation ranges from 0.6 to 0.8; the elasticity with respect to unexpected inflation is between 0.1 and 0.2.3. We find support for the multi-sector wage indexation models of Duca and VanHoose (199] ) and others. The profit-sharing elasticity (the response of industry wage growth to industry profit growth) is positive, as hypothesized in these models. The instrumental variable estimates of the profit-sharing elasticity range from 0.1 to 0.3.
Bank Lending and Economic Activity in Japan: Did "Financial Factors" Contribute to the Recent Downturn?
Authors: Brunner Allan D. , Kamin Steven
Published: August 2019

In this paper, we examine the role of "financial factors" in Japan and attempt to gauge their recent impact on the Japanese economy. First, we find that proxies for financial factors enter significantly in behavioral equations for loan standards, loan demand and aggregate demand, although these proxies explain only a small amount of the variation in those variables. Second, there is some, albeit inconclusive, evidence that balance-sheet problems of households and firms contributed to Japan's recent recession. We find that exogenous declines in equity prices contributed significantly to the decline in loans and economic activity, although part of this influence appears to be operating through traditional wealth effects. In addition, loan demand shocks, which could reflect balance-sheet problems not captured by our model, account for much of the remainder of the shortfall in loans and some of the shortfall in economic activity. Finally, we also find some evidence that an exogenous contraction in loan supply, a "credit crunch," may have lowered output by a small degree, but only in the early phases of the recession.
When is Monetary Policy Effective?
Authors: Ammer John , Brunner Allan D.
Published: August 2019

In this paper, we investigate a number of issues that have not been completely addressed in previous studies regarding the possible asymmetric effects of monetary policy. Overall, we interpret our results as weak evidence in favor of sticky-wage and sticky-price theories and strong evidence against credit-rationing theories. First, we find that models that allow for asymmetries with respect to contractionary/expansionary monetary policy fit the data better than models that allow for asymmetries associated with the state of the business cycle. Second, we find that contractionary monetary policy shocks have a much larger effect on output than expansionary policy shocks, although this result is somewhat sensitive to the econometric specification. Finally, we find that monetary policy shocks that occur during economic expansions appear to have about the same effect as shocks that occur during recessions; this result is robust to various econometric specifications.
On the Inverse of the Covariance Matrix in Portfolio Analysis
Authors: Stevens Guy V. G.
Published: August 2019

The goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification of the inverse, in terms of a few primitive constructs, helps clarify the determinants of such key concepts as (1) the optimal holding of a given risky asset, (2) the slope of the risk-return efficiency locus faced by the individual investor, and (3) the pricing of risky assets in the Capital Asset Pricing Model. The two building blocks of the inverse turn out to be the non-diversifiable part of each asset's variance and the multiple regression and correlation coefficients obtained by regressing each asset's excess expected return on the set of excess expected returns of all other assets.
Modelling Inflation in Australia
Authors: De Brouwer Gordon , Ericsson Neil R.
Published: August 2019

This paper develops an empirically constant, data-coherent, error correction model for inflation in Australia. The level of consumer prices is a mark-up over domestic and import costs, with adjustments for dynamics and relative aggregate demand. We address issues of cointegration, general to specific modelling, dynamic specification, model evaluation and testÂ­ing' parameter constancy, and exogeneity. We also test this model against existing models of Australian prices: this model encompasses (but is not encompassed by) the existing models.
The Syndrome of Exchange-Rate-Based Stabilization and the Uncertain Duration of Currency Pegs
Authors: Mendoza Enrique G. , Uribe Martin
Published: August 2019

This paper conducts a quantitative examination of the hypothesis that uncertain duration of currency pegs causes the sharp real appreciations and business cycles that affect chronically countries using fixed exchange rates as an instrument to stop high inflation. Numerical solutions of equilibrium dynamics of a two-sector small open economy with incomplete markets show that uncertain duration rationalizes the syndrome of exchange-rate-based stabilizations without price or wage rigidities. Three elements of the model are critical for these results: (a) a strictly-convex hazard rate function describing time-dependent devaluation probabilities, (b) the wealth effects introduced by incomplete insurance arkets, and (c) the supply-side effects introduced via capital accumulation and elastic labor supply. Uncertain duration also entails large welfare costs, compared to the perfect-foresight credibility framework, although temporary disinflations are welfare-improving. The model's potential empirical relevance is examined further by reviewing Mexico's post-war experience with the collapse of six currency pegs.
General-to-Specific Procedures for Fitting a Data-Admissible, Theory-Inspired, Congruent, Parsimonious, Encompassing, Weakly Exogenous, Identified, Structural Model to the DGP: A Translation and Critique
Authors: Faust Jon , Whiteman Charles H.
Published: August 2019

We characterize the LSE approach by its implications for reduced-form modeling and structural interpretations. Much of what has come to be associated with the LSE methodology involves the approach to fitting reduced forms, and can be thought of as a pragmatic solution to problems created by short samples plagued by serial correlation. The policy analysis one might be able to do with an LSE model, on the other hand, hinges on structural identification arguments which do not meet the classic Cowles Commission standards, and is thus suspect.
Regional Labor Fluctuations: Oil Shocks, Military Spending, and Other Driving Forces
Authors: Davis Steven J. , Loungani Prakash , Mahidhara Ramamohan
Published: August 2019

We quantify the contribution of various driving forces to state-level movements in unemployment rates and employment growth from 1956 to 1992. Our story of regional fluctuations in the U.S. economy has a large cast of players -- including government contract awards and the basing of military personnel -- but oil price shocks have been the leading actor since 1973. Beyond the magnitude and abruptness of oil price movements, the explanation for their pronounced regional effects has three essential elements: (i) regions differ in industry mix, (ii) industries differ in sensitivity to movements in the relative price of oil, and (iii) the reallocation of productive factors across industries and regions is costly and time-consuming. Our study provides estimates of the costs of creating regional jobs and reducing regional unemployment through the awarding of military contracts. Based on the BLS measure of state employment, our baseline specifications imply that creating one local job-year req
A Nonlinear Econometric Analysis of Capital Flight
Authors: Schineller Lisa M.
Published: August 2019

This paper develops a nonlinear econometric model of the determinants of capital flight for eighteen developing countries over the period 1978 to 1988. During most of the 1980s, capital flight proved difficult to reverse. Besides an uncertain domestic policy environment, costs associated with such an investment decision might have delayed flight reversal. Costs that characterize flight reversal could generate potentially significant barriers to continual adjustment of an investment position. This in turn would generate a nonlinear relationship between flight and its determinants, which reflect the degree of domestic macroeconomic imbalance. To detect the existence, and importance, of cost-driven thresholds we model flight within the context of a friction, or two-threshold Tobit, model. Given the panel data set, we consider a country-specific error component to account for the possibility of unobserved country-specific heterogeneity. To correct for endogeneity among the regressors in the random-effects nonlinear estimation, we implement Newey (1987). While the data seemingly do not support the existence of cost-driven thresholds for flight, the central government surplus, premium for foreign exchange in the black market and the presence of an IMF adjustment program are all significantly related to flight. The negative relationship between fiscal balances and flight highlights the desire by investors to escape future taxation directly, and indirectly via monetization of fiscal deficits, by undertaking capital flight. In devising a framework for reform, that typically entails fiscal consolidation, IMF supervision, endorsement and surveillance lend credibility to reform and reassure investors.
Habit Formation and the Comovement of Prices and Consumption During Exchange-Rate-Based Stabilization Programs
Authors: Uribe Martin
Published: August 2019

A defining stylized fact associated with exchange-rate-based (ERB) stabilization programs is that their initial phase is characterized by several years of expansion in private consumption and a gradual appreciation of the real exchange rate. In this paper, I argue that standard optimizing models are unable to account for this empirical regularity, as they predict that, except for the date of announcement of the program, an appreciation of the real exchange rate must necessarily be accompanied by a decline in consumption. I show that this price-consumption problem can be resolved by relaxing the assumption of time separability in preferences. Specifically, under habit formation a permanent ERB program generates a smooth boom in consumption and gradual real exchange rate appreciation. A temporary program induces, in addition, a smooth boom-recession cycle with the recession beginning before the abandonment of the program.
Trade Elasticities for G-7 Countries
Authors: Hooper Peter , Johnson Karen , Marquez Jaime R.
Published: August 2019

This paper reports the results of a project to estimate and test the stability properties of conventional equations relating real imports and exports of goods and services for the G-7 countries to their incomes and relative prices. We begin by estimating cointegration vectors and the error-correction formulations. We then test the stability of these equations using Chow and Kalman-Filter tests. The evidence suggests three findings. First, conventional trade equations and elasticities are stable enough, in most cases, to perform adequately in forecasting and policy simulations. Equations for German trade, as well as equations for French and Italian exports, are an exception. Second, income elasticities of U.S. trade have not been shifting in a direction that will tend to ease the trend toward deterioration in the U.S. trade position. The income-elasticity gap for Japan found in earlier studies was not confirmed in this analysis. Finally, the price channel is weak, if not wholly ineffective, in the case of continental European countries.
Macroeconomic Implications of Competitive College Admissions
Authors: Iyigun Murat , Levin Andrew
Published: August 2019

We present a public higher education model in which there exist indivisibilities in educational investment. Consequently, when demand for educational services exceed supply, a screening mechanism, which may potentially be imperfect, is required to choose the student body. We demonstrate how distortions or biases in screening--caused by parental factors--interact with the distribution of income to help explain the considerable differences across countries in the share of resources devoted to public higher education. Moderate degrees of admission bias lower the share of resources devoted to public education whereas higher levels of bias may have positive effects on public education supply. Thus, while lower screening biases lead to a better allocation of a given amount of spending on education, they do not necessarily lead to more political support for public education, and thereby to higher aggregate human capital and output. When wage rates are endogenous, the effects of screening biases on public higher education supply can be positive even for smaller biases. Moreover, higher inequality will lead to a lower share of resources devoted to public higher education when biases are relatively moderate.
What Determines Public Support for Affirmative Action?
Authors: Iyigun Murat , Levin Andrew
Published: August 2019

We present a model of public higher education finance in which demand for educational services can exceed supply because of indivisibilities in educational investment. In such situations, a screening mechanism--which may be imperfect because of direct or indirect discrimination--is required for allocation. We show how changes in the education premium affect political support for affirmative action policies. When the education premium is relatively low, the matching efficiency gains provided by affirmative action policies are relatively high compared to the opportunity cost of not acquiring education, and the majority supports broader affirmative action. In contrast, when the education premium is high, the opportunity cost of not acquiring education is high relative to the matching efficiency gains provided by affirmative action policies, and the majority's support for affirmative action is weaker. With endogenous wages, the negative relationship between the returns to education and affirmative action is reinforced.
A Framework for Economic Forecasting
Authors: Ericsson Neil R. , Marquez Jaime R.
Published: August 2019

This paper proposes a tripartite framework of design, evaluation, and post-evaluation analysis for generating and interpreting economic forecasts. This framework&amp;#x27;s value is illustrated by re-examining mean square forecast errors from dynamic models and nonlinearity biases from empirical forecasts of U.S. external trade. Previous studies have examined properties such as nonlinearity bias and the possible nonmonotonicity and nonexistence of mean square forecast errors in isolation from other aspects of the forecasting process, resulting in inefficient forecasting techniques and seemingly puzzling phenomena. The framework developed reveals how each such property follows from systematically integrating all aspects of the forecasting process.
Tradeoffs between Inflation and Output-Gap Variances in an Optimizing-Agent Model
Authors: Erceg Christopher J. , Henderson Dale W. , Levin Andrew
Published: August 2019

We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degree of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.
Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents
Authors: Henderson Dale W. , Kim Jinill
Published: August 2019

We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, complete stabilization and optimal stabilization of one variable or a combination of two variables. With wage contracts, outcomes depend crucially on whether there are also price contracts. For example, if labor supply is relatively inelastic, for productivity shocks, nominal income stabilization yields higher welfare when there are no price contracts. However, with price contracts, outcomes are independent of whether there are wage contracts, except, of course, for the nominal wage.
Uncovering Country Risk in Emerging Market Bond Prices
Authors: Durbin Erik , Ng David Tat-Chee
Published: August 2019

We investigate the role of "country risk" in determining the default risk of firms in emerging markets. In particular, we study the relationship between the secondary market spreads (over hard-currency government bond yields) of bonds issued by emerging market firms and bonds issued by their home governments over the past 3 1/2 years. Our results indicate that market participants do not strictly apply the "sovereign ceiling," under which no firm is more creditworthy than its government. We do find that the spreads of emerging market corporate and government bonds over hard-currency government bonds are highly correlated. The correlation is higher for some industries than for others, and we find no evidence that banks face greater country risk.
Investment and the Current Account in the Short Run and the Long Run
Authors: Nason James M. , Rogers John Harold
Published: August 2019

Theoretical models of the relationship between investment and the current account impose restrictions on the joint dynamic behavior of these variables. These restrictions come in two forms. One imposes causal orderings on investment and the current account. The other restriction concerns the permanent responses of these variables to different shocks. We use these restrictions to identify empirically structural shocks from vector autoregressions of investment and the current account for Canada. Under certain identifications, our results support the implications of the intertemporal, small open economy model. However, these results are sensitive to perturbations of the identifications.
Sources of Economic Fluctuations in Latin America and Implications for Choice of Exchange Rate Regimes
Authors: Ahmed Shaghil
Published: August 2019

This paper studies the sources of economic fluctuations and their implications for exchange rate regime choice in key Latin American countries. In general, external shocks play a limited role in driving output fluctuations in these countries; this absence of common business cycles undermines the case for fixed exchange rates. On the other hand, although there is some evidence that real exchange rates depreciate in response to adverse external shocks, this depreciation, in turn, tends to contract output in the short run. This suggests that exchange rate rigidity may not be as costly for these economies as conventional economic theory predicts.
Evaluating 'Correlation Breakdowns' during Periods of Market Volatility
Authors: Loretan Mico , English William B.
Published: August 2019

Financial market observers have noted that during periods of high market volatility, correlations between asset prices can differ substantially from those seen in quieter markets. For example, correlations among yield spreads were substantially higher during the fall of 1998 than in earlier or later periods. Such differences in correlations have been attributed either to structural breaks in the underlying distribution of returns or to "contagion" across markets that occurs only during periods of market turbulence. However, we argue that the differences may reflect nothing more than time-varying sampling volatility. As noted by Boyer, Gibson and Loretan (1999), increases in the volatility of returns are generally accompanied by an increase in sampling correlations even when the true correlations are constant. We show that this result is not just of theoretical interest: When we consider quarterly measures of volatility and correlation for three pairs of asset returns, we find that the theoretical relationship can explain much of the movement in correlations over time. We then examine the implications of this link between measures of volatility and correlation for risk management, bank supervision, and monetary policy making.
Monetary Disturbances Matter for Business Fluctuations in the G-7
Authors: Canova Fabio , De Nicoló Gianni
Published: August 2019

This paper examines the importance of monetary disturbances for cyclical fluctuations in real activity and inflation. It employs a novel identification approach which uses the sign of the cross-correlation function in response to shocks to assign a structural interpretation to orthogonal innovations. We find that monetary shocks significantly drive output and inflation cycles in all G-7 countries; that they are the dominant source of fluctuations in three of the seven countries; that they contain an important policy component, and that their impact is time varying.
The Effect of Markups on the Exchange Rate Exposure of Stock Returns
Authors: Allayannis George , Ihrig Jane
Published: August 2019

This paper examines how to properly specify and test for factors that affect the exchange-rate exposure of stock returns. We develop a theoretical model, which explicitly identifies three channels of exposure. An industry's exposure increases (1) by greater competitiveness in the market where its final output is sold, (2) the interaction of greater compeitiveness in its export market and a larger share of exports in production and, (3) the interaction of less competitiveness in its imported input market and the smaller the share of imports in production. Using a sample of 82 U.S. manufacturing industries at the 4-digit SIC level, classified in 18 2-digit industry groups, between 1979 and 1995, we estimate exchange-rate exposure as suggested by our model. We find that 4 out of 18 industry groups are significantly exposed to exchange-rate movements through at least one channel of exposure. On average, a 1 percent appreciation of the dollar decreases the return of the average industry by 0.13 percent. Consistent with our model's predictions, as an industry's markups fall (rise), its exchange-rate exposure increases (decreases).
Capital Controls During Financial Crises: The Case of Malaysia and Thailand
Authors: Edison Hali J. , Reinhart Carmen M.
Published: August 2019

This study examines the impact capital controls had in Malaysia (1998-1999) and Thailand (1997). We aim to assess the extent to which the capital controls were effective in delivering the outcomes that motivated their imposition. We conclude that in Thailand the controls did not deliver much of what was intended--although, one does not observe the counterfactual. By contrast, in the case of Malaysia the controls did align closely with the priors of what controls are intended to achieve: greater interest rate and exchange rate stability and more policy autonomy.
Monetary Policy Independence in the ERM: Was There Any?
Authors: Edison Hali J. , MacDonald Ronald
Published: August 2019

Recently proposals for introducing greater exchange rate fixity into the behavior of key exchange rates have become fashionable. One proposal, for example, suggests that a target zone arrangement for the dollar, mark and yen would represent a desirable reform of the international monetary system. The question we seek to address in this paper is how much monetary independence is likely to be conferred on a country participating in such an arrangement. Recent research for the Classical gold standard has suggested that even with a rigidly fixed exchange rate system there is still some scope for monetary independence. Here we examine the extent of monetary independence conferred by a target zone using data from the recent ERM experience. Amongst our findings is the result that countries which had a credible commitment to the target zone had more independence in the operation of their monetary policy than countries with a lesser commitment. It turns out that the monetary independence for a credible participant in a target zone arrangement is longer than that conferred by participation in a regime of rigidly fixed exchange rates, such as the Classical gold standard.
Exchange Rate Dynamics and the Welfare Effects of Monetary Policy in a Two-Country Model with Home-Product Bias
Authors: Warnock Francis E.
Published: August 2019

International spillovers and exchange rate dynamics are examined in a two-country dynamic optimizing model that allows for home-product bias in consumption patterns: at given relative prices the ratio of home goods consumed to foreign goods consumed is higher in the home country. The setup nests Obstfeld and Rogoff (1995), who assume identical tastes. With home bias, results are different in three ways. When preferences are biased, the wealth transfers associated with current account imbalances induce movements in the real exchange rate and produce large short-run and small long-run deviations from consumption-based purchasing power parity. With home bias, interest rates, both real and nominal, can differ across countries; relatedly, home bias is a necessary but not sufficient condition for Dornbusch (1976) type exchange rate overshooting. Finally, in this model the welfare effects of expansionary monetary policy depend not only on world demand but also on the expenditure-switching effect of an exchange rate depreciation; monetary policy is 'beggar-thy-neighbor' if individuals have strong preferences for domestic products, but can be 'beggar-thyself' if, instead, imported goods are preferred.
How Consistent are Credit Ratings? A Geographic and Sectoral Analysis of Default Risk
Authors: Ammer John , Packer Frank
Published: August 2019

We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.
The Impact of Monetary Policy on Exchange Rates During Financial Crises
Authors: Gould David , Kamin Steven
Published: August 2019

This paper addresses the impact of monetary policy on exchange rates during financial crises. Some observers have argued that a tightening of monetary policy is necessary to stabilize the exchange rate, restore confidence, and lay the groundwork for an eventual recovery of economic activity. Others have argued that by raising interest rates (which reduces the ability of borrowers to repay loans and thereby weakens the banking system), tightening may further reduce investor confidence and lead to further weakening--not strengthening--of domestic currencies.This debate, which became highly charged during the Asian financial crisis, remains unresolved. A key reason is that, because of the endogeneity of interest rates with respect to exchange rates and investor expectations, it is difficult to use statistical analysis to identify the impact of monetary policy on the exchange rate. In our research, we use measures of international credit spreads and of domestic stock prices as proxies for investor concerns about creditworthiness and country risk in order to better identify the impact of monetary policies on the exchange rate. Using weekly data from Indonesia, Korea, Malaysia, the Philippines, Thailand, and Mexico, we find that credit spreads and stock prices exert significant impacts on exchange rates during financial crises, but interest rates still are not estimated to have significant effects. We conclude that while monetary policy probably does exert an important influence over exchange rates, this most likely takes place slowly, as central banks attempt to establish credibility, and over longer periods of time than can be captured in our analysis.