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  • Author: Pierpaolo Benigno, J. David Lopez-Salido
  • Publication Date: 12-2002
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: In this paper we first present supporting evidence of the existence of heterogeneity in inflation dynamics across euro area countries. Based on the estimation of New Phillips Curves for five major countries of the euro area, we find that there is significant inertial (backward looking) behavior in inflation in four of them, while inflation in Germany has a dominant forward looking component. In the second part of the paper we present an optimizing agent model for the euro area emphasizing the heterogeneity in inflation persistence across regions. Allowing for such a backward looking component will affect the evaluation of the degree of nominal rigidities relevant for the monetary policy design. We explore the welfare implications of this circumstance by comparing the adjustment of the economies and the area as a whole in response to terms-of-trade shocks under four monetary policy rules: fully optimal, optimal inflation targeting, HICP targeting and output gap stabilization.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: Europe
  • Author: Simon Gilchrist, Jean-Olivier Hairault, Hubert Kempf
  • Publication Date: 12-2002
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Margarida Duarte, Alexandar L. Wolman
  • Publication Date: 07-2002
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We develop a general equilibrium model of a two-region currency union. There are two types of goods: non-trade goods, and traded goods for which markets are segmented. Monetary policy is set by a central monetary authority and is non-neutral due to nominal price rigidities. Fiscal policy is determined at the regional level by each region's government. We find that productivity shocks alone generate significant variation in inflation across the two countries. Government spending shocks, in contrast, do not account for a significant portion of inflation variation. Varying relative country size, we find that smaller countries experience higher variability of their inflation differential in response to shocks to productivity growth. Moreover, we show that regional governments can suppress incipient inflation differentials associated with shocks to productivity growth by letting the income tax rate respond negatively to inflation differentials.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: John H. Rogers, Jonathan H. Wright, Jon Faust
  • Publication Date: 08-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Jane Ihrig, Joseph E. Gagon
  • Publication Date: 07-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on twenty industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behavior may be a factor in the declining rate of pass-through.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States
  • Publication Date: 06-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Russia's Foreign Policy Russian foreign policy in the coming years will be characterized by weakness; frustration--primarily with the United States as the world's preeminent power--over Russia's diminished status; generally cautious international behavior; and a drive to resubjugate, though not reintegrate, the other former Soviet states. The international situation affords Russia time to concentrate on domestic reforms because, for the first time in its history, it does not face significant external threats. But rather than use the breathing space for domestic reforms, Putin is as much--if not more--focused on restoring Russia's self-defined rightful role abroad and seeking to mold the CIS into a counterweight to NATO and the European Union. The Outside World's Views of Russia Russia does not have any genuine allies. Some countries are interested in good relations with Russia, but only as a means to another end. For example, China sees Russia as a counterweight to the United States but values more highly its ties with the United States. Some countries see Russia as a vital arms supplier but resent Russia also selling arms to their rivals (China-India, Iran-Iraq). Pro-Russia business lobbies exist in Germany, Italy, Turkey, and Israel (one-fifth of whose population now consists of Soviet √©migres), but they do not single-handedly determine national policies. Europe is the only region that would like to integrate Russia into a security system, but it is divided over national priorities and institutional arrangements as well as put off by some Russian behavior. Most CIS governments do not trust their colossal neighbor, which continues to show an unsettling readiness to intervene in their internal affairs, though they know Russia well and are to a considerable degree comfortable in dealing with it. Turkey has developed an improved dialogue and an unprecedented number of economic ties with Russia during the post-Cold War period, but this more positive pattern of relations has not fully taken root, and Ankara remains suspicious of Moscow's intentions. Since the collapse of the Soviet Union, Moscow's role in the Middle East has been reduced, but Israel, Syria, Egypt, Libya, and Iraq all favor good relations with Russia. Mutual interests also override disagreements in Russian-Iranian relations, but Tehran is wary of Russian behavior, particularly toward Saddam Hussein. India still trusts Russia--a sentiment that is perhaps a residue of the genuine friendship of Cold War days--but clearly not in the same way it once did, and New Delhi fears that weakness will propel Russia into doing things that could drive India further away. In East Asia, the most substantial breakthrough has been the resurrected relationship between Russia and China, one that entails significant longer-term risk for Russia. Other countries in the region value their links with Moscow as a means to balance a more powerful China, or as a useful component of their larger political and economic strategies, but Russia's role in East Asia--as elsewhere--remains constrained by the decline in its political, military, and economic power over the last decade. Russia's Weakness Russia's weakness stems from long-term secular trends and from its domestic structure. In essence, the old nomenklatura and a few newcomers have transformed power into property on the basis of personal networks and created an equilibrium resting on insider dealings. These insiders may jockey for position but have a vested interest in preserving the system. The public does not like the system but is resigned to it and gives priority to the preservation of order. As for the economy, it is divided into a profitable, internationally integrated sector run by oligarchs and a much larger, insulated, low-productivity, old-style paternalistic sector that locks Russia into low growth. No solace will be forthcoming from the international business and energy worlds. They do not expect the poor commercial climate to improve greatly and will not increase investments much beyond current levels until it does. Militarily, Russia will also remain weak. Its nuclear arsenal is of little utility, and Moscow has neither the will nor the means to reform and strengthen its conventional forces. Hope for the Future? The best hope for change in Russia lies with the younger generation. Several participants reported that under-25 Russians have much more in common with their US counterparts, including use of the Internet, than with older Soviet generations. But there was some question over whether the new generation would change the system or adapt to it. Others placed some hope in international institutions, for instance the World Trade Organization, eventually forcing Russia to adapt to the modern world. Dissenting Views Some participants dissented from the overall forecast of depressing continuity. The keynote speaker, James Billington, stated that Russia would not be forever weak and that the current confusion would end in a few years either through the adoption of authoritarian nationalism or federated democracy. One scholar felt the Chechen war was feeding ethnic discord in other areas of the Federation to which Moscow would respond with increased authoritarianism, not necessarily successfully. Finally, a historian observed that the patience of Russians is legendary but not infinite, meaning that we should not be overly deterministic.
  • Topic: International Relations, Foreign Policy, Development
  • Political Geography: Russia, United States, China, Middle East, Israel
  • Publication Date: 06-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Several decades of science and technology, concept development, and engineering development have provided the underpinnings for a significant contribution by high-energy lasers (HELs) to national security needs. The potential for speed-of-light response with a wide variety of effects to support a variety of missions suggests a new level of flexibility and adaptability-attributes that are particularly valuable in the complex national security environment currently existing and unfolding. As in the case of most important new technologies, we are just beginning to understand and exploit the potential of high-energy lasers. It is nonetheless important to realize the extent of this potential. Directed-energy weapons can add a new dimension to a wide range of missions.
  • Topic: Defense Policy, Development, Energy Policy, Science and Technology
  • Author: Chang-Jin Kim, Jeremy Piger, Richard Startz
  • Publication Date: 05-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper investigates the relationship between permanent and transitory components of U.S. recessions in an empirical model allowing for business cycle asymmetry. Using a common stochastic trend representation for real GNP and consumption, we divide real GNP into permanent and transitory components, the dynamics of which are different in booms vs. recessions. We find evidence of substantial asymmetries in postwar recessions, and that both the permanent and transitory component have contributed to these recessions. We also allow for the timing of switches from boom to recession for the permanent component to be correlated with switches from boom to recession in the transitory component. The parameter estimates suggest a specific pattern of recessions: switches in the permanent component lead switches in the transitory component both when entering and leaving recessions.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States, Mexico
  • Publication Date: 04-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The Defense Science Board Task Force was formed to address questions related to the development of X-band, active, electronically steered arrays (AESAs) for airborne platforms. Areas focused on were advanced radar capabilities for ground targets and air targets.The airborne radar inventory can be divided into three broad categories:(1) Air target surveillance and cueing radars mounted in rotodomes (e.g., AWACS,-2C).(2) Nose- mounted fighter radars for air and ground targets (e.g., F-15, F-16, F-22, JSF).(3) Side-looking radars for ground reconnaissance, surveillance, and cueing (e.g., U-2, JSTARS, Global Hawk). Categories (2) and (3) are dominated by X-band radars; the insertion of AESA technology into category (3) was the primary subject for this task force.
  • Topic: Defense Policy, Development, Science and Technology
  • Political Geography: United States
  • Publication Date: 02-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The Under Secretary of Defense (AT) requested that the DSB form a brief study of ongoing Navy and Air Force programs aimed at developing advanced laser guided weapon targeting pods for their tactical aircraft. This request for a DSB Task Force was occasioned by Congressional interest in the possibilities of a Joint development and production program for these pods.
  • Topic: Defense Policy, Development, Science and Technology
  • Political Geography: United States