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  • Author: Bernardo Morias
  • Publication Date: 05-2015
  • Content Type: Commentary and Analysis
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows the model to better explain the relation between financial and economic development.
  • Topic: Development, Economic Theory, Risk, Fiscal Policy, Models, Productivity
  • Political Geography: Global Focus
  • Author: Ozge Akinci
  • Publication Date: 08-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) Global financial risk shocks explain about 20 percent of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies.
  • Topic: Development, Emerging Markets, International Cooperation, Financial Crisis, Global Financial Crisis
  • Political Geography: Global Focus
  • Author: Samir Jahjah, Bin Wei, Vivian Zhanwei Yue
  • Publication Date: 06-2012
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.
  • Topic: Development, Exchange Rate Policy, Fiscal Policy, Bonds
  • Political Geography: Global Focus
  • Author: Jaime Marquez, Charles Thomas, Corinne Land
  • Publication Date: 08-2012
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank’s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.
  • Topic: Development, International Trade and Finance, Exchange Rate Policy, Strategic Competition, Price
  • Political Geography: Global Focus
  • Author: Andrea Stella, James H. Stock
  • Publication Date: 11-2012
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and in the non-accelerating inflation rate of unemployment. The model, which consists of five unobserved components including the trends) with stochastic volatility, implies a time-varying vector autoregression model for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the the non-accelerating inflation rate of unemployment has increased.
  • Topic: Development, Labor Issues, Inflation, State Building, Unemployment
  • Political Geography: Global Focus
  • Author: David M. Arseneau
  • Publication Date: 02-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper uses disaggregated data from a broad cross-section of countries to empirically assess differences in energy consumption profiles across countries. We find empirical support for the energy ladder hypothesis, which contends that as an economy develops it transits away from a heavier reliance on traditional fuel sources towards an increase in the use of modern commercial energy sources. We also find empirical support for the hypothesis that structural transformation--the idea that as an economy matures, it transforms away from agriculture-based activity into industrial activity and, finally, fully matures into a service-oriented economy--is an important driver for the distribution of end-use energy consumption. However, even when these two hypotheses are taken into account, we continue to find evidence suggesting that the patterns of energy consumption in the BRIC economies are importantly different from those of other economies.
  • Topic: Development, Energy Policy, Infrastructure, Services, BRIC
  • Political Geography: Russia, China, Europe, India, Asia, Brazil, South America, Global Focus
  • Author: Malin Adolfson, Stefan Laseen, Jesper Linde, Lars E.O. Svensson
  • Publication Date: 07-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
  • Topic: Development, Economics, Monetary Policy, Finance
  • Political Geography: Global Focus
  • Author: Lee E. Ohanian, Andrea Raffo
  • Publication Date: 12-2011
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We build a dataset of quarterly hours worked for 14 OECD countries. We document that hours are as volatile as output, that a large fraction of labor adjustment takes place along the intensive margin, and that the volatility of hours relative to output has increased over time. We use these data to reassess the Great Recession and prior recessions. The Great Recession in many countries is a puzzle in that labor wedges are small, while those in the U.S. Great Recession - and those in previous European recessions - are much larger.
  • Topic: Development, International Cooperation, Labor Issues, Business , Labor Policies
  • Political Geography: Global Focus