bluuebunny/crossref_metadata_2025 huggingface dataset:
International Financial Markets and the U.S. External Imbalance
Authors: Danker Deborah J. , Hooper Peter
Published: August 2019

This paper analyzes movements in the U.S. external imbalance over the 1980s from the perspective of the capital account. It considers the empirical evidence on two competing hypotheses about the causes of the large and persistent net capital inflow during the decade: one that the capital inflow was induced by a substantial increase in the expected rate of return on real fixed investment in the United States relative to other countries, and the other that strong U.S. fiscal stimulus and a declining private savings rate boosted demand for credit in the United States.The empirical evidence that we review on this score include the pattern and composition of capital inflows, trends in the components of U.S. domestic saving and investment, and movements in U.S. relative to foreign rates of return across different types of real and financial assets. The evidence strongly supports the view that the net capital inflow resulted from an increase in demand for credit, and not to any significant degree from an increase in the relative rate of return on real fixed investment in the United States.We also consider the sustainability of the U.S. external imbalance. Available empirical evidence on this score suggests that over the short to medium term at least, continued large U.S. external deficits could be absorbed manageably into foreign portfolios. Nevertheless, if those deficits continue to finance U.S. government and private consumption rather than the increased rate of domestic investment that would be needed eventually to service the associated external debt, they are not sustainable in the long run.
Evaluating the Predictive Performance of Trade-Account Models
Authors: Marquez Jaime R. , Ericsson Neil R.
Published: August 2019

This paper evaluates the distributional properties of forecasts from six econometric models of the U.S. trade account. Using stochastic (Monte Carlo) simulation, we derive confidence intervals and forecast-based test statistics which account for uncertainty from future disturbances and from coefficient estimation. Empirically, the confidence intervals of the trade-account forecasts are very wide, and are generally (but not necessarily) increasing with the forecast horizon. Even with such a large degree of uncertainty, some models exhibit "predictive failure" when tested. To evaluate forecasts across models, we generalize Chong and Hendry's (1986) forecast-encompassing test statistic to allow for model nonlinearity and to account for uncertainty arising from estimation. All models are rejected by this test, i.e., the data are highly informative. Although both the calculated forecast uncertainty and the test failures temper the role of these models in formulating policy, the failures imply the potential for improved model specification with narrower confidence bands.A robust, competitive manufactured goods sector is also key. A growing manufactured goods sector increase the flexibility of the economy to respond to external and internal shocks and is associated with higher per capita income growth. World trade in manufactures is growing faster and at relatively better and less votatile terms of trade than trade in commodities. Criteria such as labor productivity in agriculture and manufacturing, population growth rates, and changes in the share of production and exports of manufactured goods provide evidence of which countries of the new generation can take advantage of the manufacturing dynamic.
Modeling the Demand for Narrow Money in the United Kingdom and the United States
Authors: Hendry David F. , Ericsson Neil R.
Published: August 2019

Despite the importance of well-specified empirical money-demand functions for inference, forecasting, and policy, problems in modeling have arisen concerning the economic theories of money demand, the data, institutional frameworks, financial innovation, and econometric implementation. By developing constant, data-coherent M1 demand equations for the UK and the US, we investigate these issues and explain such puzzles as "missing money", the great velocity decline, and the recent explosion in M1. The endogeneity of money, the Lucas critique, and the non-invertibility of our M1 models are also discussed.
Estimating Pass-Through: Structure and Stability
Authors: Melick William R.
Published: August 2019

This paper estimates the pass-through relationship between exchange rates and import prices for the United States using recursive techniques across a variety of specifications to examine structural and coefficient stability in a systematic fashion. Results of estimations: 1) indicate that pass-through at the macroeconomic level is a complicated amalgamation of disparate industrial structures that involves more than one long-run equilibrium relationship between the variables of interest, and 2) call into question the prevailing wisdom that foreign firms changed their pricing behavior in light of the large appreciation in the exchange value of the dollar in the early 1980s.
Is the EMS the Perfect Fix? An Empirical Exploration of Exchange Rate Target Zones
Authors: Flood Robert P. , Rose Andrew K. , Mathieson Donald J.
Published: August 2019

In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System is then used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. While some statistical evidence of non-linearities in conditional means of exchange rates is detected, these seem to have little economic content. A number of implications of existing "target zone" exchange rate models are tested; little support is found for existing models of limited exchange rate flexibility.
The Econometrics of Elasticities of the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports
Authors: Marquez Jaime R.
Published: August 2019

Fifty years of econometric modeling of U.S. import demand assumes that trade elasticities are autonomous parameters, that both cross-price effects and simultaneity biases are absent, and that expenditures on domestic and foreign goods can be studied independently of each other. To relax these assumptions, the paper assembles a simultaneous model explaining bilateral U.S. import volumes and prices. Spending behaves according to the Rotterdam model which, by design, embodies all of the properties of utility maximization and does not treat trade elasticities as autonomous parameters. Pricing behaves according to the pricing-to-market hypothesis which recognizes exporters' incentives to discriminate across export markets. Parameter estimation relies on the Full Information Maximum Likelihood (FIML) approach and uses bilateral price data for 1965-1987. According to the evidence, treating trade elasticities as autonomous parameters and ignoring the statistical implications of simultaneity and optimization impart significant biases to the structural estimates and undermine our effectiveness in addressing questions relevant to economic interactions among nations.
The Adequacy of U. S. Direct Investment Data
Authors: Stekler Lois E. , Stevens Guy V. G.
Published: August 2019

New questions dealing with the growth of foreign direct investment in the United States have prompted this reassessment of the adequacy of U.S. data on direct investment--data on both foreign direct investment in the United States and U.S. direct investment abroad. We have examined the adequacy of the existing data system for answering important questions in a number of areas--some of them new, but others of longstanding interest: the coverage and accuracy of the data, and the public's accessibility to them; the measurement of the U.S. investment position and servicing burden; the interaction between direct investment and the trade balance; the impact of direct investment operations on a country's economic welfare; and the explanation and forecasting of direct investment flows and activities. A series of conclusions and recommendations is collected in the last section of the paper.
PC-Give and David Hendry's Econometric Methodology
Authors: Ericsson Neil R. , Campos Julia , Tran Hong-Anh
Published: August 2019

This paper summarizes David Hendry's empirical econometric methodology, unifying discussions in many of his and his co-authors' papers. Then, we describe how Hendry's suite of computer programs PC-GIVE helps users implement that methodology. Finally, we illustrate that methodology and the programs with three empirical examples: postÂ­war narrow money demand in the United Kingdom, nominal income determination in the United Kingdom from Friedman and Schwartz (1982), and consumers' expenditure in Venezuela. These examples help clarify the methodology's central concepts, which include cointegration, error-correction, general-to-simple modeling, dynamic specification, model evaluation and testing, parameter constancy, and exogeneity.
Argentina's Experience with Parallel Exchange Markets: 1981-1990
Authors: Kamin Steven
Published: August 2019

This paper surveys the development and operation of the parallel exchange market in Argentina during the 1980s, and evaluates its impact upon macroeconomic performance and policy. The historical evolution of Argentina's exchange market policies is reviewed in order to understand the government's motives for imposing exchange controls. The parallel exchange market engendered by these controls is then analyzed, and econometric methods are used to evaluate the behavior of the parallel exchange rate and its impact upon the balance of payments.The main conclusion of the paper is that exchange controls were never effective enough in Argentina to allow the authorities to set the commercial exchange rate independently of the parallel market rate. Attempts to set the commercial exchange rate at too appreciated a level consistently prompted widespread evasion of exchange controls that undermined the government's international reserve position. Econometric evidence supports the hypothesis that important components of the balance of payments were negatively correlated with the parallel market premium during the 1980s. The evidence also confirms that the parallel market premium was influential in the determination of the commercial exchange rate.
A Re-Assessment of the Relationship between Real Exchange Rates and Real Interest Rates: 1974-1990
Authors: Edison Hali J. , Pauls B. Dianne
Published: August 2019

The general view of the economics profession is that we can not explain exchange rate movements. However, some researchers still contend that the relationship between real interest rates and the real exchange rate is a useful framework for thinking about exchange rate movements. This paper asks whether there is such a systematic relationship and whether it is revealed by the data. In our attempt to find such a relationship we investigate whether the empirical results are conditional on: (1) the time period selected, (2) the choice of interest rate, (3) the measure of expected inflation, and (4) the choice of exchange rate. The results show that exchange rates and interest rates, both nominal and real are nonstationary; however, they are not cointegrated with each other. On the other hand, the dynamic models indicate that there might be a long-run relationship between these variables, but cannot corroborate this. Consequently, the final conclusion is that the empirical results do not confirm the relationship and this result is robust across exchange rates, time periods, interest rates, and inflation measures.
Cointegration, Exogeneity, and Policy Analysis: An Overview
Authors: Ericsson Neil R.
Published: August 2019

This overview describes the concepts of cointegration and exogeneity, focusing on analytical structure, statistical inference, and implications for policy analysis. Examples help clarify the concepts. The remainder of the overview summarizes the articles in a special issue of the Journal of Policy Modeling entitled Cointegration, Exogeneity, and Policy Analysis.
A Primer on the Japanese Banking System
Authors: Frankel Allen B. , Morgan Paul B.
Published: August 2019

This paper examines the effects of the liberalization of the Japanese financial system in the past twenty years. The changes are viewed in terms of their current and potential future impact on the Japanese banking industry. The purpose of this paper is to provide a discussion of the situation facing the banking system during the present transition period between the highly segmented and regulated financial system of the post-war high growth period, and the liberalized, financially deregulated environment toward which the Japanese regulatory authorities aspire.
The Autonomy of Trade Elasticities: Choice and Consequences
Authors: Marquez Jaime R.
Published: August 2019

Fifty years of econometric work on trade assumes that trade elasticities are invariant to changes in spending patterns, that prices can be taken as given, and that expenditures on domestic and foreign goods can be studied independently of each other. To relax these assumptions, this paper assembles a simultaneous model explaining trade among Canada, Japan, and the United States. Spending behaves according to the Rotterdam model which, by design, embodies all of the properties of utility maxiÂ­mization and does not treat trade elasticities as autonomous parameters. Pricing behaves according to the pricing-to-market hypothesis which recognizes exporters' incentives to discriminate across export markets. Parameter estimation relies on the Full Information Maximum Likelihood approach and uses bilateral price data for 1965-1987. According to the evidence, treating trade elasticities as autonomous parameters and ignoring the statistical implications of simultaneity and optimization unÂ­dermines our effectiveness in addressing questions relevant to economic interactions among nations. Specifically, the estimates from the Rotterdam model predict that asymmetries in income elasticities, which were important once, have vanished.
Purchasing Power Parity and Uncovered Interest Rate Parity: The United States 1974 - 1990
Authors: Edison Hali J. , Melick William R.
Published: August 2019

This paper examines the factors behind long-run movements of the dollar. Most recent work has concluded that structural exchange rate models explain only a small proportion of exchange rate movements. However, many economists still find the theory that links exchange rates and interest rates persuasive. We investigate the relationship between exchange rates, prices, and interest rates using multivariate maximum likelihood cointegration tests. In particular, we explicitly test for purchasing power parity and uncovered interest rate parity when using nominal exchange rates, and implicitly test for these two hypothesis when using real exchange rates. The conclusion that emerges from this study is that we almost always identify at least one cointegrating vector among the variables, but we can not verify the theoretical models that show how exchange rates and interest rates are linked.
Real Exchange Rates: Measurement and Implications for Predicting U.S. External Imbalances
Authors: Marquez Jaime R.
Published: August 2019

That international trade flows respond to changes in real exchange rates is beyond question. What is less clear is whether the measurement of real exchange rates matters for characterizing and predicting such responses. To identify the implications of choosing a given measure of the real exchange rate, I examine how the parameter estimates and the forecast performance of a given model vary in response to alternative measures of real exchange rates. I reject a given measure if its use (a) implies estimates inconsistent with economic theory; (b) contradicts the assumptions needed for statistical inference; (c) leads to systematic forecast errors; or (d) entails a loss of information relative to an alternative measure. Although the analysis rejects several measures of real exchange rates, it cannot identify a unique measure suitable for explaining U.S. trade: relative unit labor costs and relative consumer prices are equally suited for modeling and predicting U.S. trade.
Whom can we Trust to Run the FED? Theoretical Support for the Founders' Views
Authors: Faust Jon
Published: August 2019

The Federal Reserve Act erected a unique structure of government decisionÂ­making, independent with elaborate rules balancing internal power. Historical evidence suggests that this outcome was a response to public conflict over inflation's redistributive powers. This paper documents and formalizes this argument: in the face of conflict over redistributive inflation, policy by majority can lead to policy that is worse, even for the majority, than obvious alternatives. The bargaining solution of an independent board with properly balanced interests leads to a better outcome. Technically, this paper extends earlier work in making policy preferences fully endogenous and in extending the notion of equilibrium policy to such a world. Substantively, this work provides a simple grounding of policy preferences--largely missing heretofore--linking game theoretic models of policy to historical evidence about the formation of an independent monetary authority.
The Power of Cointegration Tests
Authors: Kremers Jeroen J. M. , Ericsson Neil R. , Dolado Juan José
Published: August 2019

A cointegration test statistic based upon estimation of an error correction model can be approximately normally distributed when no cointegration is present. By contrast, the equivalent Dickey-Fuller statistic applied to residuals from a static relationship has a non-standard asymptotic distribution. When cointegration exists, the error-correction test generally is more powerful than the Dickey-Fuller test. These differences arise because the latter imposes a possibly invalid common factor restriction. The issue is general and has ramifications for system-based cointegration tests. Monte Carlo analysis and an empirical study of U.K. money demand demonstrate the differences in power.
The Liquidity Premium in Average Interest Rates
Authors: Coleman Wilbur John , Gilles Christian , Labadie Pamela
Published: August 2019

This paper studies recent models of the liquidity effect of money on interest rates to determine if a systematic relationship between liquidity shocks and the economy could affect the average real interest rate.
The Political Economy of the Won: U.S.-Korean Bilateral Negotiations on Exchange Rates
Authors: Lindner Deborah J.
Published: August 2019

This paper traces the development of U.S.-Korean negotiations on exchange rates in the second half of the 1980s. Background on Korea's foreign exchange control system is provided, including the evolution of its exchange rate determination mechanisms from 1945 to the current period. The U.S. Congress' rationale for including exchange rates in the Omnibus Trade and Competitiveness Act, the U.S. Treasury's Reports to Congress, and the results of the U.S. Treasury's negotiations with Korea on exchange rate "manipulation" are examined.Korea's current account surpluses emerged at a time when the United States was experiencing record current account deficits, in part due to the rapid appreciation of the dollar in the first half of the 1980s. The fact that the dollar subsequently depreciated against the United. States' industrial-country trading partners but moved little against the currencies of the NIEs prompted the U.S. Congress to examine the exchange rate policies of those economies. Under the Omnibus Trade and Competitiveness Act, Korea and Taiwan were cited in 1988 as "manipulating" their currencies for "unfair" trade gain. With the implementation of the market average-rate system in March 1990, Korea was removed from Treasury's list of exchange rate manipulators. However, the Treasury has complained that even though Korea does not directly manipulate the won within the meaning of the Exchange Rates Act, pervasive capital controls limit potential exchange rate movements and may be used to "manipulate" the value of the won indirectly.
A Utility Based Comparison of Some Models of Exchange Rate Volatility
Authors: West Kenneth D. , Edison Hali J. , Cho Dongchul
Published: August 2019

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonparametric models for the conditional variance of each exchange rate, GARCH models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.
Industry Restructuring and Export Performance: Evidence on the Transition in Hungary
Authors: Chang Valerie J. , Mann Catherine L.
Published: August 2019

Robust and numerous small and medium-size enterprises (SMEs) are a hallmark of the market economy and development of these firms is an integral part of the structural transformation of the economies of East-Central Europe (ECE). Data for Hungary on changes in the size distribution of firms and their importance for output and employment indicates that industry restructuring is taking place. One measure of the success of restructuring is export performance. That is, increased exports by those industries undergoing restructuring suggests that the process is creating firms that are successfully responding to market demand and international price signals. Disaggregated industry data from Hungary support the propositions that restructured industries and industries that have historically been important for domestic and export markets have become more important exporters. Moreover, it appears that Hungarian exporters have been effectively exploiting the switch from the CMEA market and the opening up of the border with the European Community. However, perhaps because of the short time series of the investigation, it is too early to tell whether Hungarian exports will respond systematically to standard determinants of trade, such as changes in EC income and relative prices.
Near Observational Equivalence and Unit Root Processes: Formal Concepts and Implications
Authors: Faust Jon
Published: August 2019

A number of recent papers have discussed the fact that difference stationary and trend stationary processes are nearly observationally equivalent. The meaning of this fact, however, remains clouded. This paper defines near observational equivalence and derives several implications of the notion for classical and Bayesian unit root inference. For example, unless restrictions are imposed on the general difference and trend stationary models, the exact size of any consistent unit root test rises to one with sample size. Bayesian posteriors regarding unit roots are arbitrary in the sense that given any prior, there are other priors that agree with the first regarding empirical outcomes, but that imply arbitrarily different unit root posteriors.
Macroeconomic Risk and Asset Pricing: Estimating the APT with Observable Factors
Authors: Ammer John
Published: August 2019

This paper develops and applies a new maximum likelihood method for estimating the Arbitrage Pricing Theory (APT) model with observable risk factors. The approach involves simultaneous estimation of the factor loadings and risk premiums and can be applied to return panel with more securities than time series observations per security. Observable economic factors are found to account for 25 to 40 percent of the covariation in U.S. equity returns, and the APT pricing restrictions cannot be rejected for most sample periods. A significant "firm size anomaly" is measured, but it may be partly due to sample selection bias.
Internal Funds and the Investment Function
Authors: Stevens Guy V. G.
Published: August 2019

An extensive and increasingly persuasive body of empirical evidence has linked a firm's fixed investment expenditure to its supply of internally generated funds. The central concerns of this paper are (1) the theoretical justifiability of such empirically-based investment functions, particularly those where internal funds affect only the speed of adjustment, and (2) the dynamic properties of this latter class of investment functions. A class of models is explored featuring intertemporal profit maximization under conditions of increasing costs of external finance (attributable to bankruptcy or agency costs). The paper shows that, for a major part of the optimal investment path, the function implied by the theory is remarkably close to the most promising variant found empirically: the supply of internal funds affects the speed of adjustment, but not the level of the optimal capital stock. Such investment functions possess the unusual dynamic property that the speed of adjustment increases monotonically along the optimal path.
Long-Term Banking Relationships in General Equilibrium
Authors: Gibson Michael S.
Published: August 2019

I examine the relationship between a financial intermediary ("bank") and a borrowing firm in a three-period overlapping generations model. The model can accommodate two financing arrangements between the bank and the firm: one requires commitment to a long-term contract, the other does not. Which arrangement is chosen depends on whether such a commitment can be credibly made. After defining the two arrangements, I compare their features with real-world financial dealings. Once the form of the long-term relationship between the bank and the firm is set, investment and output of the economy can be determined. Disruptions in financial markets can affect real investment and output by disrupting established long-term relationships.
Cointegration, Seasonality, Encompassing, and the Demand for Money in the United Kingdom
Authors: Ericsson Neil R. , Hendry David F. , Tran Hong-Anh
Published: August 2019

Virtually all previous narrow money demand studies for the United Kingdom have used seasonally adjusted data for money, prices, and expenditure. This paper develops a constant, data-coherent M1 demand equation for the United Kingdom with seasonally unadjusted data. For that model, we address issues of cointegration, error correction, general-to-specific modeling, dynamic specification, model evaluation and testing, parameter constancy, and exogeneity. We also establish theoretical and empirical relationships between seasonally adjusted and unadjusted data, and so between models using those data. Finally, we derive and implement encompassing tests for comparing models using adjusted data with models using unadjusted data. Unlike the "standard" encompassing framework, variance dominance is not always a necessary condition for encompassing.
Union Behavior, Industry Rents, and Optimal Policies
Authors: Swagel Phillip
Published: August 2019

This paper examines the welfare gains from strategic trade and industrial policy in the U.S. steel industry, focusing particularly on the potential gains from capturing labor rents. I take into account product market distortions such as price-setting firms, factor market distortions in the form of union-created labor rents, and the presence of fixed capital and underutilized capacity in U.S. steel production.The existence of underutilized capacity means that firms respond to protection by reducing the share of labor in production, eliminating the rents targeted by the policy and thus reducing the potential gains. At the same time, the union takes advantage of protection to "skim off" rents, further reducing the effectiveness of the optimal policy. Taking into account these endogenous responses substantially reduces the welfare gains from optimal policies. And simply reducing domestic labor market distortions results in a welfare gain nearly as large as that from optimal policies. This suggests that the focus on labor rents as the subject of U.S. trade and industrial policy is overstated, at least in manufacturing industries such as integrated steel.
Are Apparent Productive Spillovers a Figment of Specification Error?
Authors: Basu Susanto , Fernald John G.
Published: August 2019

Using data on gross output for two-digit manufacturing industries, we find that an increase in the output of one manufacturing sector has little or no significant effect on the productivity of other sectors. Using value-added data, however, we confirm the results of previous studies which find that output spillovers instead appear large. We provide an explanation for these differences, showing why, with imperfect competition, the use of value-added data leads to a spurious finding of large apparent external effects.
Understanding the Empirical Literature on Purchasing Power Parity: The Post-Bretton Woods Era
Authors: Edison Hali J. , Gagnon Joseph E. , Melick William R.
Published: August 2019

Purchasing Power Parity (PPP) in the post-Bretton Woods era by and large has failed to stand up to empirical scrutiny. This paper sheds light on this failure by documenting the low small-sample power of existing empirical tests. We also implement new, more powerful tests that find moderate evidence in favor of PPP.
European Monetary Arrangements: Implications for the Dollar, Exchange Rate Variability and Credibility
Authors: Edison Hali J. , Kole Linda Sue
Published: August 2019

This paper uses the recent history of the ERM to gain insights into what might happen to exchange rates on the road to EMU. To do this, the paper examines the variability of exchange rates, the transmission of monetary policy between countries, the role of the dollar in ERM exchange rate crises, and ERM members' credibility as measured by the realignment probabilities prior to the September 1992 crisis. We find that behavior of exchange rates has changed over time and differs between ERM and non-ERM currencies. We identify two factors that might have contributed to the September 1992 crisis: high German interest rates and weakness of the U.S. dollar.
Inflation Targeting in the 1990s: The Experiences of New Zealand, Canada, and the United Kingdom
Authors: Ammer John , Freeman Richard T.
Published: August 2019

We survey the recent experiences of three industrial countries -- New Zealand, Canada, and the United Kingdom -- that have announced specific targets for inflation. Despite success on the part of the targeting central banks in attaining their inflation goals thus far, bond yields suggest that long-term inflation expectations for these countries persistently tended to exceed long-term targets throughout the first several years of targeting. For New Zealand and Canada, survey data generally implied that inflation also was expected to exceed its targeted level in the near term.
Determinants of the 1991-93 Japanese Recession: Evidence from a Structural Model of the Japanese Economy
Authors: Brunner Allan D. , Kamin Steven
Published: August 2019

The objectives of this paper are to determine the extent to which various factors contributed to the current recession in Japan and to assess whether the recent behavior of the Japanese economy differs from that in previous recessions. Toward that end, we develop a small, structural macroeconometric model of the Japanese economy and estimate it using data from 1971 Q1 through 1991 Q1, the period just prior to the recent downturn. The important results can be summarized as follows. First, the severity of the current recession probably does not reflect structural economic changes. Second, the poor economic performance in 1991-1993 period was to some extent predictable, reflecting the unwinding of imbalances that developed during the preceding expansion. Finally, unpredictable movements in exchange rates, land and stock prices occurring after 1991 played an important, but not predominant, part in accentuating the downturn, while unusually stimulative fiscal and monetary policies appear to have contributed substantially to GDP during the recession.
Who Will Join EMU? Impact of the Maastricht Convergence Criteria on Economic Policy Choice and Performance
Authors: Craig R. Sean
Published: August 2019

To qualify for European Monetary Union (EMU) countries must meet convergence criteria established in the Maastricht treaty of December 1991. However, an analysis of how difficult it will be to meet the convergence criteria is not sufficient to identify the countries most likely to join EMU in 1999. This paper identifies a number of factors in addition to budget deficit reduction required to qualify for EMU such as; the persistence of inflationary expectations; the variance of output shocks; the inflationary bias to monetary policy; and, the political cost to not joining EMU. Moreover, countries follow a policy rule where a large negative output shocks can cause them to abandon the restrictive policies necessary to qualify for EMU and, instead, use policy for stabilization. Concern about such a policy shift could cause increases in interest rates similar to those observed during ERM crises. Data on the above factors are generally not available, except for budgetary data. However, the model shows that data on long-term interest rate differentials with Germany can serve as a measure of their influence. Two approaches, using implied forward interest rate differentials and econometric analysis, are used to evaluate the usefulness of this measure. Both support the use of long-term interest differentials. Overall, it appears likely that EMU will occur in stages as factors are relatively favorable for EMU in Denmark, France, Ireland and the Netherlands. In contrast, for Italy and Spain EMU appears unlikely.
Constrained Suboptimality in Economies With Limited Communication
Authors: Bowman David
Published: August 2019

Economies with limited communication contain an externality which typically makes them Pareto inefficient, even taking into account the communication conÂ­straints agents face. In a two period model it is shown that an open and dense set of economies with limited communication are constrained Pareto suboptimal. Thus equilibria of economies with voluntary unemployment, search, or other types of limits on communication are unlikely to be Pareto optimal, even in the absence of moral hazard, adverse selection, or search externalities.
Real Exchange Rate Movements in High Inflation Countries
Authors: Rogers John Harold , Wang Ping
Published: August 2019

We empirically assess the sources of fluctuations in the real exchange rates of four high inflation countries, for which monetary shocks are generally believed to be predominant. In a benchmark model we identify fiscal, monetary, and output shocks based on a general-equilibrium optimizing model. We then estimate two alternative extensions. In the first, we decompose the output shock into supply and demand disturbances; in the second, the monetary shock is further decomposed into money supply and nominal exchange rate disturbances. Monetary shocks are found to be generally significant. Real shocks, especially those associated with government policy restrictions on the flow of currency, income from foreign investments, capital, and/or goods, are uniformly more influential however. The paper suggests that analyses of real exchange rates in high inflation economies using models emphasizing monetary shocks and sticky prices could be improved by not negtecting real shocks.
Exchange-Rate Based Inflation Stabilization: The Initial Real Effects of Credible Plans
Authors: Uribe Martin
Published: August 2019

This paper presents a dynamic general equilibrium model of a small, open, monetary economy in order to analyze the short-run effects of credible stabilization plans that fix the nominal exchange rate in a regime of free convertibility. In this model inflation acts as a tax on domestic market transactions. In particular, it generates a wedge between the rate of return on investment in domestic capital and the rate of return on investment in foreign assets. The model stresses the importance of adjustment costs (including gestation lags) in explaining the precise character of the initial dynamics. The main stylized facts of this type of programs namely an initial phase characterized by several months of real exchange rate appreciation, trade balance deterioration and expansion in aggregate demand and production, followed by a deflationary slowdown in real activity, are replicated without resorting to credibility problems, sticky prices, adaptive expectations, or gradual disinflation schemes. Finally, the model is calibrated using long-run relations from the Argentinean economy, and its quantitative predictions are compared to the initial effects of that country's Convertibility Plan of April 1991.
Inferences From Parametric and Non-Parametric Covariance Matrix Estimation Procedures
Authors: Levin Andrew , Den Haan Wouter J.
Published: August 2019

We propose a parametric spectral estimation procedure for contructing heteroskedasticity and autocorrelation consistent (HAC) covariance matrices. We establish the consistency of this procedure under very general conditions similar to those considered in previous research. We also perform Monte Carlo simulations to evaluate the performance of this procedure in drawing reliable inferences from linear regression estimates. These simulations indicate that the parametric estimator matches, and in some cases greatly exceeds, the performance of the prewhitened kernel estimator proposed by Andrews and Monahan (1992). These simulations also illustrate the inherent limitations of non-parametric HAC covariance matrix estimation procedures, and highlight the advantages of explicitly modeling the temporal properties of the error terms.
Hysteresis in a Simple Model of Currency Substitution
Authors: Uribe Martin
Published: August 2019

A simple model of currency substitution is developed in which the private cost of performing transactions in the foreign currency depends upon the aggregate degree of dollarization. This feature generates multiple steady states and hysteresis in an otherwise standard cash-in-advance model of a small open economy. In particular, a temporary increase in the rate of inflation can drive the economy to a dollarized equilibrium in which the velocity of circulation of domestic currency is permanently higher.
Options, Sunspots, and the Creation of Uncertainty
Authors: Bowman David , Faust Jon
Published: August 2019

We present a model in which the addition of an option market leads to sunspot equilibria in an economy which has no sunspot equilibrium before the market is introduced. This phenomenon occurs because the payoff of an option contract is contingent upon market prices, and while prices are taken as exogenous by individuals within the economy they are endogenous to the economy as a whole. Our results provide robust counterexamples to the two most prevalent views of options markets in finance. Following Ross [1976], it is often assumed that the addition of option contracts to an incomplete markets economy can help complete markets. We demonstrate that the addition of option markets can instead increase the number of events which agents need to insure against. Following Black-Scholes [1973], it is often assumed that the economy is such that options are redundant. We demonstrate equilibria in which an added option market is not redundant even when markets were complete before its introduction.
Block Distributed Methods for Solving Multi-Country Econometric Models
Authors: Faust Jon , Tryon Ralph W.
Published: August 2019

This paper examines variations on a baseline Fair-Taylor algorithm used to solve multi-country, rational expectations models. One notable feature of these variations is the ability to exploit small-scale distributed processing using a network of workstations or PCs. Using four processors to solve MX-4 (152 endogenous variables), the largest speedup factor relative to Fair-Taylor is 59; for RE-7 (978 endogenous variables) the maximum speedup factor is 12.
Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence From U.S. Manufacturing Industries
Authors: Ghosal Vivek , Loungani Prakash
Published: August 2019

This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.
Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down
Authors: Edison Hali J. , Melick William R.
Published: August 2019

This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.
The Monetary Transmission Mechanism in Mexico
Authors: Copelman Martina , Werner Alejandro M.
Published: August 2019

An important question in macroeconomics has been how the transmission mechanism of monetary policy works. In particular, the question of whether there exists a credit channel for the transmission of monetary policy has been one of the central themes in the discussion of the effectiveness of monetary policy. If this channel exists, then shocks to credit markets, particularly to bank loans, can have real effects. This paper presents new evidence on the credit hypothesis for the case of Mexico after 1984. We present a simple variant of the open economy IS-LM model which includes a credit channel. The model has the following empirical implications which are absent from models which do not include a credit channel. We show that changes in the expectations of devaluation, the desired cash/deposit ratio, and measures of financial deregulation, will have real effects because they change the quantity of credit available in the economy. We explore these implications of the model through standard VAR techniques and find that the evidence strongly supports the credit view. We find that the impact on economic activity of credit and nominal depreciation rate shocks is very significant.
Excess Returns and Risk at the Long End of the Treasury Market: An Egarch-M Approach
Authors: Brunner Allan D. , Simon David P.
Published: August 2019

This paper models weekly excess returns of 10-year Treasury notes and long-term Treasury bonds from 1968 through 1993 using an exponential generalized autoregressive conditional hetroskedasticity in mean (EGARCH-M) approach. The results indicate the presence of conditional hetroskedasticity and a strong tendency for the ex-ante volatility of excess returns to increase more following negative excess return innovations compared to positive innovations of equal magnitude. In addition, increases in ex-ante volatility are associated in some subperiods with rising excess returns on longer-term instruments, although the slope of the yield curve and lagged excess returns generally remain significant predictors of excess returns.
Human Capital Accumulation, Fertility and Growth: A Re-Analysis
Authors: Iyigun Murat
Published: August 2019

This paper develops an economic growth model with endogenous fertility. In doing so, it provides a new explanation for the relation between fertility, economic development and human capital accumulation. The model emphasizes the role returns on human capital play in economic development through individuals' alÂ­location of time between acquiring human capital and production and rearing of children. In the model, production and rearing children are time intensive and accumulating human capital requires time and has a cost. Individuals' stock of human capital depends positively on the time allocated to education and on their parents' stock of human capital. Moreover, increases in the parents' stock of huÂ­man capital raises the rate of return on human capital investment. As a result, individuals choose to allocate more time to education and less to producing and rearing children as their parents' stock of human capital increases. The model also demonstrates that individuals' choices on fertility and education may lead to multiple equilibria. Specifically, even if individuals' utility depends relatively more on their own consumption rather than on the number of children that they have, countries that have a low enough initial stock of human capital converge to a development trap with large families, little human capital and low output per capita.
Targeting Inflation in the 1990s: Recent Challenges
Authors: Freeman Richard T. , Willis Jonathan L.
Published: August 2019

This paper provides an evaluation of the effectiveness of inflation targeting in four industrial countries --New Zealand, Canada, the United Kingdom, and Sweden --focussing on the recent period of economic recovery. Evidence drawn from fmancial market data suggests that credibility of their inflation targeting regimes on balance has deteriorated during the past year and a half, as reflected mainly in sizeable increases in medium-and long-term interest rates. Even after accounting for spillovers from increases in real rates globally (which appear to have been important) and cyclical effects, recent increases in long-term interest rates appear to be incompatible with the possibility that market expectations for inflation have remained on track with official objectives. The deterioration of credibility during this period, however, is considerably less than is implied by changes in nominal interest rates alone and varies considerably across targeting countries. Other evidence suggests that, although inflation targets have not had any detectable effect in altering the time-series characteristics of nominal interest rates (and, by implication, of inflationÂ­expectations formation), there is mixed evidence that inflation targets may have helped stabilize inflation expectations and possibly lowered the inflation-risk premium in some countries.