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  • Author: Francis E. Warnock
  • Publication Date: 04-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The Tesar and Werner (1995) finding of very high turnover rates on foreign equity portfolios is based on an underestimation of cross-border equity positions. Foreign turnover rates calculated using information from comprehensive benchmark surveys on cross-border holdings are much lower than previously reported and comparable to domestic turnover rates. However, the basic intuition from the Tesar-Werner study, that transaction costs do not help explain the observed home bias, is confirmed using data on transaction costs in 41 markets.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: Neil R. Ericsson, Esfandiar Maasoumi, Grayham E. Mizon
  • Publication Date: 03-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This retrospective provides a biographical history of Denis Sargan's career and reviews his contributions to econometrics, emphasizing the breadth of his work in both theoretical and applied econometrics. We include a complete bibliography for Denis and a list of PhD theses that he supervised--students were a substantive facet of his professional life. Finally, two of Denis's previously unpublished manuscripts on model building now appear in print.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States
  • Author: John H. Rogers, Hayden P. Smith
  • Publication Date: 03-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Using consumer price indexes from cities in the U.S., Canada and Mexico, we estimate the "border effect" on U.S.-Mexican relative prices and find that it is nearly an order of magnitude larger than for U.S.-Canadian prices. However, during a very stable sub-period in Mexico (May 1988 to November 1994), the "width" of the U.S.-Mexican border falls dramatically and becomes approximately equal to the U.S.-Canadian border. We then show that when consideration is limited to cities lying geographically very close to the U.S.-Mexican border--San Diego, Los Angeles, Houston, Dallas, Tijuana, Mexicali, Juarez, and Matamoros--the border width falls compared to that estimated with the full sample of U.S. and Mexican cities, but falls only very slightly. We also present evidence that the border effect in U.S.-Mexican prices is not primarily due to the border effect in U.S.-Mexican wages. Finally, using the prices of 276 highly dis-aggregated goods and services, we estimate the variability of relative prices of different items within Mexican cities. This measure of relative price variability declines during the stable peso sub-period, but by less than the decline in nominal and real (i.e., CPI-based) exchange rate variability. Our results are strong evidence of a "nominal border effect" in relative prices within NAFTA, but also indicate that real side influences are important.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: United States, Canada, North America, Mexico
  • Author: John H. Rogers
  • Publication Date: 03-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs "one-size-fits-all" monetary policy. I present direct evidence on price level convergence in Europe, using a unique data set, and then investigate how much of the recent divergence of national inflation rates can be explained by price level convergence. I show that between 1990 and 1999 prices did become less dispersed in the euro area. Convergence is especially evident for traded goods, and more in the first half of the 1990s than the second half. By some measures, traded goods price dispersion across the euro area is now close to that across U.S. cities. Despite an on-going process of convergence, deviations from the law of one price are large. Finally, I find a statistically-significant and robust negative relationship between the 1999 price level and 2000 inflation rate in Europe, and that the contribution of price level convergence to explaining inflation differentials is often quite important economically. Still, factors other than price convergence explain most of the cross-country inflation differences.
  • Topic: Economics, Emerging Markets, International Trade and Finance
  • Political Geography: Europe
  • Publication Date: 03-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: In its 1996 report, the Defense Science Board (DSB) recommended that the Pentagon invest an additional $3 billion to strengthen defenses of its information networks. This report was viewed by some as unrealistic and prophetic by others, but in all cases it faced a readership with a very uneven appreciation of the effects of disruptive technology and dicontinuous change. The defense establishment has increased its intellectual capital on the subject of Defensive Information Systems (DIO) considerably since 1996. However, it has yet to fully accomodate the realities of an information intensive future in its architecture, processes, and investments. Technology has continued to evolve and the problems have become much more difficult and complex. DoD must now accomplish more than anyone could have imagined in 1996. Perhaps more important is the dawning realization that incremental modifications to our existing institutions and processes will not produce the adaptation we need.
  • Topic: Defense Policy, Economics, Science and Technology
  • Political Geography: United States
  • Author: Neil R. Ericsson
  • Publication Date: 02-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper provides an introduction to forecast uncertainty in empirical economic modeling. Forecast uncertainty is defined, various measures of forecast uncertainty are examined, and some sources and consequences of forecast uncertainty are analyzed. Empirical illustrations with the U.S. trade balance, U.K. inflation and real national income, and the U.S./U.K. exchange rate help clarify the issues involved.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States, United Kingdom
  • Author: Jinill Kim, Andrew Levin, Sunghyun Henry Kim
  • Publication Date: 02-2001
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: In this paper, we investigate the welfare implications of alternative financial market structures in a two-country endowment economy model. In particular, we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset, and we compare this welfare level with that obtained under complete asset markets. The welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent, but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent. For realistic cases in which agents are very patient and shocks are highly persistent (that is, the discount factor and the first-order autocorrelation are both near unity), the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters. Finally, using a non-linear solution algorithm, we confirm that a two-country production economy with endogenous labor supply has qualitatively similar welfare properties.
  • Topic: Economics, Human Welfare, International Trade and Finance
  • Political Geography: United States
  • Publication Date: 12-2000
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Over the past 15 months, the National Intelligence Council (NIC), in close collaboration with US Government specialists and a wide range of experts outside the government, has worked to identify major drivers and trends that will shape the world of 2015. The key drivers identified are: Demographics, Natural resources and environment, Science and technology, The global economy and globalization, National and international governance, Future conflict, The role of the United States. In examining these drivers, several points should be kept in mind: No single driver or trend will dominate the global future in 2015 Each driver will have varying impacts in different regions and countries The drivers are not necessarily mutually reinforcing; in some cases, they will work at cross-purposes. Taken together, these drivers and trends intersect to create an integrated picture of the world of 2015, about which we can make projections with varying degrees of confidence and identify some troubling uncertainties of strategic importance to the United States.
  • Topic: Economics, Environment, Government, Science and Technology
  • Political Geography: United States
  • Publication Date: 07-2000
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Bribery of foreign public officials by businesses is a serious problem in the international marketplace. This corrupt practice penalizes firms that play by the rules and compete on the merits of their products and services. But the damage is not limited to billions of dollars of lost exports. Bribery of public officials in commercial dealings undermines good governance, retards economic development and is especially damaging to developing countries and those in transition to market economies.
  • Topic: Foreign Policy, Defense Policy, Economics
  • Political Geography: United States
  • Publication Date: 05-2000
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: In a recent conference, trade experts identified three primary reasons the World Trade Organization (WTO) failed to launch a new trade Round at its December 1999 Ministerial. First, leading members were unable to resolve differences on critical issues prior to the gathering. In addition, many developing countries and nongovernmental organizations were more assertive than they had been at previous conferences. Finally, in recent years, the WTO has expanded the range of issues it addresses, which has made efforts to reach a consensus on any point more difficult. According to the speakers, as a result of the acrimonious Ministerial, the WTO has suffered a substantial loss of credibility, which will impair efforts to launch a new Round in the near term. There is no immediate alternative to strong US leadership, and WTO negotiations will be more complicated because developing countries and nongovernmental organizations will be more inclined to resist trade liberalization efforts that they believe do not advance their interests. Experts at the conference offered a variety of assessments regarding the course the WTO might choose to follow this year. The majority argued that if the trade body is seeking to rebuild confidence, it could continue with scheduled meetings on agriculture and services and use the time to rebuild confidence. A minority, however, held that the forum is too fractured to make progress, thus talks would only undermine the already declining prestige of the trade body. The experts identified several long-run challenges that the WTO will probably need to address to be an effective decisionmaking institution, including: Bridging the developed-developing country gap Costa Rica, Mexico, and South Africa generally support trade liberalization and have credibility among developed and developing states; thus they are in a position to meld the interests of the two sides. Enacting institutional reforms The organization's expansive agenda and large membership require that it adopt policies that facilitate decisionmaking, especially before new members such as China and Russia join. The trade body may try to increase transparency to promote greater trust in its procedures. Also, to avoid protracted and bitter selections such as the forum suffered last year, the WTO could review its procedures for electing a new director general. Managing the backlash against globalization Supporters of freer trade could launch a massive educational program to highlight the gains for all countries from expanded trade and to counter the dire assertions made by nongovernmental organizations (NGOs).
  • Topic: Foreign Policy, Development, Economics, International Trade and Finance
  • Political Geography: Russia, China