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

31. Firm Default and Aggregate Fluctuations

Author:
Tor Jacobson, Jesper Linde, and Kasper Roszbach
Publication Date:
08-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms' relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.
Topic:
Economics, Finance, Macroeconomics, and Banking
Political Geography:
Global Focus

32. Empirical Estimation of Trend and Cyclical Export Elasticities

Author:
Jane Haltmaier
Publication Date:
09-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses an adaptation of Vahid and Engle's common trend/common cycle analysis to estimate trend and cyclical export elasticities for trading partner income and real exchange rates for 36 countries. For the countries for which both types of income elasticities can be identified, the cyclical elasticity is on average more than twice as large as the trend elasticity. The methodology is applied to forecasting exports during the recent cycle and it appears to improve on simpler models for about half of the countries. For an aggregate of all of the countries for which separate elasticities can be identified, the RMSE is about half as large for the trend/cycle model as for the simple model.
Topic:
Economics, International Trade and Finance, Exchange Rate Policy, and Exports
Political Geography:
Global Focus

33. Loose Commitment in Medium-Scale Macroeconomic Models: Theory and Applications

Author:
Davide Debortoli, Junior Maih, and Ricardo Nunes
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.
Topic:
Economics, Monetary Policy, Business, and Macroeconomics
Political Geography:
Global Focus

34. 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

35. Monetary Regime Switches and Unstable Objectives

Author:
Davide Debortoli and Ricardo Nunes
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers' behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.
Topic:
Economics, Monetary Policy, Interest Rates, and Fiscal Policy
Political Geography:
Global Focus

36. Are Recoveries from Banking and Financial Crises Really So Different?

Author:
Greg Howard, Robert Martin, and Beth Anne Wilson
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.
Topic:
Economics, Financial Crisis, Finance, Banking, and Banking Crisis
Political Geography:
Global Focus

37. Financial Globalization and Monetary Policy

Author:
Steven B. Kamin
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future.
Topic:
Economics, Globalization, International Cooperation, Monetary Policy, and Interest Rates
Political Geography:
Global Focus

38. The Taylor Rule and Interval Forecast For Exchange Rates

Author:
Jian Wang and Jason J. Wu
Publication Date:
01-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold. First, we find that in general, Taylor rule models generate tighter forecast intervals than the random walk, given that their intervals cover out-of-sample exchange rate realizations equally well. This result is more pronounced at longer horizons. Our results suggest a connection between exchange rates and economic fundamentals: economic variables contain information useful in forecasting the distributions of exchange rates. The benchmark Taylor rule model is also found to perform better than the monetary and PPP models. Second, the inference framework proposed in this paper for forecast-interval evaluation can be applied in a broader context, such as inflation forecasting, not just to the models and interval forecasting methods used in this paper.
Topic:
Economics, Exchange Rate Policy, and Models
Political Geography:
Global Focus

39. Currency Crashes in Industrial Countries: Much Ado About Nothing?

Author:
Joseph Gagnon
Publication Date:
02-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.
Topic:
Economics, Exchange Rate Policy, Inflation, and Currency
Political Geography:
Global Focus

40. Border Prices and Retail Prices

Author:
David Berger, Jon Faust, John H. Rogers, and Kai Steverson
Publication Date:
04-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We analyze retail prices and at-the-dock (import) prices of speciÖc items in the Bureau of Labor Statisticsí(BLS) CPI and IPP databases, using both databases simultaneously to identify items that are identical in description at the dock and when sold at retail. This identiÖcation allows us to measure the distribution wedge associated with bringing traded goods from the point of entry into the United States to their retail outlet. We Önd that overall U.S. distribution wedges are 50-70%, around 10 to 20 percentage points higher than that reported in the literature. We discuss the implications of this for measuring the size of the "pure" tradeables sector, exchange rate pass-through, and real exchange rate determination. We Önd that distribution wedges are very stable over time but there is considerable variation across items. There is some variation across the country of origin for the imported item, for our major trading partners, but not as much as the cross-item variation. We also investigate the determinants of distribution wedges, Önding that wedges do not vary systematically with exchange rates, but are related to other features of the micro data.
Topic:
Economics and Exchange Rate Policy
Political Geography:
Global Focus