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  • Author: Etienne Gagnon, Benjamin R. Mandel, Robert J. Vigfusson
  • Publication Date: 01-2012
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics (BLS) microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection effects. Our analysis suggests that the biases induced by selective exits and entries are modest over typical forecast horizons. As such, the empirical evidence continues to support the conclusion that exchange rate pass-through to U.S. import prices is low.
  • Topic: International Trade and Finance, Exchange Rate Policy, Imports, Price
  • Political Geography: Global Focus
  • Author: Lutz Kilian, 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, Natural Resources
  • Political Geography: North America, United States of America
  • Author: Joseph W. Gruber, Flippo di Mauro, Bernd Schnatz, 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, Financial Crisis
  • Political Geography: North America, United States of America
  • Author: Ron Alquist, Lutz Kilian, Robert J. Vigfusson
  • Publication Date: 07-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries?
  • Topic: Energy Policy, International Trade and Finance, Oil, Natural Resources
  • Political Geography: North America, United States of America
  • Author: Trevor A. Reeve, Robert J. Vigfusson
  • Publication Date: 08-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices.
  • Topic: International Trade and Finance, Markets, Investment, Commodities
  • Political Geography: Global Focus
  • Author: Massimo Del Gatto, Flippo de Mauro, Joseph W. Gruber, 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, Exports
  • Political Geography: North America, United States of America
  • 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, Exports
  • Political Geography: Global Focus
  • Author: Martin Bodenstein, Luca Guerrieri
  • Publication Date: 10-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but have modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.
  • Topic: Energy Policy, International Trade and Finance, Oil, Natural Resources
  • Political Geography: North America, United States of America
  • Author: Brett Berger, Robert F Martin
  • Publication Date: 11-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Over the past decade, Chinese exports have boomed, increasing far faster than GDP growth. What can account for this explosion? Our paper uses finely detailed Chinese export data (8-digit HS codes) combined with U.S. trade data to explore this question. Although exchange rate policy clearly boosted the trade surplus, and the structure of the economy, e.g. abundant cheap labor, encouraged investment, these alone cannot account for the changing composition and acceleration of exports. We find that the growth in exports is most likely a product of effective Chinese industrial policy and fortuitous timing. The detailed trade data reveal that key “new” technology goods, such as cell phones, LCD screens, and laptops played a critical role. Finally, we use the data to examine the relationship between Chinese exports and global manufacturing, in particular U.S. manufacturing employment. We find that increased Chinese competition in both domestic and U.S. export markets likely lowered U.S. manufacturing employment between 2000 and 2007. Chinese policy is not, however, wholly responsible. Some job losses, such as in textile production, were no doubt the result of China’s natural comparative advantages, while other U.S. job losses are attributable to relatively low investment and slow GDP growth in the United States following the 2001 recession.
  • Topic: International Trade and Finance, Hegemony, Exports, Trade, Strategic Competition
  • Political Geography: China, Asia
  • Author: Shaghil Ahmed
  • Publication Date: 12-2009
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper builds a model of two types of Chinese exports, those processed and assembled laregely from imported inputs ("processed" exports) and "non- processed" exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurredoverthepastthreeyears. Theresultsshowthatgreaterexchangerate appreciation dampens export growth, both for non-processed and processed ex- ports, with the estimated cumulative price elasticity being substantially greater thanunity. WhenthesourceoftheincreaseintheChineserealexchangerateis appreciations against the currencies of other emerging Asian trading partners, the e§ect on processing exports is positive but insignÖcant, while the e§ect on non-processing exports is signiÖcantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against Chinaís advanced-economy trading partners, the e§ects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactualsimulationsbasedontheestimatedmodelstronglysug- gest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate áexibility could contribute to lowering Chinaís huge trade surplus through restraining growth of exports.
  • Topic: Economics, International Trade and Finance, Exchange Rate Policy, Exports
  • Political Geography: China, Asia