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Begin New Search Topic Economics Publishing Institution Board of Governors of the Federal Reserve System Publication Year within 25 Years

31. Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes

Author:
Christopher J. Erceg and Jesper Linde
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
Topic:
Economics, Monetary Policy, Tax Systems, Macroeconomics, Fiscal Policy, Public Spending, and Liquidity
Political Geography:
Global Focus

32. Interest Rates and the Volatility and Correlation of Commodity Prices

Author:
Joseph W. Gruber and Robert J. Vigfusson
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we show that price correlation can increase as a result of a decline in interest rates. More generally, we examine the effect of interest rates on the volatility and correlation of commodity prices, theoretically through the framework of Deaton and Laroque (1992) and empirically via a panel GARCH model. In theory, we show that lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and can increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, as predicted by theory, we find that price volatility attributable to transitory shocks declines with interest rates, while, particularly for metals prices, price correlation increases as interest rates decline.
Topic:
Economics, Commodities, Interest Rates, and Price
Political Geography:
Global Focus

33. Do Recessions Affect Potential Output?

Author:
Jane T. Haltmaier
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A number of previous studies have looked at the effect of financial crises on actual output several years beyond the crisis. The purpose of this paper is to examine whether the growth of potential output also is affected by recessions, whether or not they include financial crises. Trend per capita output growth is calculated using HP filters, and average growth is compared for the two years preceding a recession, the two years immediately following a recession peak, and the two years after that. Panel regressions are run to determine whether characteristics of recessions, including depth, length, extent to which they are synchronized across countries, and whether or not they include a financial crisis, can explain the cumulative four-year loss in the level of potential output following an output peak preceding a recession. The main result is that the depth of a recession has a significant effect on the loss of potential for advanced countries, while the length is important for emerging markets. These results imply that the Great Recession might have resulted in declines in trend output growth averaging about 3 percent for the advanced economies, but appear to have had little effect on emerging market trend growth.
Topic:
Economics, Global Recession, Global Markets, and Economic Growth
Political Geography:
Global Focus

34. Variance Risk Premiums and the Forward Premium Puzzle

Author:
Juan M. Londono and Hao Zhou
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper presents evidence that the foreign exchange appreciation is predictable by the currency variance risk premium at a medium 6-month horizon and by the stock variance risk premium at a short 1-month horizon. Although currency variance risk premiums are highly correlated with each other over longer horizons, their correlations with stock variance risk premiums are quite low. Interestingly the currency variance risk premium has no predictive power for stock returns. We rationalize these findings in a consumption-based asset pricing model with orthogonal local and global economic uncertainties. In our model the market is incomplete in the sense that the global uncertainty is not priced by local stock markets and is therefore a forex-specific phenomenon—the currency uncertainty’s effects on the expected stock return are off-setting between the cash flow channel and the volatility channel.
Topic:
Economics, Risk, Currency, and Stock Markets
Political Geography:
Global Focus

35. Firm Characteristics and Em

Author:
Leonid Kogan and Mary Tian
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
"A three-factor model using the standardized-unexpected-earnings and cashflow-to-price factors explains 15 well-known asset pricing anomalies." Our data-mining experiment provides a backdrop against which such claims can be evaluated. We construct three-factor linear pricing models that match return spreads associated with as many as 15 out of 27 commonly used firm characteristics over the 1971-2011 sample. We form target assets by sorting firms into ten portfolios on each of the chosen characteristics and form candidate pricing factors as long-short positions in the extreme decile portfolios. Our analysis exhausts all possible 351 three-factor models, consisting of two characteristic-based factors in addition to the market portfolio. 65% of the examined factor models match a larger fraction of the target return cross-sections than the CAPM or the Fama-French three-factor model. We find that the relative performance of the complete set of three-factor models is highly sensitive to the sample choice and the factor construction methodology. Our results highlight the challenges of evaluating empirical factor models.
Topic:
Economics, Markets, Economic Theory, Data, and Models
Political Geography:
Global Focus

36. Nonlinearities in the Oil Price-Output Relationship

Author:
Lutz Kilian and 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, and Natural Resources
Political Geography:
North America and United States of America

37. U.S. International Equity Investment and Past Prospective Returns

Author:
Stephanie E. Curcuru, Charles Thomas, Francis E. Warnock, and Jon Wongswan
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Counter to extant stylized facts, using newly available data on country allocations in U.S. investors' foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, U.S. investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per year.
Topic:
Economics, Finance, Investment, Stock Markets, and Equity
Political Geography:
North America and United States of America

38. Where are Global and U.S. Trade Heading in the Aftermath of the Trade Collapse: Issues and Alternative Scenarios

Author:
Joseph W. Gruber, Flippo di Mauro, Bernd Schnatz, and 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, and Financial Crisis
Political Geography:
North America and United States of America

39. Quantitative Easing and Bank Lending: Evidence from Japan

Author:
David Bowman, Fang Cai, Sally Davies, and Steve Kamin
Publication Date:
06-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Prior to the recent financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan's "quantitative easing policy" (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether QEP simply provided little stimulus, or whether its positive effects were overwhelmed by the contractionary forces in Japan's post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP, the Bank of Japan's injections of liquidity into the interbank market. We identify a robust, positive, and statistically significant effect of bank liquidity positions on lending, suggesting that the expansion of reserves associated with QEP likely boosted the flow of credit. However, the overall size of that boost was probably quite small. First, the estimated response of lending to liquidity positions in our regressions is small. Second, much of the effect of the BOJ's reserve injections on bank liquidity was offset as banks reduced their lending to each other. Finally, the effect of liquidity on lending appears to have held only during the initial years of QEP, when the banking system was at its weakest; by 2005, even before QEP was abandoned, the relationship between liquidity and lending had evaporated.
Topic:
Economics, Financial Crisis, Lending, and Banking
Political Geography:
Japan and Asia

40. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

Author:
Malin Adolfson, Stefan Laseen, Jesper Linde, and 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, and Finance
Political Geography:
Global Focus