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3301. Contagion: An Empirical Test

Author:
Jon Wongswan
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using the conditional Capital Asset Pricing Model (CAPM), this paper tests for the existence and pattern of contagion and capital market integration in global equity markets. Contagion is defined as significant excess conditional correlation among different countries' asset returns above what could be explained by economic fundamentals (systematic risks). Capital market integration is defined as the situation in which only systematic risks are priced. The paper uses a panel of sixteen countries, divided into three blocs: Asia, Latin America, and Germany-U.K.-U.S., for the period from 1990 through 1999. The results show evidence of contagion and capital market integration. In addition, contagion is found to be a regional phenomenon.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
United States, United Kingdom, Asia, Germany, and Latin America

3302. The USA and UNESCO: Building Knowledge, Building Cultures

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The United Nations Educational, Scientific and Cultural Organization, UNESCO, was founded after World War II to contribute to peace and security. Collaboration among nations through education, science and culture remains a cornerstone of a peaceful world order. The founders of UNESCO believed that the rule of law, respect for human rights, and freedom of expression would be strengthened through international cooperation. The need for the world community to renew its efforts to advance these principles has never been more urgent. American leadership in the service of peace and security can help mobilize multilateral institutions, including UNESCO, to stand up for common values that promote tolerance and thwart terrorism. The sanctity of human life must be a common commitment.
Topic:
International Relations, Treaties and Agreements, and United Nations
Political Geography:
United States

3303. News or Noise? An Analysis of Brazilian GDP Announcements

Author:
Rebeca de la Rocque Palis, Roberto Luis Olinto Ramos, and Patrice Robitaille
Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Revisions to GDP announcements in many countries are often large, and Faust, Rogers, and Wright (2003) have found that G-7 GDP revisions are predictable to varying degrees. In this paper, we extend FRW to study revisions to Brazilian GDP announcements. We document that revisions to Brazilian GDP are large relative to those of G-7 countries. Brazilian GDP revisions are also predictable, which is consistent with the view that GDP revisions correct errors in preliminary GDP rather than reflect news. However, GDP revisions are far from being entirely predictable. Although GDP revisions are largest only one year following the initial GDP release, those revisions are nearly unpredictable.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Brazil and South America

3304. The Effect of Exchange Rate Fluctuations on Multinationals' Returns

Author:
Jane Ihrig and David Prior
Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
<p>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. </p><blockquote><p> </p> </blockquote><p> </p><p> </p>
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3305. SARS: Down But Still a Threat

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This Intelligence Community Assessment (ICA) was requested by Secretary of Health and Human Services Tommy Thompson and Ambassador Jack Chow, Deputy Assistant Secretary of State for International Health Affairs. It highlights the evolution of Severe Acute Respiratory Syndrome (SARS) and the potential implications of the disease for the United States under several scenarios; this paper does not attempt to provide a scientific assessment of the epidemiology of SARS. Even though SARS has infected and killed far fewer people than other common infectious diseases such as influenza, malaria, tuberculosis, and HIV/AIDS, it has had a disproportionately large economic and political impact because it spread in areas with broad international commercial links and received intense media attention as a mysterious new illness that seemed able to go anywhere and hit anyone.
Topic:
International Relations, Human Welfare, Poverty, and Third World
Political Geography:
United States

3306. Strategic Reactions to American Preeminence: Great Power Politics in the Age of Unipolarity

Author:
John G. Ikenberry
Publication Date:
07-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
American global power – military, economic, technological, cultural, and political – is one of the great realities of our age. Never before has one country been so powerful and unrivaled. The United States began the 1990s as the world's only superpower and its advantages continued to grow through the decade. After the Cold War, the United States reduced its military spending at a slower rate than other countries and its economy grew at a faster pace. The globalization of the world economy has reinforced American economic and political dominance. No ideological challengers are in site. More recently, in response to terrorist attacks, the United States has embarked on a massive military buildup. In the recent National Security Strategy, the Bush administration has articulated an ambitious and provocative global military role for the United States in confronting new-age threats. Overall, American power advantages are multidimensional, unprecedented, and unlikely to disappear any time soon. The world has taken notice of these developments. Indeed, the post-Cold War rise of American power -- what might be called the rise of American "unipolarity" -- has unsettled world politics. Governments everywhere are worried about the uncertainties and insecurities that appear to flow from such extreme and unprecedented disparities of power. The shifting global security environment – triggered by the terrorist attacks of September 11th –also has conspired to upset old relationships and expectations. The American invasions of Afghanistan and Iraq have put American power on display and raised far-reaching questions about the use of force, alliances, weapons of mass destruction, sovereignty and interventionism. The world is in the midst of a great geopolitical adjustment process. Governments are trying to figure out how an American-centered unipolar order will operate. How will the United States use its power? Will a unipolar world be built around rules and institutions or the unilateral exercise of American power? This global worry about how a unipolar world will operate – in which the most basic questions about the character of world politics are at stake, namely, who benefits and who commands – is the not-so-hidden subtext of all the recent controversies in America's relations with the rest of the world. The question posed in this report is: how are the major countries around the world responding to American global preeminence? Overall, strategies and policies are mostly still in flux around the world. Responses up to now have been mostly ad hoc. Governments are learning, adapting, negotiating, and reacting – thus it is not possible to identify fixed "strategies of response." This report seeks to help us understand these evolving responses in two ways: first, it will provide conceptual tools to identify and track strategic responses by major states to American preeminence, and second, it will offer some preliminary characterizations of the patterns of response, particularly by Western Europe, Russia, and China. This report might be seen as a sort of "field guide" to global reactions rather than a definitive theoretical and empirical statement on the subject. I begin by offering a summary of the findings. After this, I look at the rise of American unipolar power and the variety of ways that American power is "experienced" around the world. In the next section, I survey the deeper sources and multifaceted character of American unipolar power. Next I explore the limits of the basic strategies of response to concentrated power – balancing, bandwagoning and binding. In the next section, I explore some of the emerging strategies that are appearing among the major countries. Finally, in the conclusion I return to the issue of unipolar power and rule-based order.
Topic:
International Relations, Politics, and Sovereignty
Political Geography:
United States and America

3307. Report of the Defense Science Board Task Force on Discriminate Use of Force

Publication Date:
07-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In the terms of reference, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the task force “to conduct a comprehensive study of the ends and means of precision compellence, or the nuanced use of force, in concert with coalition partners, to achieve political, economic and moral change in countries affecting US interests.” Real-world events have since underscored the need for such a study; indeed, the U.S. military applied key elements of a measured, nuanced approach in both the Afghanistan and Iraq campaigns. We are pleased to note this evolution in operations and a parallel evolution in the thinking of the combatant commands and Services. Because of this evolution, it is no longer as necessary as it once was to sell the fundamental objectives of what we term here the discriminate use of force (DUF).
Topic:
International Relations, Defense Policy, and Science and Technology
Political Geography:
United States

3308. Afghanistan: Seeds of Hope

Author:
David Johnson
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In 2000, an overwhelming 97 percent of Afghan girls did not attend school, and today only about 20 percent are literate. Tens of thousands of Afghan girls are now attending school for the first time in years.
Topic:
International Relations, Democratization, and Development
Political Geography:
Afghanistan and Middle East

3309. An Empirical Analysis of Inflation in OECD Countries

Author:
Jaime Marquez and Jane Ihrig
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the relationship between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU), and productivity developments on inflation. In line with previous work on the United States, we find that productivity advancements were the main structural factor reducing inflation in the United States. For foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation. This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment rate was declining.
Topic:
International Relations, Development, Economics, and International Trade and Finance
Political Geography:
United States

3310. Putting 'M' Back in Monetary Policy

Author:
Eric M. Leeper and Jennifer E. Roush
Publication Date:
04-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Money demand and the stock of money have all but disappeared from monetary policy analyses. Remarkably, it is more common for empirical work on monetary policy to include commodity prices than to include money. This paper establishes and explores the empirical fact that whether money enters a model and how it enters matters for inferences about policy impacts. The way money is modeled significantly changes the size of output and inflation effects and the degree of inertia that inflation exhibits following a policy shock. We offer a simple and conventional economic interpretation of these empirical facts.
Topic:
Conflict Resolution, International Relations, Economics, and International Trade and Finance

3311. Are Financially Dollarized Countries More Prone to Costly Crises?

Author:
Carlos Ó. Arteta
Publication Date:
03-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In view of the role of liability dollarization in recent financial crises, whether or not the widespread presence of foreign-currency-denominated deposits and credits in developing-country banking systems leads to greater financial fragility is an open and pressing question. Using a comprehensive dataset on deposit and credit dollarization for a large number of developing and transition economies, I find little evidence that high dollarization heightens the probability of banking crises or currency crashes. Furthermore, while empirical results suggest that banking crises and currency crashes are contractionary, there is no robust evidence that they are more costly in highly dollarized countries than in countries where dollarization is low. This extensive empirical search highlights that macroeconomic and exchange rate policies are far more important than bank dollarization in determining crisis risks and costs.
Topic:
Conflict Resolution, International Relations, Economics, and International Trade and Finance

3312. New Keynesian, Open-Economy Models and Their Implications for Monetary Policy

Author:
Brian M. Doyle and David Bowman
Publication Date:
03-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The considerable amount of research in recent years on New Keynesian, open-economy models -- models with nominal price rigidities and intertemporally maximizing agents -- has yielded fresh insights for what Alan Blinder has called the “dark art” of making monetary policy. The literature has made its greatest contributions in understanding the transmission of shocks across countries, exchange rate pass-through and the effects of different pricing rules, and how these impact optimal monetary policy rules and international policy coordination. While the literature has by no means solved the great mysteries of open-economy macroeconomics, it has laid out a framework where we can ask normative questions of monetary policy, such as how much a central bank should react to movements in the exchange rate. However, monetary policy remains an empirical endeavour, and would be helped by further work which empirically estimates or calibrates these new models.
Topic:
International Relations, Development, Economics, International Trade and Finance, and Monetary Policy

3313. Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth

Author:
J. Benson Durham
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In contrast to the empirical literature's focus on foreign direct investment (FDI), this study examines the effects of foreign portfolio investment (FPI) and “other” foreign investment (OFI) on economic growth using data on 88 countries from 1977 through 2000. Most measures suggest that FPI has no effect, and some results indicate that OFI has a negative impact on growth that is somewhat mitigated by initial financial and/or legal development. However, these results are questionable due to possible simultaneity bias. The empirical analyses also examine whether non-FDI foreign investment affects growth indirectly. FPI does not correlate positively with macroeconomic volatility, but the results indicate that the negative indirect effect of OFI through macroeconomic volatility comprises a substantial portion of the gross negative effect of OFI on growth.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3314. The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects

Author:
John H. Rogers and James M. Nason
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the “usual suspects” of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We con firm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a “canonical” RBC model moves closest to the data when it features exogenous world real interest rate shocks.
Topic:
Conflict Resolution, International Relations, Economics, and International Trade and Finance

3315. Diversification, Original Sin, and International Bond Portfolios

Author:
Francis E. Warnock and John D. Burger
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
While there is a severe home bias in U.S. investors' foreign bond portfolios, we find that portfolio weights are greater for countries with more open capital accounts and whose bond returns are less correlated with U.S. returns. Positions in local-currency-denominated bonds are particularly sensitive to past and prospective returns volatility. An analysis of changes in portfolio weights over time indicates that U.S. investors have recently moved out of smaller markets and those with low and declining credit ratings. Our data also allow for an analysis of the size and currency composition of international bond markets. We find that countries with stronger institutions and better inflation performance have larger local currency bond markets. An implication for developing countries is that creditor friendly policies, such as vigilance on the inflation front and the development of strong institutions, can enable local bond market development and may in turn attract global investors.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3316. Uncovered Interest Parity: It Works, But Not For Long

Author:
Jonathan H. Wright and Alain P. Chaboud
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The failure of uncovered interest parity can be ascribed to the existence of a risk premium. The size of this risk premium may shrink to zero over sufficiently small intervals of time. In contrast, because no interest is paid on intradaily positions and interest is instead paid discretely at the point when a position is rolled over from one day to the next, the size of the interest differential remains fixed over any interval that covers the time of the discrete interest payment. This is true no matter how short that interval is. Using a large dataset of high frequency exchange rate data, we run uncovered interest parity regression over different time intervals. We replicate the rejection of the uncovered interest parity hypothesis with daily data, but find results that are consistently much more supportive of the uncovered interest parity hypothesis over short windows of intradaily data that span the time of the discrete interest payment.
Topic:
Conflict Prevention, International Relations, Economics, and International Trade and Finance

3317. Long-Run Supply Effects and the Elasticities Approach to Trade

Author:
Joseph E. Gagnon
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Krugman (1989) argued that differences across countries in estimated income elasticities of import demand are due to omission of an exporter supply effect. He showed that such an effect can be derived in a theoretical model with economies of scale in production and a taste for variety in consumption. In his model, countries grow by producing new varieties of goods, and they are able to export these goods without suffering any deterioration in their terms of trade. This paper analyzes U.S. import demand from different source countries and finds strong evidence of a supply effect of roughly half the magnitude (0.75) of the income elasticity (1.5). Price elasticities for the most part are estimated close to -1, which is typical for the literature. Exclusion of the supply effect leads to overestimation of the income elasticity. Results based on U.S. exports to different destinations are less robust, but largely corroborate these findings.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3318. Firm-Level Access To International Capital Markets: Evidence From Chilean Equities

Author:
Francis E. Warnock and Sara B. Holland
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
High growth, liquid Chilean firms have greater relative weights in U.S. equity portfolios, but the most important determinant of a firm's portfolio weight is whether it is listed on a U.S. exchange. Cross-listing does not, however, appear to have permanent benefits: Weights in U.S. portfolios of firms that cross-listed in the mid-1990s increased at the expense of firms that cross-listed earlier. Put another way, firms appear to be able to access international capital at the time of the cross-listing, but this access may well be short-lived.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
South America

3319. The ROK—U.S. Alliance: Where Is It Headed?

Author:
Kim Dong Shin
Publication Date:
04-2003
Content Type:
Working Paper
Abstract:
The National Security Strategy of the United States of America (September 2002) provides an important framework from which to examine the current crisis on the Korean Peninsula and other challenges in Northeast Asia. With its focus on terrorism and weapons of mass destruction (WMD), this strategy is concerned with North Korea as much as, if not more than, any other state. In particular, North Korea poses a unique set of challenges in regard to WMD. North Korea stands in sharp contrast to the Republic of Korea (ROK) on issues such as human rights, democracy, and market economies. The National Security Strategy suggests that the United States should revitalize its alliance with South Korea, while encouraging North Korea to transform its political and economic system. Yet South Korea and the United States are currently having some difficulties in developing a consensus on how to approach Pyongyang, and appear to have no clear plan to operationalize the strategy to deal with North Korea.
Topic:
International Relations and Security
Political Geography:
United States, America, Asia, and North Korea

3320. China Brief, Sars: Spreading Unrest

Author:
Willy Lam, William R. Hawkins, Harvey Stockwin, and Li Thian-hok
Publication Date:
05-2003
Content Type:
Policy Brief
Institution:
The Jamestown Foundation
Abstract:
The spread of Severe Acute Respiratory Syndrome—the SARS virus—throughout China is a phenomenon that had previously been denied by authorities and had gone unreported. But the penetration of the disease is now being admitted publicly, and efforts to combat it have begun. While the immediate epidemic in Beijing appears to be in decline, the fear remains that the spread of SARS within China will still be difficult—and maybe impossible—to control, let alone to eliminate. World Health Organization (WHO) officials admit that what happens in China will “make or break” the course of the epidemic. China's neighbors, and particularly Hong Kong, worry that a failure to curtail the virus will inevitably result in a fresh round of crossborder infection, further intensifying the already grave economic impact of SARS on the region. At worst, a sustained epidemic could bring China's opening-up to the outside world to a screeching halt.
Topic:
International Relations, Government, and Political Economy
Political Geography:
China, Israel, Beijing, and Hong Kong