http://www.bis.org/cbhub/list/country/country_united states/index.rss Latest research hub papers from United States en http://research.stlouisfed.org/wp/2012/2012-012.pdf St Louis Fed Working Papers by David Andolfatto and Fernando M. Martin Information Disclosure and Exchange Media 2012-04-27T06:25:00Z When commitment is lacking, intertemporal trade is facilitated with the use of exchange media-interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset's property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including fiat money. When lump-sum taxation is not permitted, fiat money may still improve welfare-but only if its circulation is supported by a cash-in-advance constraint. Information Disclosure and Exchange Media 2012-04-27T06:25:00Z Abstract http://research.stlouisfed.org/wp/more/2012-012 Full text http://research.stlouisfed.org/wp/2012/2012-012.pdf Fernando M. Martin David Andolfatto David Andolfatto and Fernando M. Martin 2012-04 St Louis Fed Working Papers http://research.stlouisfed.org/wp/2012/2012-013.pdf St Louis Fed Working Papers by Michael T. Owyang, Jeremy M. Piger, and Howard J. Wall Forecasting National Recessions Using State Level Data 2012-04-27T06:25:00Z A large literature studies the information contained in national-level economic indicators, such as financial and aggregate economic activity variables, for forecasting U.S. business cycle phases (expansions and recessions.) In this paper, we investigate whether there is additional information regarding business cycle phases contained in subnational measures of economic activity. Using a probit model to predict the NBER expansion and recession classification, we assess the forecasting benefits of adding state-level employment growth to a common list of national-level predictors. As state-level data adds a large number of variables to the model, we employ a Bayesian model averaging procedure to construct forecasts. Based on a variety of forecast evaluation metrics, we find that including state-level employment growth substantially improves short-horizon forecasts of the business cycle phase. The gains in forecast accuracy are concentrated during months of national recession. Posterior inclusion probabilities indicate substantial uncertainty regarding which states belong in the model, highlighting the importance of the Bayesian model averaging approach. Forecasting National Recessions Using State Level Data 2012-04-27T06:25:00Z Abstract http://research.stlouisfed.org/wp/more/2012-013 Full text http://research.stlouisfed.org/wp/2012/2012-013.pdf Michael T. Owyang Jeremy M. Piger Howard J. Wall Michael T. Owyang, Jeremy M. Piger, and Howard J. Wall 2012-04 St Louis Fed Working Papers C52 C53 E32 E37 http://www.newyorkfed.org/research/current_issues/ci18-3.pdf New York Fed Current issues by Paul J Santoro The Evolution of Treasury Cash Management during the Financial Crisis 2012-04-27T06:23:59Z The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship, each helping the other to carry out certain statutory responsibilities. This relationship proved beneficial during the 2008-09 financial crisis, when the Treasury altered its cash management practices to facilitate the Fed's dramatic expansion of credit to banks, primary dealers, and foreign central banks. The Evolution of Treasury Cash Management during the Financial Crisis 2012-04-27T06:23:59Z Abstract http://www.newyorkfed.org/research/current_issues/ci18-3.html Full text http://www.newyorkfed.org/research/current_issues/ci18-3.pdf Paul J Santoro Paul J Santoro 2012-04-26 New York Fed Current issues http://www.newyorkfed.org/research/epr/12v18n1/1203morg.pdf New York Fed Economic policy review by Donald P. Morgan, Benjamin Iverson and Matthew Botsch Subprime Foreclosures and the 2005 Bankruptcy Reform 2012-04-14T06:23:00Z This article presents arguments and evidence suggesting that the bankruptcy abuse reform (BAR) of 2005 may have been one contributor to the destabilizing surge in subprime foreclosures. Before BAR took effect, overly indebted borrowers could file bankruptcy to free up income to pay their mortgage by having their credit card and other unsecured debts discharged. BAR eliminated that option for better-off filers through a means test and other requirements, thus making it harder to save one's home by filing bankruptcy. By way of evidence, the authors show that the impact of BAR was greater in U.S. states where one would expect it to have a larger impact-namely, in states with high bankruptcy exemptions. Filers in low-exemption states were not very protected before BAR, so they were less likely to be affected by the reform. The authors estimate that for a state with an average home equity exemption, the subprime foreclosure rate after BAR rose 11 percent relative to average before the reform; given the number of subprime mortgages in the United States, that figure translates into 29,000 additional subprime foreclosures per quarter nationwide attributable to BAR. Subprime Foreclosures and the 2005 Bankruptcy Reform 2012-04-14T06:23:00Z Abstract http://www.newyorkfed.org//www.newyorkfed.org/research/epr/12v18n1/1203morg.html Full text http://www.newyorkfed.org/research/epr/12v18n1/1203morg.pdf Donald P. Morgan Matthew Botsch Benjamin Iverson Donald P. Morgan, Benjamin Iverson and Matthew Botsch 2012-03 New York Fed Economic policy review http://www.newyorkfed.org/research/epr/12v18n1/1203mart.pdf New York Fed Economic policy review by Morten Bech, Antoine Martin and James McAndrews Settlement Liquidity and Monetary Policy Implementation -- Lessons from the Financial Crisis 2012-04-14T06:23:00Z The U.S. dollar clearing and settlement system received little attention during the recent financial crisis, mainly because it performed reliably, processing record volumes and values of trades made in stressed financial markets. This article shows how Federal Reserve policy measures aimed at providing liquidity and stability to the financial system during and after the crisis had a major impact on settlement liquidity and thus on the efficiency of clearing and settlement system activity. The measures led to a substantial decrease in daylight overdrafts extended by the Federal Reserve and a quickening of settlement relative to the precrisis period. The decrease in daylight overdrafts reduced credit risk for the Federal Reserve and the earlier time at which payments settled suggests important efficiency gains as well as diminished operational risks. Interestingly, both improvements were the focus of the revisions to the Federal Reserve's Payment System Risk policy, adopted in late 2008 and implemented in March 2011. To a large extent, the desired outcome had been achieved ahead of the policy change. The authors explain that as the amount of reserves available to the banking system and the opportunity cost of holding such reserves are at the center of any framework for implementing monetary policy, the recent experience offers important lessons for policy going forward. Settlement Liquidity and Monetary Policy Implementation -- Lessons from the Financial Crisis 2012-04-14T06:23:00Z Abstract http://www.newyorkfed.org/research/epr/12v18n1/1203mart.html Full text http://www.newyorkfed.org/research/epr/12v18n1/1203mart.pdf Morten L. Bech Antoine Martin James McAndrews Morten Bech, Antoine Martin and James McAndrews 2012-03 New York Fed Economic policy review http://www.newyorkfed.org/research/epr/12v18n1/1203flem.pdf New York Fed Economic policy review by Michael J. Fleming and Neel Krishnan The Microstructure of the TIPS Market 2012-04-14T06:23:00Z The potential advantages from the introduction of Treasury inflation-protected securities (TIPS) in 1997 have not been fully realized, mainly because TIPS are less liquid than nominal Treasury securities. The lack of liquidity is thought to adversely affect TIPS prices relative to prices of nominal securities, offsetting the benefits that come from TIPS having no inflation risk. Despite the importance of TIPS liquidity and the market's large size, there is virtually no quantitative evidence on the securities' liquidity. This article sheds light on this phenomenon using novel tick data from the interdealer market. The authors identify several features of the TIPS market also present in the nominal securities market, but some unique features as well. As in the nominal market, there is a marked difference in trading activity between the most recently issued ("on-the-run") and previously issued ("off-the-run") securities, as trading drops sharply when securities go off the run. In contrast to the nominal market, there is little difference in bid-ask spreads or quoted depth between these securities, but there is a difference in the incidence of posted quotes. These results suggest that trading activity and quote incidence may be better cross-sectional measures of liquidity in the TIPS market than bid-ask spreads or quoted depth. Intraday patterns of trading activity are broadly similar in both markets, but TIPS activity peaks somewhat later, likely reflecting differences in the use and ownership of these securities. Announcement effects also differ between markets, with TIPS auction results and CPI releases eliciting particularly strong increases in trading activity, likely indicating these announcements' special importance to TIPS valuation. The Microstructure of the TIPS Market 2012-04-14T06:23:00Z Abstract http://www.newyorkfed.org/research/epr/12v18n1/1203flem.html Full text http://www.newyorkfed.org/research/epr/12v18n1/1203flem.pdf Michael J. Fleming Neel Krishnan Michael J. Fleming and Neel Krishnan 2012-03 New York Fed Economic policy review http://www.newyorkfed.org/research/current_issues/ci18-2.pdf New York Fed Current issues by Carlos Carvalho, Stefano Eusepi and Christian Grisse Did monetary and fiscal expansions help stabilize expectations during the Great Recession? 2012-04-14T06:23:00Z The global recession of 2008-09 led to monetary and fiscal policy responses by central banks and government authorities that were often unconventional in size and scope. A study of expansionary measures employed during the recession suggests that overall, the policies were likely effective in shaping the outlook for a recovery, as forecasters raised their expectations of inflation and GDP growth after the policies' implementation. From this perspective, the policies stimulated economic activity and prevented deflationary pressures during the financial crisis. Did monetary and fiscal expansions help stabilize expectations during the Great Recession? 2012-04-14T06:23:00Z Abstract http://www.newyorkfed.org/research/current_issues/ci18-2.html Full text http://www.newyorkfed.org/research/current_issues/ci18-2.pdf Carlos Carvalho Christian Grisse Stefano Eusepi Carlos Carvalho, Stefano Eusepi and Christian Grisse 2012-02-23 New York Fed Current issues http://research.stlouisfed.org/wp/2012/2012-011.pdf St Louis Fed Working Papers by André Kurmann and Christopher Otrok News Shocks and the Slope of the Term Structure of Interest Rates 2012-04-11T17:38:59Z We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). We confirm this interpretation formally by identifying a TFP news shock following recent work by Barsky and Sims (2011). By showing that the 'slope shock' and the 'TFP news shock' are closely related, we provide a new explanation for the relationship between the slope of the term structure and macroeconomic fundamentals and for why the yield curve is one of the most reliable predictors of future economic growth. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance. News Shocks and the Slope of the Term Structure of Interest Rates 2012-04-11T17:38:59Z Abstract http://research.stlouisfed.org/wp/more/2012-011 Full text http://research.stlouisfed.org/wp/2012/2012-011.pdf André Kurmann Christopher Otrok André Kurmann and Christopher Otrok 2012-04 St Louis Fed Working Papers http://richmondfed.org/publications/research/working_papers/2012/pdf/wp12-02.pdf Richmond Fed Working Papers by Luca Benati, Thomas A. Lubik Sales, Inventories, and Real Interest Rates: A Century of Stylized Facts 2012-04-11T06:23:59Z We use Bayesian time-varying parameters structural VARs with stochastic volatility to investigate changes in both the reduced-form and the structural correlations between business inventories and either sales growth or the real interest rate in the United States during both the interwar and the post-WWII periods. We identify four structural shocks by combining a single long-run restriction to identify a permanent output shock as in Blanchard and Quah (1989), with three sign restrictions to identify demand- and supply-side transitory shocks. We produce several new stylized facts which should inform the development of new models of inventories. In particular, we show that (i) during both the interwar and the post-WWII periods, the structural correlation between inventories and the real interest rate conditional on identified interest rate shocks is systematically positive; (ii) the reduced-form correlation between the two series is positive during the post-WWII period, but in line with the predictions of theory it is robustly negative during the interwar era; and (iii) during the interwar era, the correlations between inventories and either of the two other series exhibits a remarkably strong co-movement with output at the business-cycle frequencies. Sales, Inventories, and Real Interest Rates: A Century of Stylized Facts 2012-04-11T06:23:59Z Abstract http://richmondfed.org/publications/research/working_papers/2012/wp_12-02.cfm Full text http://richmondfed.org/publications/research/working_papers/2012/pdf/wp12-02.pdf Luca Benati Thomas A. Lubik Luca Benati, Thomas A. Lubik 2012-04 Richmond Fed Working Papers C11 C32 E32 http://research.stlouisfed.org/wp/2012/2012-010.pdf St Louis Fed Working Papers by Piyusha Mutreja, B. Ravikumar, Raymond Riezman, and Michael J. Sposi Price Equalization Does Not Imply Free Trade 2012-04-11T06:23:59Z In this paper we show that price equalization alone is not sufficient to establish that there are no barriers to international trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. Therefore, in order to make statements about trade barriers it is necessary to know the trade flows. We demonstrate this first in a simple two-country model. We then extend the result to a multi-country model with two sectors. We show that for the case of capital goods trade, barriers have to be large in order to be consistent with the observed trade flows. Our model also implies that capital goods prices look similar across countries, an implication that is consistent with data. Zero barriers to trade in capital goods will deliver price equalization in capital goods, but cannot reproduce the observed trade flows in our model. Price Equalization Does Not Imply Free Trade 2012-04-11T06:23:59Z Abstract http://research.stlouisfed.org/wp/more/2012-010 Full text http://research.stlouisfed.org/wp/2012/2012-010.pdf B. Ravikumar Michael J. Sposi Raymond Riezman Piyusha Mutreja Piyusha Mutreja, B. Ravikumar, Raymond Riezman, and Michael J. Sposi 2012-04 St Louis Fed Working Papers http://research.stlouisfed.org/wp/2012/2012-009.pdf St Louis Fed Working Papers by YiLi Chien and Kanda Naknoi The Risk Premium and Long-Run Global Imbalances 2012-04-11T06:23:59Z Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of the US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future. The Risk Premium and Long-Run Global Imbalances 2012-04-11T06:23:59Z Abstract http://research.stlouisfed.org/wp/more/2012-009 Full text http://research.stlouisfed.org/wp/2012/2012-009.pdf Kanda Naknoi YiLi Chien YiLi Chien and Kanda Naknoi 2012-03 St Louis Fed Working Papers E21 F32 F41 G12 http://www.minneapolisfed.org/research/wp/WP697.pdf Minneapolis Fed Working Papers by Greg Kaplan, Sam Schulhofer-Wohl Understanding the Long-Run Decline in Interstate Migration 2012-04-05T06:23:00Z Understanding the Long-Run Decline in Interstate Migration 2012-04-05T06:23:00Z Full text http://www.minneapolisfed.org/research/wp/WP697.pdf Sam Schulhofer-Wohl Greg Kaplan Greg Kaplan, Sam Schulhofer-Wohl 2012-04 Minneapolis Fed Working Papers D83 J11 J24 J61 R12 R23 http://research.stlouisfed.org/wp/2012/2012-008.pdf St Louis Fed Working Papers by Deniz Erdemlioglu, Sébastien Laurent, and Christopher J. Neely Econometric Modeling of Exchange Rate Volatility and Jumps 2012-04-04T06:25:00Z This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information about periodic volatility patterns and macroeconomic announcements in their calculations. This article details these volatility and jump estimation methods, compares those methods empirically and provides some suggestions for further research. Econometric Modeling of Exchange Rate Volatility and Jumps 2012-04-04T06:25:00Z Abstract http://research.stlouisfed.org/wp/more/2012-008 Full text http://research.stlouisfed.org/wp/2012/2012-008.pdf Deniz Erdemlioglu Christopher J. Neely Sébastien Laurent Deniz Erdemlioglu, Sébastien Laurent, and Christopher J. Neely 2012-04 St Louis Fed Working Papers C13 C14 C58 F31 http://research.stlouisfed.org/wp/2012/2012-007.pdf St Louis Fed Working Papers by Subhayu Bandyopadhyay, Dustin Chambers, and Jonathan Munemo Foreign Aid, Illegal Immigration, and Host Country Welfare 2012-03-27T06:23:59Z This paper analyzes the effect of foreign aid on illegal immigration and host country welfare using a general equilibrium model. We show that foreign aid may worsen the recipient nation's terms of trade. Furthermore, it may also raise illegal immigration, if the terms of trade effect on immigration flows dominates the other effects identified in our analysis. Empirical analysis of the effect of foreign aid on illegal immigration to the United States broadly supports the predictions of our theoretical model. Foreign aid worsens the recipient's terms of trade. While the terms of trade effect tends to reduce illegal immigration, countervailing effects are found to dominate. The paper contributes to the related literature by establishing that there are unintended consequences of foreign aid, and, while some of them are reminiscent of the classical transfer problem, others are new and arise due to endogenous illegal immigration flows. Foreign Aid, Illegal Immigration, and Host Country Welfare 2012-03-27T06:23:59Z Abstract http://research.stlouisfed.org/wp/more/2012-007 Full text http://research.stlouisfed.org/wp/2012/2012-007.pdf Subhayu Bandyopadhyay Dustin Chambers Jonathan Munemo Subhayu Bandyopadhyay, Dustin Chambers, and Jonathan Munemo 2012-03 St Louis Fed Working Papers F1 F35 O1 http://richmondfed.org/publications/research/working_papers/2012/pdf/wp12-01.pdf Richmond Fed Working Papers by Juan Carlos Hatchondo, Leonardo Martinez, Francisco Roch Fiscal Rules and the Sovereign Default Premium 2012-03-26T17:38:59Z We find the optimal target values for fiscal rules and measure their aggregate effects using a model of sovereign default. We calibrate the model to an economy that pays a significant sovereign default premium when the government is not constrained by fiscal rules. For different levels of the default premium, we find that a government with a debt of 38 percent of trend income (typical in the case studied here) chooses to commit to a debt ceiling of 30 percent of trend income that starts being enforced four years after its announcement. This rule generates expectations of lower future indebtedness, and thus it allows the government to borrow at interest rates significantly lower than the ones it pays without a rule. We also study the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by the existence of a fiscal rule. In this case, the government is found to choose instead a debt ceiling of 25 percent of trend income that starts being enforced less than two years after its announcement. After the imposition of the debt ceiling, lower debt levels allow the government to implement a less procyclical fiscal policy that reduces consumption volatility. However, the government prefers a procyclical debt ceiling that implies a larger reduction of the default probability at the expense of a higher consumption volatility. Fiscal Rules and the Sovereign Default Premium 2012-03-26T17:38:59Z Abstract http://richmondfed.org/publications/research/working_papers/2012/wp_12-01.cfm Full text http://richmondfed.org/publications/research/working_papers/2012/pdf/wp12-01.pdf Francisco Roch Leonardo Martinez Juan Carlos Hatchondo Juan Carlos Hatchondo, Leonardo Martinez, Francisco Roch 2012-03 Richmond Fed Working Papers F34 F41 http://www.federalreserve.gov/pubs/ifdp/2012/1045/ifdp1045.pdf Board of Governors of the Federal Reserve System International Financial Discussion Papers by Tara Rice and Jonathan Rose When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover 2012-03-24T06:23:00Z 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. When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover 2012-03-24T06:23:00Z Abstract http://www.federalreserve.gov/pubs/ifdp/2012/1045/default.htm Full text http://www.federalreserve.gov/pubs/ifdp/2012/1045/ifdp1045.pdf Tara Rice Jonathan Rose Tara Rice and Jonathan Rose 2012-03-23 Board of Governors of the Federal Reserve System International Financial Discussion Papers E61 G21 G28 http://www.frbatlanta.org/documents/pubs/wp/wp1205.pdf Atlanta Fed Working papers by R. Anton Braun, Lena Mareen Körber, and Yuichiro Waki Some Unpleasant Properties of Log-Linearized Solutions When the Nominal Rate Is Zero 2012-03-23T17:38:59Z A growing body of recent research examines the nonlinearity created by a zero lower bound on the nominal interest rate. It is common practice in the literature to log-linearize the other equilibrium restrictions around a deterministic steady state with a stable price level. This paper shows that the resulting log-linearized equilibria can have some very unpleasant properties. We make this point using a tractable stochastic New Keynesian model that admits an exact solution. We characterize the log-linearized equilibrium. This characterization is highly misleading. Using the log-linearized equilibrium conditions gives incorrect results about existence and uniqueness of equilibrium and provides an incorrect classification of the types of zero-bound equilibria that can arise in the true economy. These problems are severe. For instance, using empirically relevant parameterizations of the model labor falls in response to a tax cut in the log-linearized economy but rises in the true nonlinear economy. Some Unpleasant Properties of Log-Linearized Solutions When the Nominal Rate Is Zero 2012-03-23T17:38:59Z Abstract http://www.frbatlanta.org/pubs/wp/12_05.cfm Full text http://www.frbatlanta.org/documents/pubs/wp/wp1205.pdf R. Anton Braun Yuichiro Waki Lena Mareen Körber R. Anton Braun, Lena Mareen Körber, and Yuichiro Waki 2012-03-23 Atlanta Fed Working papers E12 E50 E62 H30 http://www.federalreserve.gov/pubs/ifdp/2012/1044/ifdp1044.pdf Board of Governors of the Federal Reserve System International Financial Discussion Papers by John Ammer, Sara B. Holland, David C. Smith, and Francis E. Warnock U.S. International Equity Investment 2012-03-23T17:38:00Z U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show that our firm-level analysis has implications for country-level studies, suggesting that research investigating equity investment patterns at the country-level should include cross-listing as an endogenous control variable. We describe easy-to-implement methods for including the importance of cross-listing at the country level. U.S. International Equity Investment 2012-03-23T17:38:00Z Abstract http://www.federalreserve.gov/pubs/ifdp/2012/1044/default.htm Full text http://www.federalreserve.gov/pubs/ifdp/2012/1044/ifdp1044.pdf David C. Smith Sara B. Holland Francis E. Warnock John Ammer John Ammer, Sara B. Holland, David C. Smith, and Francis E. Warnock 2012-03-19 Board of Governors of the Federal Reserve System International Financial Discussion Papers C35 F21 G11 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0111.pdf Dallas Fed Institute Working Papers by Michele Ca' Zorzi, Alexander Chudik and Alistair Dieppe The Perils of Aggregating Foreign Variables in Panel Data Models 2012-03-22T12:39:59Z Abstract: The curse of dimensionality refers to the difficulty of including all relevant variables in empirical applications due to the lack of sufficient degrees of freedom. A common solution to alleviate the problem in the context of open economy models is to aggregate foreign variables by constructing trade-weighted cross-sectional averages. This paper provides two key contributions in the context of static panel data models. The first is to show under what conditions the aggregation of foreign variables (AFV) leads to consistent estimates (as the time dimension T is fixed and the cross section dimension N ? 8). The second is to design a formal test to assess the admissibility of the AFV restriction and to evaluate the small sample properties of the test by undertaking Monte Carlo experiments. Finally, we illustrate an application in the context of the current account empirical literature where the AFV restriction is rejected. The Perils of Aggregating Foreign Variables in Panel Data Models 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0111.pdf Alexander Chudik Michele Ca' Zorzi Alistair Dieppe Michele Ca' Zorzi, Alexander Chudik and Alistair Dieppe 2012-03 Dallas Fed Institute Working Papers C12 C31 C33 F41 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0109.pdf Dallas Fed Institute Working Papers by Saroj Bhattarai, Jae Won Lee and Woong Yong Park Policy Regimes, Policy Shifts, and U.S. Business Cycles 2012-03-22T12:39:59Z Abstract: Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy which resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post- Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred. Policy Regimes, Policy Shifts, and U.S. Business Cycles 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0109.pdf Woong Yong Park Jae Won Lee Saroj Bhattarai Saroj Bhattarai, Jae Won Lee and Woong Yong Park 2012-03 Dallas Fed Institute Working Papers C52 E31 E32 E52 E63 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0108.pdf Dallas Fed Institute Working Papers by Mario J. Crucini and Anthony Landry Accounting for Real Exchange Rates Using Micro-Data 2012-03-22T12:39:59Z Abstract: The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by nontraded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and nontraded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value. Accounting for Real Exchange Rates Using Micro-Data 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0108.pdf Mario J. Crucini Anthony Landry Mario J. Crucini and Anthony Landry 2012-03 Dallas Fed Institute Working Papers F4 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0104.pdf Dallas Fed Institute Working Papers by Optimal Monetary Policy in a Two Country Model with Firm-Level Heterogeneity Optimal Monetary Policy in a Two Country Model with Firm-Level Heterogeneity 2012-03-22T12:39:59Z Abstract: This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation. Optimal Monetary Policy in a Two Country Model with Firm-Level Heterogeneity 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0104.pdf Dudley Cooke Dudley Cooke 2012-03 Dallas Fed Institute Working Papers E31 E52 F41 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0107.pdf Dallas Fed Institute Working Papers by Alexander Chudik and Marcel Fratzscher Liquidity, Risk and the Global Transmission of the 2007-08 Financial Crisis and the 2010-11 Sovereign Debt Crisis Title 2012-03-22T12:39:59Z Abstract: The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a fight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. Liquidity, Risk and the Global Transmission of the 2007-08 Financial Crisis and the 2010-11 Sovereign Debt Crisis Title 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0107.pdf Alexander Chudik Marcel Fratzscher Alexander Chudik and Marcel Fratzscher 2012-03 Dallas Fed Institute Working Papers C5 E44 F3 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0110.pdf Dallas Fed Institute Working Papers by Enrique Alberola, Aitor Erce Bank and José Maria Serena International Reserves and Gross Capital Flows: Dynamics During Financial Stress 2012-03-22T12:39:59Z Abstract: This paper explores the role of international reserves as a stabilizer of international capital flows during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database using event analyses and standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves are useful during financial stress. International reserves facilitate financial disinvestment overseas by residents, offsetting the simultaneous drop in foreign financing. International Reserves and Gross Capital Flows: Dynamics During Financial Stress 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0110.pdf Enrique Alberola José Maria Serena Aitor Erce Bank Enrique Alberola, Aitor Erce Bank and José Maria Serena 2012-03 Dallas Fed Institute Working Papers F21 F32 F33 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0112.pdf Dallas Fed Institute Working Papers by Alexander Chudik A Simple Model of Price Dispersion 2012-03-22T12:39:59Z Abstract: This article considers a simple stock-flow matching model with fully informed market participants. Unlike in the standard matching literature, prices are assumed to be set ex-ante. When sellers pre-commit themselves to sell their products at an advertised price, the unique equilibrium is characterized by price dispersion due to the idiosyncratic match payoffs (in a marketplace with full information). This provides new insights into the price dispersion literature, where price dispersion is commonly assumed to be generated by a costly search of uninformed buyers. A Simple Model of Price Dispersion 2012-03-22T12:39:59Z Full text http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0112.pdf Alexander Chudik Alexander Chudik 2012-03 Dallas Fed Institute Working Papers C78 D43