bluuebunny/crossref_metadata_2025 huggingface dataset:
Has International Financial Co-Movement Changed?: Emerging Markets in the 2007-2009 Financial Crisis
Authors: Ammer John , Cai Fang , Scotti Chiara
Published: August 2019

Emerging market (EM) assets have historically been regarded as inherently risky and particularly vulnerable to international shocks that result in a general increase in investor risk perceptions. In this paper, we assess the ongoing relevance of this view by examining the linkages between EM and non-EM stock and bond markets in the past two decades, with a focus on how these relationships played out during the global financial crisis of 2007-2009. We evaluate how these linkages have evolved over the period 1992-2009, through statistical tests of whether the volatility of EM financial markets changed - either in their response to international shocks originating in advanced economy markets or in their independent fluctuations. We find that over the longer period EM bond and stock prices have on average moved in the same direction as the prices of non-EM risky assets, and this co-movement has persisted. However, these relationships have evolved somewhat over time. Both EM sensitivity to international shocks and EM-specific volatility in EM sovereign bond spreads appear to have decreased over time, consistent with the greater fundamental stability of EM economies and perhaps a reduced inclination by investors to sell off EM assets in response to a rise in risk perceptions. Somewhat in contrast, while an upward trend in co-variation between EM and non-EM stock prices suggests an increasing degree of global market integration, idiosyncratic volatility has declined, consistent with a diminished level of locally-driven risk in these markets. In addition, the response of EM asset prices to the latest financial crisis appears to be moderate in comparison to historical experience. This evidence may reflect reduced EM vulnerability to external shocks in general, which is consistent with some encouraging improvements in the underlying fundamentals of EM economies over the decade preceding the onset of the crisis.
Asymmetric Shocks in a Currency Union with Monetary and Fiscal Handcuffs?
Authors: Erceg Christopher J. , Lindé Jesper
Published: August 2019

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending.
Nonlinearities in the Oil Price-Output Relationship
Authors: Kilian Lutz , Vigfusson Robert J.
Published: August 2019

It is customary to suggest that the asymmetry in the transmission of oil price shocks to real output is well established. Much of the empirical work cited as being in support of asymmetries, however, has not directly tested the hypothesis of an asymmetric transmission of oil price innovations. Moreover, many of the papers quantifying these asymmetric responses are based on censored oil price VAR models which recently have been shown to be invalid. Other studies are based on dynamic correlations in the data that do not shed light on the central question of whether the structural responses of real output triggered by positive and negative oil price innovations are asymmetric. Recently, a number of new methodologies have been introduced and applied to the problem of testing and quantifying asymmetric responses of U.S. real economic activity to positive and negative oil price innovations. Our objective is to put this literature in perspective, to contrast it with more traditional approaches, to highlight directions for further research, and to reconcile some seemingly conflicting results reported in the literature.
International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007
Authors: Bernanke Ben , Bertaut Carol C. , DeMarco Laurie Pounder , Kamin Steven
Published: August 2019

A broad array of domestic institutional factors--including problems with the originate-to-distribute model for mortgage loans, deteriorating lending standards, deficiencies in risk management, conflicting incentives for the GSEs, and shortcomings of supervision and regulation--were the primary sources of the U.S. housing boom and bust and the associated financial crisis. In addition, the extended rise in U.S. house prices was likely also supported by long-term interest rates (including mortgage rates) that were surprisingly low, given the level of short-term rates and other macro fundamentals--a development that Greenspan (2005) dubbed a &amp;amp;#x27;conundrum.&amp;amp;#x27; The &amp;amp;#x27;global saving glut&amp;amp;#x27; (GSG) hypothesis (Bernanke, 2005 and 2007) argues that increased capital inflows to the United States from countries in which desired saving greatly exceeded desired investment--including Asian emerging markets and commodity exporters--were an important reason that U.S. longer-term interest rates during this period were lower than expected. This essay investigates further the effects of capital inflows to the United States on U.S. longer-term interest rates however, we look beyond the overall size of the inflows emphasized by the GSG hypothesis to examine the implications for U.S. yields of the portfolio preferences of foreign creditors. We present evidence that, in the spirit of Caballero and Krishnamurthy (2009), foreign investors during this period tended to prefer U.S. assets perceived to be safe. In particular, foreign investors--especially the GSG countries--acquired a substantial share of the new issues of U.S. Treasuries, Agency debt, and Agency-sponsored mortgage-backed securities. The downward pressure on yields exerted by inflows from the GSG countries was reinforced by the portfolio preferences of other foreign investors. We focus particularly on the case of Europe: although Europe did not run a large current account surplus as did the GSG countries, we show that it leveraged up its international balance sheet, issuing exter
Quantitative Easing and Bank Lending: Evidence from Japan
Authors: Bowman David , Cai Fang , Davies Sally M. , Kamin Steven
Published: August 2019

Prior to the recent financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan&amp;amp;amp;amp;#x27;s &amp;amp;amp;amp;#x27;quantitative easing policy&amp;amp;amp;amp;#x27; (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether QEP simply provided little stimulus, or whether its positive effects were overwhelmed by the contractionary forces in Japan&amp;amp;amp;amp;#x27;s post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP, the Bank of Japan&amp;amp;amp;amp;#x27;s injections of liquidity into the interbank market. We identify a robust, positive, and statistically significant effect of bank liquidity positions on lending, suggesting that the expansion of reserves associated with QEP likely boosted the flow of credit. However, the overall size of that boost was probably quite small. First, the estimated response of lending to liquidity positions in our regressions is small. Second, much of the effect of the BOJ&amp;amp;amp;amp;#x27;s reserve injections on bank liquidity was offset as banks reduced their lending to each other. Finally, the effect of liquidity on lending appears to have held only during the initial years of QEP, when the banking system was at its weakest by 2005, even before QEP was abandoned, the relationship between liquidity and lending had evaporated.
Trade Credit and International Trade during the 2008-09 Global Financial Crisis
Authors: Coulibaly Brahima , Sapriza Horacio , Zlate Andrei
Published: August 2019

This paper studies the role of the credit crunch in the severe contraction of economic activity during the 2008-09 global financial crisis, using firm-level data from six emerging Asian economies. After controlling for the effect of falling demand, we find that sales declined by less for firms with better pre-crisis financial conditions. Amid the decline in external financing opportunities, some firms relied more on trade credit from suppliers during the crisis, which allowed them to post relatively better sales. Export-intensive firms resorted less to trade credit as an alternative source of finance, which contributed to their larger declines in sales.
U.S. Domestic and International Financial Reform Policy: Are G20 Commitments and the Dodd-Frank Act in Sync?
Authors: Nolle Daniel E.
Published: August 2019

The Dodd-Frank Act of 2010 is the keystone policy response directed at reforming U.S. financial system activities and oversight in the wake of the 2007-2009 financial crisis. The United States also has financial system reform policy commitments in the international arena, including in particular by virtue of its membership in the G20. This analysis considers U.S. policy initiatives related to a core dimension of financial system reform: risks posed by systemically important financial institutions (&amp;amp;#x27;SIFIs&amp;amp;#x27;). It provides a comparison of SIFI policy initiatives and timetables under both the Dodd-Frank Act and the G20 agenda, as reflected in the ongoing work plan of the Financial Stability Board (FSB), and poses the question &amp;amp;#x27;Are U.S. domestic and international financial system reform commitments in sync?&amp;amp;#x27; While finding that, fundamentally, the answer is &amp;amp;#x27;yes,&amp;amp;#x27; the detailed comparison yields two caveats with potential policy implications. First, the two agendas differ in their relative emphasis on the coverage of both banks and nonbanks. The G20/FSB focus, at least over the near-term, is bank-centric compared with the Dodd-Frank Act, which consistently addresses both bank and nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to long-established U.S. law mandating that there be sufficient opportunity for public input into the rulemaking process, whereas the G20/FSB process has been less systematic and transparent on public consultation and feedback. The lesser emphasis on transparency and public input characterizing the G20/FSB policy development process may be attributable in part to the somewhat more rapid pace of the G20/FSB agenda relative to corresponding Dodd-Frank Act timelines. These observations may be relevant to the current debate over the speed and scope of Dodd-Frank Act implementation measures, and to the discussion about the future international competitiveness of U.S. banks and nonbank financial firms.
Evaluating the Forecasting Performance of Commodity Futures Prices
Authors: Reeve Trevor A. , Vigfusson Robert J.
Published: August 2019

Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices.
Are Chinese Exports Sensitive to Changes in the Exchange Rate?
Authors: Ahmed Shaghil
Published: August 2019

This paper builds a model of two types of Chinese exports, those processed and assembled largely from imported inputs ( processed exports) and non-processed exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurred over the past three years. The results show that greater exchange rate appreciation dampens export growth, both for non-processed and processed exports, with the estimated cumulative price elasticity being substantially greater than unity. When the source of the increase in the Chinese real exchange rate is appreciations against the currencies of other emerging Asian trading partners, the effect on processing exports is positive but insignificant, while the effect on non-processing exports is significantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against China's advanced-economy trading partners, the effects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactual simulations based on the estimated model strongly suggest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate flexibility could contribute to lowering China's huge trade surplus through restraining growth of exports.
Immigration, Remittances and Business Cycles
Authors: Mandelman Federico S. , Zlate Andrei
Published: August 2019

We use data on border enforcement and macroeconomic indicators from the U.S. and Mexico to estimate a two-country business cycle model of labor migration and remittances. The model matches the cyclical dynamics of labor migration to the U.S. and documents how remittances to Mexico serve an insurance role to smooth consumption across the border. During expansions in the destination economy, immigration increases with the expected stream of future wage gains, but it is dampened by a sunk migration cost that reflects the intensity of border enforcement. During recessions, established migrants are deterred from returning to their country of origin, which places an additional downward pressure on the wage of native unskilled workers. Thus, migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle, enhancing the volatility of unskilled wages and remittances. We quantify the welfare implications of various immigration policies for the destination economy.
Limited Market Participation and Asset Prices in the Presence of Earnings Management
Authors: Sun Bo
Published: August 2019

We examine the role of earnings management in explaining the properties of asset prices and stock market participation. We demonstrate that investors&amp;#x27; uncertainty about the extent of manipulation can cause excess movements in stock price relative to fluctuations in output. When faced with information asymmetry about fundamentals in the presence of earnings management, investors demand a higher equity premium for bearing the additional risk associated with their payoffs. In addition, when investors have heterogeneous beliefs about managerial manipulation, the dispersion in belief endogenously gives rise to limited stock market participation. Our model suggests that the increasing stringency of corporate governance and varying composition of investors may have played a role in the contemporaneous run-up of market participation rates in the recent years.
Trade Credit and International Trade during the 2008-09 Global Financial Crisis
Authors: Coulibaly Brahima , Sapriza Horacio , Zlate Andrei
Published: August 2019

This paper studies the role of the credit crunch in the severe contraction of trade and economic activity at the height of the 2008-09 global financial crisis, using firm-level data from six emerging market economies in Asia. We construct firm-specific measures of global demand, which allow us to disentangle the effect of falling demand from that of financial constraints on sales. The results indicate that: (1) Although the fall in demand adversely affected the sales of all firms during the crisis, sales declined by less for firms with better pre-crisis financial conditions. (2) In the face of the decline in external financing opportunities, some firms relied more on trade credit from suppliers to supplement operating capital during the crisis, which allowed them to post relatively better sales. (3) Export-intensive firms with comparable financial vulnerability resorted less to trade credit as an alternative source of finance, and hence experienced sharper declines in sales than the domestically-oriented firms. These findings point to the presence of credit frictions among the factors that contributed to the disproportionately large decline in international trade during the crisis.
Firm Default and Aggregate Fluctuations
Authors: Jacobson Tor , Lindé Jesper , Roszbach Kasper
Published: August 2019

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms&amp;#x27; relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.
Oil Efficiency, Demand, and Prices: A Tale of Ups and Downs
Authors: Bodenstein Martin , Guerrieri Luca
Published: August 2019

The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but have modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.
Monetary Regime Switches and Unstable Objectives
Authors: Debortoli Davide , Nunes Ricardo
Published: August 2019

Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers&amp;#x27; behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers&amp;#x27; behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers&amp;#x27; preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.
Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields
Authors: Beltran Daniel O. , Thomas Charles P. , Kretchmer Maxwell , Marquez Jaime R.
Published: August 2019

Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40-60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points.
Monetary Policy in Emerging Market Economies: What Lessons from the Global Financial Crisis?
Authors: Coulibaly Brahima
Published: August 2019

During the 2008-2009 global financial crisis, emerging market economies (EMEs) loosened monetary policy considerably to cushion the shock. In previous crises episodes, by contrast, EMEs generally had to tighten monetary policy to defend the value of their currencies, to contain capital flight, and to bolster policy credibility. Our study aims to understand the factors that enabled this remarkable shift in monetary policy, and also to assess whether this marks a new era in which EMEs can now conduct countercyclical policy, more in line with advanced economies. The results indicate statistically significant linkages between some characteristics of the economies and their ability to conduct countercyclical monetary policy. We find that macroeconomic fundamentals and lower vulnerabilities, openness to trade, and international capital flows, financial reforms, and the adoption of inflation targeting all facilitated the conduct of countercyclical policy. Of these factors, the most important have been the financial reforms achieved over the past decades and the adoption of inflation targeting. As long as EMEs maintain these strong economic fundamentals, continue to reform their financial sector, and adopt credible and transparent monetary policy frameworks such as inflation targeting, the conduct of countercyclical monetary policy will likely be sustainable.
When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover
Authors: Rice Tara N. , Rose Jonathan Derek
Published: August 2019

In September 2008, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship and dividend payments on common and preferred shares were suspended. As a result, share prices fell to nearly zero and many banks across the country lost the value of their investments in the preferred shares. We estimate more than 600 depository institutions in the United States were exposed to at least $8 billion in investment losses from these securities. In addition, fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover. Since these GSE investments were considered to be safe investments by banks, regulators, and rating agencies, we consider these losses to be exogenous shocks to bank capital, and use this event to examine the relationship between community bank condition and lending during this crisis. We find that in the quarter following the takeover of Fannie Mae and Freddie Mac, the measured Tier 1 capital ratio at exposed banks fell about three percent on average, and loan growth at exposed banks with median capitalization was about 2 percentage points lower compared to other banks in the following quarter. Consequently, considering the set of community banks that incurred about $2 billion in GSE-related losses, and assuming that each bank reduced loan growth by 2 percentage points, the estimated aggregate lending drop among these banks would be roughly $4 billion.
Fiscal Consolidation in an Open Economy
Authors: Erceg Christopher J. , Lindé Jesper
Published: August 2019

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
Commodity Price Movements in a General Equilibrium Model of Storage
Authors: Arseneau David M. , Leduc Sylvain
Published: August 2019

We embed the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the non-linear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. Our main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared to a model in which the real interest rate is fixed, we find that storage in general equilibrium leads to more persistence in commodity prices and somewhat lower volatility. Moreover, the frequency of stockouts is lower in general equilibrium. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochasic equilibrium. Finally, the model is used to examine the macroeconomic effects of both biofuel subsidies for ethanol producers and, separately, subsidies designed to insulate households from high food prices.
International Relative Price Levels: A Look Under the Hood
Authors: Marquez Jaime R. , Thomas Charles P. , Vincent Nicholas
Published: August 2019

This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank&amp;#x27;s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.
Nonparametric HAC Estimation for Time Series Data with Missing Observations
Authors: Datta Deepa Dhume , Du Wenxin
Published: August 2019

The Newey and West (1987) estimator has become the standard way to estimate a heteroskedasticity and autocorrelation consistent (HAC) covariance matrix, but it does not immediately apply to time series with missing observations. We demonstrate that the intuitive approach to estimate the true spectrum of the underlying process using only the observed data leads to incorrect inference. Instead, we propose two simple consistent HAC estimators for time series with missing data. First, we develop the Amplitude Modulated estimator by applying the Newey-West estimator and treating the missing observations as non-serially correlated. Secondly, we develop the Equal Spacing estimator by applying the Newey-West estimator to the series formed by treating the data as equally spaced. We show asymptotic consistency of both estimators for inference purposes and discuss finite sample variance and bias tradeoff. In Monte Carlo simulations, we demonstrate that the Equal Spacing estimator is preferred in most cases due to its lower bias, while the Amplitude Modulated estimator is preferred for small sample size and low autocorrelation due to its lower variance.
A State-Dependent Model for Inflation Forecasting
Authors: Stella Andrea , Stock James H.
Published: August 2019

We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the NAIRU has increased.
A State-Dependent Model for Inflation Forecasting
Authors: Stella Andrea , Stock James H.
Published: August 2019

We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and in the non-accelerating inflation rate of unemployment. The model, which consists of five unobserved components including the trends) with stochastic volatility, implies a time-varying vector autoregression model for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the the non-accelerating inflation rate of unemployment has increased.
Foreign Banks in the U.S.: A Primer
Authors: Goulding William , Nolle Daniel E.
Published: August 2019

This paper describes the foreign banking landscape in the United States. It begins by establishing a vocabulary for discussion of the subject, and then identifies a number of important data-related issues. With that information in hand, the remainder of the paper focuses on identifying the most important underlying trends on both sides of the balance sheets of foreign-owned banks&amp;#x27; U.S. operations. At each step, the investigation considers how foreign-owned banks compare to U.S.-owned domestic banks, and how two types of foreign banks operations in the U.S. -- branches and agencies of foreign banks (FBAs), and foreign-owned subsidiary banks (FSUBs) -- compare to each other. The banking sector in the U.S. experienced substantial swings in performance and stability over the decade surrounding the 2008-2009 financial crisis and changes in every major dimension of foreign-owned banks&amp;#x27; assets and liabilities were even larger than for domestic banks. Changes were especially large at FBAs. For example, cash balances came to dominate the assets side of FBAs&amp;#x27; aggregate balance sheet, with the absolute level of cash balances larger than those of domestic U.S. banks beginning in 2011, despite the fact that total assets of domestic U.S. banks are five times the assets of FBAs. Further, the recent unprecedented build-up of cash balances by FBAs was almost entirely composed of excess reserves. Changes in FBAs&amp;#x27; liabilities-side activities have also been large, with much funding coming from large wholesale deposits and net borrowing from their foreign parents and related offices abroad.
Interest Rates and the Volatility and Correlation of Commodity Prices
Authors: Gruber Joseph W. , Vigfusson Robert J.
Published: August 2019

We purpose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we show that price correlation can increase as a result of a decline in the interest rate. More generally, we examine the effect of interest rates on the volatility and correlation of commodity prices, theoretically through the framework of Deaton and Laroque (1992) and empirically via a panel GARCH model. In theory, we show that lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and can increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, as predicted by theory, we find that price volatility attributable to transitory shocks declines with interest rates, while, for many commodity pairs, price correlation increases as interest rates decline.
Banks, Sovereign Debt and the International Transmission of Business Cycles
Authors: Guerrieri Luca , Iacoviello Matteo , Minetti Raoul
Published: August 2019

This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.
Asymmetric Information and the Death of ABS CDOs
Authors: Beltran Daniel O. , Thomas Charles P. , Cordell Lawrence R.
Published: August 2019

A key feature of the 2007 financial crisis is that, for some classes of securities, trade has practically ceased. And where trade has occurred, it appears that market prices are well below their intrinsic values. This seems especially true for those securities where the payoff streams are particularly complex, for example, structured finance ABS CDOs. One explanation for this is that information about these securities&amp;amp;#x27; intrinsic values since the crisis has been asymmetric, with current holders having better information than potential buyers. We first characterize the information asymmetries that were present in the structured finance ABS CDO market. Because many of the CDO dealers had partially or fully integrated the pipeline from mortgage originations through CDO issuance, they had informational advantages over potential buyers that could well have disrupted trading in CDOs as the crisis took hold in August of 2007. Using a &amp;amp;#x27;workhorse&amp;amp;#x27; model for pricing securities under asymmetric information and a novel dataset for the intrinsic values of ABS CDOs, we show how the resulting adverse selection problem could explain why the bulk of these securities either trade at significant discounts to their intrinsic values or do not trade at all.
Collateral Constraints and Macroeconomic Asymmetries
Authors: Guerrieri Luca , Iacoviello Matteo
Published: August 2019

A model with collateral constraints displays asymmetric responses to house price changes. When housing wealth is high, collateral constraints become slack, and the response of consumption and hours to shocks that move house prices is positive yet small. When housing wealth is low, collateral constraints become tight, and the response of consumption and hours to house price changes is negative and large. This finding is corroborated using evidence from national, state-level, and MSA-level data. Wealth effects computed in normal times may underestimate the response to large house price declines. Debt-relief policies may be far more effective during protracted housing slumps.
Unemployment and Business Cycles
Authors: Christiano Lawrence J. , Eichenbaum Martin S. , Trabandt Mathias
Published: August 2019

We develop and estimate a general equilibrium model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, wages are not subject to exogenous nominal rigidities. Instead we derive wage inertia from our specification of how firms and workers interact when negotiating wages. Our model outperforms the standard Diamond-Mortensen-Pissarides model both statistically and in terms of the plausibility of the estimated structural parameter values. Our model also outperforms an estimated sticky wage model.
Portfolio Diversification and the Cross-Sectional Distribution of Foreign Investment
Authors: Tabova Alexandra
Published: August 2019

In this paper I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, &amp;quot;covariance risk&amp;quot;, which I construct as how countries&amp;#x27; growth rates covary with the stochastic discount factor of a representative international investor. My key new empirical finding is a strong and significant correlation between this new measure of country riskiness and foreign investment allocations. Less risky countries, i.e. countries whose growth rates are more highly correlated with the investor&amp;#x27;s stochastic discount factor, receive larger investment shares than more risky countries. I interpret this result as evidence that investors do take into account diversification opportunities, not only for portfolio investment decisions, but also for foreign direct investment decisions. My empirical results confirm the theoretical predictions of standard portfolio allocation models.
Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison
Authors: Scotti Chiara , Rogers John Harold , Wright Jonathan H.
Published: August 2019

This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
Liquidity Risk and U.S. Bank Lending at Home and Abroad
Authors: Correa Ricardo , Goldberg Linda S. , Rice Tara N.
Published: August 2019

While the balance sheet structure of U.S. banks influences how they respond to liquidity risks, the mechanisms for the effects on and consequences for lending vary widely across banks. We demonstrate fundamental differences across banks without foreign affiliates versus those with foreign affiliates. Among the nonglobal banks (those without a foreign affiliate), cross-sectional differences in response to liquidity risk depend on the banks&amp;amp;#x27; shares of core deposit funding. By contrast, differences across global banks (those with foreign affiliates) are associated with ex ante liquidity management strategies as reflected in internal borrowing across the global organization. This intra-firm borrowing by banks serves as a shock absorber and affects lending patterns to domestic and foreign customers. The use of official-sector emergency liquidity facilities by global and nonglobal banks in response to market liquidity risks tends to reduce the importance of ex ante differences in balance sheets as drivers of cross-sectional differences in lending.
Understanding the Great Recession
Authors: Christiano Lawrence J. , Eichenbaum Martin S. , Trabandt Mathias
Published: August 2019

We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions interacting with the zero lower bound. We reach this conclusion looking through the lens of a New Keynesian model in which firms face moderate degrees of price rigidities and no nominal rigidities in the wage setting process. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small size of the drop in inflation that occurred during the Great Recession.
The Energy Boom and Manufacturing in the United States
Authors: Melick William R.
Published: August 2019

This paper examines the response of U.S. manufacturers to changes in competitiveness brought about by movements in the price of natural gas. I estimate the response of various measures of manufacturing activity using panel regression methods across roughly 80 industries that allow each industry&amp;amp;#x27;s response to vary with its energy intensity. These estimates suggest that the fall in the price of natural gas since 2006 is associated with a 2 to 3 percent increase in activity for the entire manufacturing sector, with much larger effects of 30 percent or more for the most energy intensive industries
Taxes and International Risk Sharing
Authors: Epstein Brendan , Mukherjee Rahul , Ramnath Shanthi
Published: August 2019

We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.
Estimating U.S. Cross-Border Securities Positions: New Data and New Methods
Authors: Bertaut Carol C. , Judson Ruth A.
Published: August 2019

The role of capital flows in the buildup to the global financial crisis and the potential vulnerabilities posed by capital flows to emerging market economies highlight the importance of reliable and timely measures of cross-border investment activity to better monitor developments as they unfold. We present new monthly estimates of U.S. cross-border securities investment, combining information from detailed annual Treasury International Capital (TIC) surveys with new information from the TIC form SLT. We also show how changes in the new monthly data can be decomposed into flows, estimated valuation changes, and a residual &amp;quot;gap&amp;quot;. These decompositions can provide a richer and timelier view of developments in both foreign portfolio investment in the U.S. and U.S. portfolio investment abroad than available from transactions data or survey data alone. Data on cross-border holdings through December 2013, by country, are available for download; we also provide advice on how to construct estimates going forward. These data can be combined with the existing Bertaut-Tryon monthly estimates of securities holdings (now updated through 2011) to generate consistent monthly time series of positions.
Financial Business Cycles
Authors: Iacoviello Matteo
Published: August 2019

Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.
Bank Interventions and Options-Based Systemic Risk: Evidence from the Global and Euro-Area Crisis
Authors: Londono Juan M. , Tian Mary
Published: August 2019

Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP.
Banks, Capital Flows and Financial Crises
Authors: Akinci Özge , Queralto Albert
Published: August 2019

This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks&amp;#x27; precautionary equity issuance makes financial crises infrequent events occurring along with &amp;quot;regular&amp;quot; business cycle fiuctuations. We show that an episode of capital inflows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks&amp;#x27; balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare.
Generating Options-Implied Probability Densities to Understand Oil Market Events
Authors: Datta Deepa Dhume , Londono Juan M. , Ross Landon J.
Published: August 2019

We investigate the informational content of options-implied probability density functions (PDFs) for the future price of oil. Using a semiparametric variant of the methodology in Breeden and Litzenberger (1978), we investigate the fit and smoothness of distributions derived from alternative PDF estimation methods, and develop a set of robust summary statistics. Using PDFs estimated around episodes of high geopolitical tensions, oil supply disruptions, and macroeconomic data releases, we explore the extent to which oil price movements are expected or unexpected, and whether agents believe these movements to be persistent or temporary.