bluuebunny/crossref_metadata_2025 huggingface dataset:
Loans to Japanese Borrowers
Authors: Smith David C.
Published: August 2019

This paper examines the characteristics of loans to Japanese borrowers using a relatively unexplored, contract-specific data set. I find that Japanese banks charge less on loans to Japanese borrowers than do foreign banks, holding constant many of the risk characteristics of the borrower. Moreover, Japanese banks vary pricing less across these risks than do foreign banks, suggesting that Japanese banks tend not to distinguish good risks from bad. Taken together, the results suggest that problems at Japanese banks stem from the behavior of the banks themselves, not simply from poor economic conditions. I also document a significant shortening in the maturity structure of Japanese loans in the late 1990s.
How do Canadian Hours Worked Respond to a Technology Shock?
Authors: Christiano Lawrence J. , Eichenbaum Martin S. , Vigfusson Robert J.
Published: August 2019

This paper investigates the response of hours worked to a permanent technology shock. Based on annual data from Canada, we argue that hours worked rise after a positive technology shock. We obtain a similar result using annual data from the United States. These results contradict a large literature that claims that a positive technology shock causes hours worked to fall. We find that the different results are due to the literature making a specification error in the statistical model of per capital hours worked. Finally, we present results that Canadian monetary policy has accommodated technology shocks.
Revisiting the Border: An Assessment of the Law of One Price Using Very Disaggregated Consumer Price Data
Authors: Engel Charles , Rogers John Harold , Wang Shing-Yi
Published: August 2019

We reexamine the evidence for border effects in deviations from the law of one price, using data for consumer prices from Canadian and U.S. cities. The study parallels Engel and Rogers (1996), except that this study uses actual price data rather than price index data. We find evidence of border effects both in the levels of prices and the percentage change in prices. Even accounting for distance between cities and relative population sizes, we find that the absolute difference between prices in the U.S. and Canada in our data (annual from 1990 to 2002) is greater than seven percent. This difference exists among tradables and nontradables, though for some categories of tradables (clothing and durables) the difference is smaller. The findings are similar for annual changes, though the magnitude is smaller: the border accounts for a difference in 1.5 percent in annual (log) price changes. Relative population sizes and distance are helpful in explaining price level differences (between Canadian and U.S. cities) for traded goods, but are less helpful in explaining price level differences for nontraded goods or for accounting for differences in price changes for either traded or nontraded goods.
The Effect of Exchange Rate Fluctuations on Multinationals' Returns
Authors: Ihrig Jane , Prior David
Published: August 2019

This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates. All told, we find about 1 in 4 firms' returns is significantly affected by movement in the exchange rate between 1995 and 1999.
Market Power and Inflation
Authors: Bowman David
Published: August 2019

This paper examines the extent to which a decline in market power could have contributed to the general decline in inflation rates experienced in developed countries during the 1990s.
Breaks in the Variability and Co-Movement of G-7 Economic Growth
Authors: Doyle Brian M. , Faust Jon
Published: August 2019

This paper investigates breaks in the variability and co-movement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on co-movement, we test for changes in co-movement allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the members of the euro area in the G-7.
How Does the Border Affect Productivity? Evidence from American and Canadian Manufacturing Industries
Authors: Vigfusson Robert J.
Published: August 2019

This study reports on how much productivity fluctuations are industry specific versus country specific. For the manufacturing industries in Canada and the United States, the correlation between cross-border pairings of the same industry are found to be more often highly correlated than previously thought. Furthermore, the study confirms earlier findings that the similarity of input use can help describe the comovement of productivity fluctuations across industries.
International Diversification at Home and Abroad
Authors: Cai Fang , Warnock Francis E.
Published: August 2019

We analyze foreigners' and domestic institutional investors' holdings of U.S. equities and find common preferences for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of 'foreign' equities in U.S. portfolios doubles to 24 percent, greatly reducing the observed home bias.
International Diversification at Home and Abroad
Authors: Cai Fang , Warnock Francis E.
Published: August 2019

We analyze foreigners' and domestic institutional investors' positions in U.S. equities. Controlling for many factors, we uncover a common preference for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of 'foreign' equities in investors' portfolios nearly doubles, reducing (but not eliminating) the observed home bias.
Price-level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
Authors: Alstadheim Ragna , Henderson Dale W.
Published: August 2019

We consider monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There may also be below-target equilibria (BTE) with inflation always below target and constant, asymptotically approaching or eventually reaching a below-target value, or oscillating. Liquidity traps are neither necessary nor sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary rules that preclude BTE when fiscal policy does not. Plausible fiscal policies preclude BTE for any monetary policy; those policies exclude surpluses and, possibly, balanced budgets.
Sand in the Wheels of the Labor Market: The Effect of Firing Costs on Employment
Authors: De Michelis Andrea
Published: August 2019

This paper examines the effects of firing costs in a dynamic general equilibrium model where firms face stochastic demand. It derives analytically two simple closed-form equations, one for the supply of labor, the other for its demand. These equations determine the comparative static effects of changes in firing costs on the labor market. When negative shocks are more likely to occur than positive shocks, and when the frequency of these shocks is high, firing costs have a substantial negative impact on aggregate employment. In addition, product market integration, as it has occurred in the formation of the European Union, induces firms to be more wary of future possible downturns and therefore intensifies the negative consequences of firing costs.
The Great Inflation of the 1970s
Authors: Collard Fabrice , Dellas Harris
Published: August 2019

Was the high inflation of the 1970s mostly due to incomplete information about the structure of the economy (an unavoidable mistake as suggested by Orphanides, 2000)? Or, to weak reaction to expected inflation and/or excessive policy activism that led to indeterminacies (a policy mistake, a scenario suggested by Clarida, Gali and Gertler, 2000)? We study this question within the NNS model with policy commitment and imperfect information, requiring that the model have satisfactory overall empirical performance. We find that both explanations do a good job in accounting for the great inflation. Even with the commonly used specification of the interest policy rule, high and persistent inflation can occur following a significant productivity slowdown if policymakers significantly and persistently underestimate "core" inflation.
The Optimal Degree of Discretion in Monetary Policy
Authors: Athey Susan , Atkeson Andrew , Kehoe Patrick J.
Published: August 2019

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority discretion to react to its private information against society's need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none.
Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria
Authors: King Robert G. , Wolman Alexander L.
Published: August 2019

In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds.
Understanding the Effects of Government Spending on Consumption
Authors: Gali Jordi , López-Salido J. David , Vallés Javier
Published: August 2019

Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach
Authors: Benigno Pierpaolo , Woodford Michael
Published: August 2019

We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky (so that the supply-side effects of tax changes are more complex than in standard fiscal analyses) and the only available sources of government revenue are distorting taxes (so that the fiscal consequences of monetary policy must be considered alongside the usual stabilization objectives). Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, in addition to characterizing the optimal dynamic responses to shocks under an optimal policy, we derive policy rules through which the monetary and fiscal authorities may implement the optimal equilibrium. These take the form of optimal targeting rules, specifying an appropriate target criterion for each authority.
The Delayed Response To A Technology Shock: A Flexible Price Explanation
Authors: Vigfusson Robert J.
Published: August 2019

I present empirical evidence of how the U.S. economy, including per-capita hours worked, responds to a technology shock. In particular, I present results based on permanent changes to a constructed direct measure of technological change for U.S. manufacturing industries. Based on empirical evidence, some claim that hours worked declines and never recovers in response to a positive technology shock. This paper's empirical evidence suggests that emphasizing the drop in hours worked is misdirected. Because the sharp drop in hours is not present here, the emphasis rather should be on the small (perhaps negative) initial response followed by a subsequent large positive response. Investment, consumption, and output have similar dynamic responses. In response to a positive technology shock, a standard flexible price model would have an immediate increase in hours worked. Therefore, such a model is inconsistent with the empirical dynamic responses. I show, however, that a flexible price model with habit persistence in consumption and certain kinds of capital adjustment costs can better match the empirical responses. Some recent papers have critiqued the use of long run VARs to identify the dynamic responses to a technology shock. In particular they report that, when long run VARs are applied to data simulated from particular economic models, the point estimates of the impulse responses may be imprecisely estimated. However, based on additional simulation evidence, I find that, although the impact response may be imprecisely estimated, a finding of a delayed response is much more likely when the true model response also has a delayed response.
The ET Interview: Professor David F. Hendry
Authors: Ericsson Neil R.
Published: August 2019

This interview for Econometric Theory explores David Hendry's research. Issues discussed include estimation and inference for nonstationary time series; econometric methodology; strategies, concepts, and criteria for empirical modeling; the general-to-specific approach, as implemented in the computer packages PcGive and PcGets; computer-automated model selection procedures; David's textbook Dynamic Econometrics; Monte Carlo techniques (PcNaive); evaluation of these developments in simulation studies and in empirical investigations of consumer expenditure, money demand, inflation, and the housing and mortgage markets; economic forecasting and policy analysis; the history of econometric thought; and the use of computers for live empirical and Monte Carlo econometrics.
Does Monetary Policy Keep Up with the Joneses? Optimal Interest-Rate Smoothing with Consumption Externalities
Authors: Chugh Sanjay K.
Published: August 2019

Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that time-non-separable preferences may render interest-rate smoothing optimal. We find that when consumers have "catching-up-with-the-Joneses" preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustments in consumption. We also extend our basic model to investigate the effects of capital formation and nominal rigidities on the dynamics of optimal monetary policy. Optimal policy responses continue to be gradual in the presence of capital and sticky prices, with a size and speed that are in line with empirical findings for the U.S. economy. Our results emphasize that gradualism in monetary policy may be needed simply to guide the economy on an optimally smooth path.
The Performance of International Equity Portfolios
Authors: Thomas Charles P. , Warnock Francis E. , Wongswan Jon
Published: August 2019

This paper evaluates the performance of U.S. investors' portfolios in the equities of over 40 countries over a 25-year period. We find that these portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We uncover three potential reasons for this success. First, U.S. investors abstained from momentum trading and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, the documented preference for cross-listed and well-governed foreign firms appears to have served U.S. investors well. We conclude with a short discussion of the implications of our findings for the home bias literature.
What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities
Authors: Bertaut Carol C. , Kole Linda Sue
Published: August 2019

Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.
An Assessment of the Impact of Japanese Foreign Exchange Intervention: 1991-2004
Authors: Chaboud Alain P. , Humpage Owen F.
Published: August 2019

We analyze the short-term price impact of Japanese foreign exchange intervention operations between 1991 and 2004, using official data from Japan's Ministry of Finance. Over the period as a whole, we find some evidence of a modest "against the wind" effect, but interventions do not have value as a forecast that the exchange rate will move in a direction consistent with the operations. Interventions conducted between 1995 and 2002, which were large and infrequent, met with a much higher degree of success. For the most recent episode of intervention, in 2003 and 2004, despite the record size and frequency of the overall episode, it is difficult to statistically distinguish the pattern of exchange rate movements on intervention days from that of all the days in that particular subperiod, showing little effectiveness. Still, while the evidence of Japanese intervention effectiveness is modest overall, it appears to be stronger than that found using similar techniques for U.S. intervention operations conducted in the 1980s and 1990s.
International Risk-Sharing and the Transmission of Productivity Shocks
Authors: Corsetti Giancarlo , Dedola Luca , Leduc Sylvain
Published: August 2019

A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that a standard international business cycle model with incomplete asset markets augmented with distribution services can account quantitatively for these properties of real exchange rates. Distribution services, intensive in local inputs, drive a wedge between producer and consumer prices, thus lowering the impact of terms-of-trade changes on optimal agents' decisions. This reduces the price elasticity of tradables separately from assumptions on preferences. Two very different patterns of the international transmission of positive technology shocks generate the observed degree of risk-sharing: one associated with improving, the other with deteriorating terms of trade and real exchange rate. In both cases, large equilibrium swings in international relative prices magnify consumption risk due to country-specific shocks, running counter to risk sharing. Suggestive evidence on the effect of productivity changes in U.S. manufacturing is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements in response to supply shocks invariably foster international risk-pooling.
Investment-Specific and Multifactor Productivity in Multi-Sector Open Economies: Data and Analysis
Authors: Guerrieri Luca , Henderson Dale W. , Kim Jinill
Published: August 2019

In the last half of the 1990s, labor productivity growth rose in the U.S. and fell almost everywhere in Europe. We document changes in both capital deepening and multifactor productivity (MFP) growth in both the information and communication technology (ICT) and non-ICT sectors. We view MFP growth in the ICT sector as investment-specific productivity (ISP) growth. We perform simulations suggested by the data using a two-country DGE model with traded and nontraded goods. For ISP, we consider level increases and persistent growth rate increases that are symmetric across countries and allow for costs of adjusting capital-labor ratios that are higher in one country because of structural differences. ISP increases generate investment booms unless adjustment costs are too high. For MFP, we consider persistent growth rate shocks that are asymmetric. When such MFP shocks affect only traded goods (as often assumed), movements in `international' variables are qualitatively similar to those in the data. However, when they also affect nontraded goods (as suggested by the data), movements in some of the variables are not. To obtain plausible results for the growth rate shocks, it is necessary to assume slow recognition.
Optimal Inflation Persistence: Ramsey Taxation with Capital and Habits
Authors: Chugh Sanjay K.
Published: August 2019

Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets.
Order Flow and Exchange Rate Dynamics in Electronic Brokerage System Data
Authors: Berger David W. , Chaboud Alain P. , Chernenko Sergey V. , Howorka Edward , Iyer Raj S. Krishnasami , Liu David , Wright Jonathan H.
Published: August 2019

We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices.
A Flexible Finite-Horizon Identification of Technology Shocks
Authors: Francis Neville , Owyang Michael T. , Roush Jennifer E.
Published: August 2019

Recent empirical studies using infinite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long-run restrictions in Monte Carlo experiments. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its infinite horizon counterpart by producing less biased impulse responses and technology shocks that are more highly correlated with the technology shocks from the underlying model. We apply our identification to post-war U.S. data and find that the negative hours response is not robust to allowing a slightly greater role for non-technology shocks in the variance of productivity at long horizons. We conclude that restrictions aimed at isolating the dynamics of productivity beyond business cycle frequencies do not provide information sufficient to robustly predict short-run movements in labor hours.
Optimal Fiscal and Monetary Policy with Sticky Wages and Sticky Prices
Authors: Chugh Sanjay K.
Published: August 2019

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominal riskless debt, and money creation. One main result is that sticky wages alone make price stability optimal in the face of government spending shocks, to a degree quantitatively similar as sticky prices alone. With productivity shocks also present, optimal inflation volatility is higher, but still dampened relative to the fully-flexible economy. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. We also show that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Interestingly, a necessary condition for the ability to use the nominal interest rate for this purpose is positive producer profits. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of labor market imperfections that are widely-believed to be important.
SIGMA: A New Open Economy Model for Policy Analysis
Authors: Erceg Christopher J. , Guerrieri Luca , Gust Christopher J.
Published: August 2019

In this paper, we describe a new multi-country open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in policy simulations. We show that SIGMA's implications for the near-term responses of key variables are generally similar to those of FRB/Global. Nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization- based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework.
Estimating Elasticities for U.S. Trade in Services
Authors: Marquez Jaime R.
Published: August 2019

Explanations of the persistent deficit in U.S. net exports of goods rest on macroeconomic developments and an asymmetry in elasticities: the income elasticity for imports being larger than the income elasticity for exports. Such macroeconomic developments are not applicable to the equally persistent surplus in U.S. net exports of services unless the income elasticities for services exhibit the reversed asymmetry. There have been surprisingly few attempts to demonstrate the existence of this reversed asymmetry, a task that I undertake here. Specifically, I estimate income and price elasticities for U.S. trade in services and evaluate the importance of simultaneity and aggregation biases. The analysis reveals two findings. First, the income elasticity for U.S. exports of services is significantly greater than the income elasticity for U.S. imports of services. Second, disaggregation is the most important aspect of econometric design in this area.
Currency Crashes and Bond Yields in Industrial Countries
Authors: Gagnon Joseph E.
Published: August 2019

This paper examines episodes of sudden large exchange rate depreciations (currency crashes) in industrial countries and characterizes the behavior of government bond yields during and after these crashes. The most important determinant of changes in bond yields appears to be inflationary expectations. When inflation is high and rising at the time of a currency crash, bond yields tend to rise. Otherwise--and in every currency crash since 1985--bond yields tend to fall. Over the past 20 years, inflation rates have been remarkably stable in industrial countries after currency crashes.
House Prices and Monetary Policy: A Cross-Country Study
Authors: Ahearne Alan G. , Ammer John , Doyle Brian M. , Kole Linda Sue , Martin Robert F.
Published: August 2019

This paper examines periods of pronounced rises and falls of real house prices since 1970 in eighteen major industrial countries, with particular focus on the lessons for monetary policy. We find that real house prices are pro-cyclical--co-moving with real GDP, consumption, investment, CPI inflation, budget and current account balances, and output gaps. House price booms are typically preceded by a period of easing monetary policy, but then diminishing slack and rising inflation lead monetary authorities to begin tightening policy before house prices peak. In a careful reading of official reports, speeches, and minutes, we find little evidence that foreign central banks have reacted to past episodes of rising real house prices beyond taking into account their implications for inflation and output growth. However, central bankers have expressed a range of opinions in the more recent policy debate with some willing in certain cases to raise policy rates to try to stem current and future surges in asset prices while others favor moral suasion or a hands-off approach. Finally, we characterize the risks associated with house-price reversals. Although mortgage lenders in some countries have significant exposure to house prices, the balance of evidence suggests that this exposure does not, in and of itself, pose a significant risk to financial stability. Nevertheless, the co-movement of both property prices and default rates with the business cycle means that losses on mortgage lending are likely to be higher when banks' other lines of business are also performing poorly.
Accounting Standards and Information: Inferences from Cross-Listed Financial Firms
Authors: Ammer John , Clinton Nathanael , Nini Greg
Published: August 2019

Publicly traded financial firms within the European Union will be required to adhere to International Accounting Standards (IAS) in their financial reporting beginning in 2005, which can entail a higher degree of financial disclosure than was previously mandated under national accounting standards. A number of European financial firms had previously subjected themselves to additional disclosure by listing their stock on U.S. exchanges, which obligates them to reconcile their financial accounts to U.S. GAAP (Generally Accepted Accounting Principles). Among national accounting systems, U.S. GAAP is considered to be both among the strictest and the most similar to International Financial Reporting Standards (IFRS). To test whether U.S. GAAP reconciliation effectively enhances disclosure, we examine several measures of transparency for the cross-listed firms, relative both to pre-listing measures and to a control sample of firms that have not cross-listed. Our measures include bid-ask spreads, earnings forecast errors, analyst coverage, dispersion in earnings expectations, and disagreement between Moody's and S&amp;P;'s bond ratings. We find evidence that cross-listing increases transparency in at least some cases. Our cross-sectional results also distinguish a handful of European financial firms that had already adopted IFRS before the European Commission announced that IAS would be required in the near future, with results similar to those of the cross-listed firms. Accordingly, to the extent that commitment to increased transparency has been a motivation for cross-listing, the adoption of IAS in Europe may reduce the incentives for European firms to cross-list in the United States.
The Baby Boom: Predictability in House Prices and Interest Rates
Authors: Martin Robert F.
Published: August 2019

This paper explores the baby boom's impact on U.S. house prices and interest rates in the post-war 20th century and beyond. Using a simple Lucas asset pricing model, I quantitatively account for the increase in real house prices, the path of real interest rates, and the timing of low-frequency fluctuations in real house prices. The model predicts that the primary force underlying the evolution of real house prices is the systematic and predictable changes in the working age population driven by the baby boom. The model is calibrated to U.S. data and tested on international data. One surprising success of the model is its ability to predict the boom and bust in Japanese real estate markets around 1974 and 1990.
Fighting Against Currency Depreciation, Macroeconomic Instability and Sudden Stops
Authors: Zanna Luis-Felipe
Published: August 2019

In this paper we show that, in the aftermath of a currency crisis, a government that adjusts the nominal interest rate in response to domestic currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles. We find that, if a government raises the interest rate proportionally more than an increase in currency depreciation, then it induces selffulfilling cycles that, driven by people's expectations about depreciation, replicate several of the salient stylized facts of the "Sudden Stop" phenomenon. These facts include a decline in domestic production and aggregate demand, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods, an improvement in the current account deficit, a moderately higher CPI-inflation, more rapid currency depreciation, and higher nominal interest rates. In this sense, an interest rate policy that responds to depreciation may have contributed to generating the dynamic cycles experienced by some economies in the aftermath of a currency crisis.
The Adjustment of Global External Imbalances: Does Partial Exchange Rate Pass-Through to Trade Prices Matter?
Authors: Gust Christopher J. , Sheets D. Nathan
Published: August 2019

Recent papers have found evidence of a decline in exchange rate pass-through to import prices in the United States and in a number of other industrial countries as well. This paper examines the implications of a decline in pass-through for the prospective adjustment of global external imbalances. We find that a decline in pass-through to trade prices may mute the responsiveness of the nominal trade balance to shifts in the exchange rate, but that a decline in pass-through does not shut down nominal adjustment completely. We also find that the channels of adjustment vary with pass-through. When pass-through is high, nominal adjustment is driven by moves in trade quantities. When pass-through is low, nominal adjustment mainly reflects shifts in the terms of trade (i.e., export prices relative to import prices). Our work employs a forward-looking, optimizing model in which firms set their prices with an eye toward maintaining their competitiveness against other producers; this feature of the model generates a variable desired markup and, hence, exchange rate pass-through that is less than complete.
The Adjustment of Global External Balances: Does Partial Exchange Rate Pass-Through to Trade Prices Matter?
Authors: Gust Christopher J. , Sheets D. Nathan
Published: August 2019

This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop an open-economy DGE model in which firms set their prices with an eye toward maintaining their competitiveness against other producers; this feature of the model generates a variable desired markup and, hence, pass-through that is less than complete. With trade price elasticities of unity or greater, we find that for a given move in the exchange rate the nominal trade balance adjusts more when pass-through is high. However, an ofsetting consideration is that the exchange rate tends to be more sensitive to shocks in a low pass-through environment. We show that the relative importance of these considerations depends on the structural features of the economy, including the magnitude of the trade price elasticities and the sensitivity of private spending to shocks.
Exchange-Rate Pass-Through in the G-7 Countries
Authors: Ihrig Jane , Marazzi Mario , Rothenberg Alexander D.
Published: August 2019

This paper examines the current thinking on exchange-rate pass-through to both import prices and consumer prices and estimates the extent to which they have fallen in the G-7 countries since the late 1970s and 1980s. For import-price pass-through we find that all countries experience a numerical decline in the responsiveness of import prices to exchange-rate movements; for nearly half of these countries the decline between 1975-1989 and 1990-2004 is statistically significant. We estimate that while a 10 percent depreciation in the local currency would have increased import prices by nearly 7 percent on average across these countries in the late 1970s and 1980s, it would have only increased import prices by 4 percent in the last 15 years. The responsiveness of consumer prices to exchange-rate movements declines for nearly every country, with the decline being statistically significant for two countries. Specifically, while a 10 percent depreciation in the local currency would have increased consumer prices by almost 2 percent on average in the late 1970s and 1980s, it would have had a neutral effect on consumer prices in the last 15 years.
New Methods for Inference in Long-Run Predictive Regressions
Authors: Hjalmarsson Erik
Published: August 2019

I develop new asymptotic results for long-horizon regressions with overlapping observations. I show that rather than using auto-correlation robust standard errors, the standard t-statistic can simply be divided by the square root of the forecasting horizon to correct for the effects of the overlap in the data. Further, when the regressors are persistent and endogenous, the long-run OLS estimator suffers from the same problems as does the short-run OLS estimator, and similar corrections and test procedures as those proposed for the short-run case should also be used in the long-run. In addition, I show that under an alternative of predictability, long-horizon estimators have a slower rate of convergence than short-run estimators and their limiting distributions are non-standard and fundamentally different from those under the null hypothesis. These asymptotic results are supported by simulation evidence and suggest that under standard econometric specifications, short-run inference is generally preferable to long-run inference. The theoretical results are illustrated with an application to long-run stock-return predictability.
The U.S. Current Account Deficit and the Expected Share of World Output
Authors: Engel Charles , Rogers John Harold
Published: August 2019

We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S. current account deficit. Full paper (screen reader version)
What Drives Volatility Persistence in the Foreign Exchange Market?
Authors: Berger David W. , Chaboud Alain P. , Hjalmarsson Erik , Howorka Edward
Published: August 2019

We analyze the factors driving the widely-noted persistence in asset return volatility using a unique dataset on global euro-dollar exchange rate trading. We propose a new simple empirical specification of volatility, based on the Kyle-model, which links volatility to the information flow, measured as the order flow in the market, and the price sensitivity to that information. Through the use of high-frequency data, we are able to estimate the time-varying market sensitivity to information, and movements in volatility can therefore be directly related to movements in two observable variables, the order flow and the market sensitivity. The empirical results are very strong and show that the model is able to explain almost all of the long-run variation in volatility. Our results also show that the variation over time of the market's sensitivity to information plays at least as important a role in explaining the persistence of volatility as does the rate of information arrival itself. The econometric analysis is conducted using novel estimation techniques which explicitly take into account the persistent nature of the variables and allow us to properly test for long-run relationships in the data.
Trade Integration, Competition, and the Decline in Exchange-Rate Pass-Through
Authors: Gust Christopher J. , Leduc Sylvain , Vigfusson Robert J.
Published: August 2019

Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that a significant portion of this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which trade occurs along both the intensive and extensive margins. The key element we introduce into this environment is strategic complementarity in price setting. As a result, a firm's pricing decision depends on the prices set by its competitors. This feature implies that a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate.
Assessing Structural VARs
Authors: Christiano Lawrence J. , Eichenbaum Martin S. , Vigfusson Robert J.
Published: August 2019

This paper analyzes the quality of VAR-based procedures for estimating the response of the economy to a shock. We focus on two key issues. First, do VAR-based confidence intervals accurately reflect the actual degree of sampling uncertainty associated with impulse response functions? Second, what is the size of bias relative to confidence intervals, and how do coverage rates of confidence intervals compare with their nominal size? We address these questions using data generated from a series of estimated dynamic, stochastic general equilibrium models. We organize most of our analysis around a particular question that has attracted a great deal of attention in the literature: How do hours worked respond to an identified shock? In all of our examples, as long as the variance in hours worked due to a given shock is above the remarkably low number of 1 percent, structural VARs perform well. This finding is true regardless of whether identification is based on short-run or long-run restrictions. Confidence intervals are wider in the case of long-run restrictions. Even so, long-run identified VARs can be useful for discriminating among competing economic models.