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Begin New Search Topic Economics Political Geography North America Content Type Working Paper Publishing Institution Board of Governors of the Federal Reserve System

1. Do Central Banks' Forecasts Take Into Account Public Opinion and Views?

Author:
Ricardo Nunes
Publication Date:
05-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Federal Reserve through the Federal Open Market Committee (FOMC) regularly releases macroeconomic forecasts to the general public and the US congress with the purpose of explaining the likely evolution of the economy and the appropriate stance of monetary policy. Immediately before doing so, the FOMC receives a forecast produced by the Federal Reserve staff which remains private for five years. The literature has pointed out that, despite the informational advantage of the FOMC, its forecast differs from and is not always more accurate than the staff forecast. This finding has raised concerns regarding the loss of relevant information and the usefulness of the FOMC forecasts. This paper brings evidence that the FOMC forecast also incorporates other publicly available forecasts and views, and that the weight attributed to public forecasts is larger than what is optimal given a mean squared error objective. These findings are consistent with i) the institutional role of the FOMC in being representative of a variety of public views, ii) the academic literature recommendation to use equal weights and not to overfit specific forecasts based on past performance. The statistical model can also account for several empirical regularities of the forecasts.
Topic:
Economics, Monetary Policy, Governance, and Banking
Political Geography:
North America and United States of America

2. Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields

Author:
Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles Thomas
Publication Date:
01-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40-60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points.
Topic:
Economics, International Cooperation, Foreign Direct Investment, and Fiscal Policy
Political Geography:
North America and United States of America

3. U.S. Real Interest Rates and Default Risk in Emerging Economies

Author:
Nathan Foley-Fisher and Bernardo Guimaraes
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper empirically investigates the impact of changes in U.S. real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy-induced increases in U.S. interest rates starkly raise default risk in emerging market economies. However, the overall correlation between U.S. real interest rates and the risk of default is negative, demonstrating that the effects of other variables dominate the anterior relationship.
Topic:
Economics, Interest Rates, Risk, and Fiscal Policy
Political Geography:
North America and United States of America

4. The Return on U.S. Direct Investment at Home and Abroad

Author:
Stephanie E. Curcuru and Charles Thomas
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S.. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which U.S. firms invest, and U.S. investments are perceived as relatively safe. This has implications for the long-run sustainability of the U.S. current account deficit which will depend, in part, on the long-run behavior of this income.
Topic:
Economics, International Cooperation, Foreign Direct Investment, Tax Systems, and Investment
Political Geography:
North America and United States of America

5. Nonlinearities in the Oil Price-Output Relationship

Author:
Lutz Kilian and Robert J. Vigfusson
Publication Date:
01-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
It is customary to suggest that the asymmetry in the transmission of oil price shocks to real output is well established. Much of the empirical work cited as being in support of asymmetries, however, has not directly tested the hypothesis of an asymmetric transmission of oil price innovations. Moreover, many of the papers quantifying these asymmetric responses are based on censored oil price VAR models which recently have been shown to be invalid. Other studies are based on dynamic correlations in the data that do not shed light on the central question of whether the structural responses of real output triggered by positive and negative oil price innovations are asymmetric. Recently, a number of new methodologies have been introduced and applied to the problem of testing and quantifying asymmetric responses of U.S. real economic activity to positive and negative oil price innovations. Our objective is to put this literature in perspective, to contrast it with more traditional approaches, to highlight directions for further research, and to reconcile some seemingly conflicting results reported in the literature.
Topic:
Economics, Energy Policy, International Trade and Finance, Oil, and Natural Resources
Political Geography:
North America and United States of America

6. U.S. International Equity Investment and Past Prospective Returns

Author:
Stephanie E. Curcuru, Charles Thomas, Francis E. Warnock, and Jon Wongswan
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Counter to extant stylized facts, using newly available data on country allocations in U.S. investors' foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, U.S. investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per year.
Topic:
Economics, Finance, Investment, Stock Markets, and Equity
Political Geography:
North America and United States of America

7. Where are Global and U.S. Trade Heading in the Aftermath of the Trade Collapse: Issues and Alternative Scenarios

Author:
Joseph W. Gruber, Flippo di Mauro, Bernd Schnatz, and Nico Zorell
Publication Date:
03-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework – an error correction model – that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.
Topic:
Economics, International Cooperation, International Trade and Finance, and Financial Crisis
Political Geography:
North America and United States of America

8. U.S. Domestic and International Financial Reform Policy: Are G20 Commitments and the Dodd-Frank Act in Sync?

Author:
Daniel E. Nolle
Publication Date:
07-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Dodd-Frank Act of 2010 is the keystone policy response directed at reforming U.S. financial system activities and oversight in the wake of the 2007-2009 financial crisis. The United States also has financial system reform policy commitments in the international arena, including in particular by virtue of its membership in the G20. This analysis considers U.S. policy initiatives related to a core dimension of financial system reform: risks posed by systemically important financial institutions ("SIFIs"). It provides a comparison of SIFI policy initiatives and timetables under both the Dodd-Frank Act and the G20 agenda, as reflected in the ongoing work plan of the Financial Stability Board (FSB), and poses the question "Are U.S. domestic and international financial system reform commitments in sync?" While finding that, fundamentally, the answer is "yes," the detailed comparison yields two caveats with potential policy implications. First, the two agendas differ in their relative emphasis on the coverage of both banks and nonbanks. The G20/FSB focus, at least over the near-term, is bank-centric compared with the Dodd-Frank Act, which consistently addresses both bank and nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to long-established U.S. law mandating that there be sufficient opportunity for public input into the rulemaking process, whereas the G20/FSB process has been less systematic and transparent on public consultation and feedback. The lesser emphasis on transparency and public input characterizing the G20/FSB policy development process may be attributable in part to the somewhat more rapid pace of the G20/FSB agenda relative to corresponding Dodd-Frank Act timelines. These observations may be relevant to the current debate over the speed and scope of Dodd-Frank Act implementation measures, and to the discussion about the future international competitiveness of U.S. banks and nonbank financial firms.
Topic:
Economics, Financial Crisis, Reform, and Finance
Political Geography:
North America and United States of America

9. The Revealed Competitiveness of U.S. Exports

Author:
Massimo Del Gatto, Flippo de Mauro, Joseph W. Gruber, and Benjamin R. Mandel
Publication Date:
08-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The U.S. share of world merchandise exports has declined sharply over the last decade. Using data at the level of detailed industries, this paper analyzes the decline in U.S. share against the backdrop of alternative measures of the competitiveness of the U.S. economy. We document the following facts: (i) only a few industries contributed to the decline in any meaningful way, (ii) a large part of the drop was driven by the changing size of U.S. export industries and not the size of U.S. sales within those industries, (iii) in a gravity framework, the majority of the decline in the U.S. export share within industries was due to the declining U.S. share of world income, and (iv) in a computed structural measure of firm productivity, average U.S. export productivity has generally maintained its high level versus other countries over time. Overall, our analysis suggests that the dismal performance of the U.S. market share is not a sufficient statistic for competitiveness.
Topic:
Economics, International Trade and Finance, Hegemony, Finance, and Exports
Political Geography:
North America and United States of America

10. Housing Wealth and Consumption

Author:
Matteo Iacoviello
Publication Date:
08-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Housing wealth is about one half of household net worth, and consumption is a considerable fraction (about two thirds) of Gross Domestic Product in the United States. Empirically, movements in housing wealth are associated with movements in consumption in the same direction. This observation has led many economists, commentators and policy makers to study how housing wealth and consumption are linked together. A sizeable portion of the comovement between housing wealth and consumption reflects common factors driving both variables, rather than the "wealth effect" of the former on the latter; however, a growing body of evidence suggests that the comovement is larger in developed financial markets and in the presence of liquidity constraints.
Topic:
Economics, Markets, Infrastructure, and Housing
Political Geography:
North America and United States of America

11. The Variance Risk Premium Around the World

Author:
Juan M. Londono
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper investigates the variance risk premium in an international setting. First, I provide new evidence on the basic stylized facts traditionally documented for the US. I show that while the variance premiums in several other countries are, on average, positive and display significant time variation, they do not predict local equity returns. Then, I extend the domestic model in Bollerslev, Tauchen and Zhou (2009) to an international setting. In light of the qualitative implications of my model, I provide empirical evidence that the US variance premium outperforms that of all other countries in predicting local and foreign equity returns.
Topic:
Economics, Risk, Fiscal Policy, and Equity
Political Geography:
North America and United States of America

12. Foreign Exposure to Asset-Backed Securities of U.S. Origin

Author:
Daniel O. Beltran, Laurie Pounder, and Charles Thomas
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners’ holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.
Topic:
Economics, Financial Crisis, Financial Markets, and Mortgages
Political Geography:
United States and North America

13. Emerging Market Business Cycles with Remittance Fluctuations

Author:
Ceyhun Bora Durdu and Serdar Sayan
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops.
Topic:
Debt, Economics, and Credit
Political Geography:
Europe, Turkey, Asia, North America, and Mexico

14. Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices

Author:
Lutz Kilian and Clara Vega
Publication Date:
11-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered last in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification.
Topic:
Economics, Energy Policy, Oil, and Macroeconomics
Political Geography:
United States and North America

15. Uncertainty over Models and Data: The Rise and Fall of American Inflation

Author:
Seth Pruitt
Publication Date:
12-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
An economic agent who is uncertain of her economic model learns, and this learning is sensi- tive to the presence of data measurement error. I investigate this idea in an existing framework that describes the Federal Reserve’s role in U.S. inflation. This framework successfully fits the observed inflation to optimal policy, but fails to motivate the optimal policy by the perceived Philips curve trade-off between inflation and unemployment. I modify the framework to account for data uncertainty calibrated to the actual size of data revisions. The modified framework ameliorates the existing problems by adding sluggishness to the Federal Reserve’s learning: the key point is that data uncertainty is amplified by the nonlinearity induced by learning. Conse- quently there is an explanation for the rise and fall in inflation: the concurrent rise and fall in the perceived Philips curve trade-off.
Topic:
Economics, Inflation, and Models
Political Geography:
United States and North America

16. How Does the Border Affect Productivity? Evidence from American and Canadian Manufacturing Industries

Author:
Robert J. Vigfusson
Publication Date:
12-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies how much of productivity fluctuations are industry specific versus how much are country specific. Using data on manufacturing industries in Canada and the United States, the paper shows that the correlation between cross-border pairings of the same industry are more often highly correlated than previously thought. In addition, the paper confirms earlier findings that the similarity of input use can help describe the co-movement of productivity fluctuations across industries.
Topic:
Economics, Industrial Policy, and Science and Technology
Political Geography:
United States, Canada, and North America

17. Breaks in the Variability and Co-Movement of G-7 Economic Growth

Author:
Jon Faust and Brian M. Doyle
Publication Date:
12-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
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.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States, Canada, and North America

18. Productivity Growth and the Phillips Curve in Canada

Author:
Joseph W. Gruber
Publication Date:
11-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This study examines the impact of productivity growth on the relationship between inflation and unemployment in Canada. Recently it has been suggested that higher productivity growth is responsible for a shift in the U.S. Phillips curve that occurred in the late 1990s. This paper examines whether the Phillips curve in Canada shifted in a manner similar to that of the United States, and the degree to which higher productivity growth explains this shift.
Topic:
International Relations, Economics, and Industrial Policy
Political Geography:
Canada and North America

19. Revisiting the Border: An Assessment of the Law of One Price Using Very Disaggregated Consumer Price Data

Author:
John H. Rogers, Shing-Yi B. Wang, and Charles M. Engels
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
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.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Canada and North America

20. How do Canadian Hours Worked Respond to a Technology Shock?

Author:
Robert J. Vigfusson, Lawrence J. Christiano, and Martin Eichenbaum
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
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.
Topic:
Economics, International Trade and Finance, and Science and Technology
Political Geography:
Canada and North America