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54861. Bayesian Model Averaging and Exchange Rate Forecasts

Author:
Jonathan H. Wright
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Exchange rate forecasting is hard and the seminal result of Meese and Rogoff (1983) that the exchange rate is well approximated by a driftless random walk, at least for prediction purposes, has never really been overturned despite much effort at constructing other forecasting models. However, in several other macro and financial forecasting applications, researchers in recent years have considered methods for forecasting that combine the information in a large number of time series. One method that has been found to be remarkably useful for out-of-sample prediction is simple averaging of the forecasts of different models. This often seems to work better than the forecasts from any one model. Bayesian Model Averaging is a closely related method that has also been found to be useful for out-of-sample prediction. This starts out with many possible models and prior beliefs about the probability that each model is the true one. It then involves computing the posterior probability that each model is the true one, and averages the forecasts from the different models, weighting them by these posterior probabilities. This is effectively a shrinkage methodology, but with shrinkage over models not just over parameters. I apply this Bayesian Model Averaging approach to pseudo-out-of-sample exchange rate forecasting over the last ten years. I find that it compares quite favorably to a driftless random walk forecast. Depending on the currency-horizon pair, the Bayesian Model Averaging forecasts sometimes do quite a bit better than the random walk benchmark (in terms of mean square prediction error), while they never do much worse. The forecasts generated by this model averaging methodology are however very close to (but not identical to) those from the random walk forecast.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

54862. Revisiting the Border: An Assessment of the Law of One Price Using Very Disaggregated Consumer Price Data

Author:
John H. Rogers, Shing-Yi B. Wang, and Charles M. Engels
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We reexamine the evidence for border effects in deviations from the law of one price, using data for consumer prices from Canadian and U.S. cities. The study parallels Engel and Rogers (1996), except that this study uses actual price data rather than price index data. We find evidence of border effects both in the levels of prices and the percentage change in prices. Even accounting for distance between cities and relative population sizes, we find that the absolute difference between prices in the U.S. and Canada in our data (annual from 1990 to 2002) is greater than seven percent. This difference exists among tradables and nontradables, though for some categories of tradables (clothing and durables) the difference is smaller. The findings are similar for annual changes, though the magnitude is smaller: the border accounts for a difference in 1.5 percent in annual (log) price changes. Relative population sizes and distance are helpful in explaining price level differences (between Canadian and U.S. cities) for traded goods, but are less helpful in explaining price level differences for nontraded goods or for accounting for differences in price changes for either traded or nontraded goods.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Canada and North America

54863. Contagion: An Empirical Test

Author:
Jon Wongswan
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using the conditional Capital Asset Pricing Model (CAPM), this paper tests for the existence and pattern of contagion and capital market integration in global equity markets. Contagion is defined as significant excess conditional correlation among different countries' asset returns above what could be explained by economic fundamentals (systematic risks). Capital market integration is defined as the situation in which only systematic risks are priced. The paper uses a panel of sixteen countries, divided into three blocs: Asia, Latin America, and Germany-U.K.-U.S., for the period from 1990 through 1999. The results show evidence of contagion and capital market integration. In addition, contagion is found to be a regional phenomenon.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
United States, United Kingdom, Asia, Germany, and Latin America

54864. How do Canadian Hours Worked Respond to a Technology Shock?

Author:
Robert J. Vigfusson, Lawrence J. Christiano, and Martin Eichenbaum
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper investigates the response of hours worked to a permanent technology shock. Based on annual data from Canada, we argue that hours worked rise after a positive technology shock. We obtain a similar result using annual data from the United States. These results contradict a large literature that claims that a positive technology shock causes hours worked to fall. We find that the different results are due to the literature making a specification error in the statistical model of per capital hours worked. Finally, we present results that Canadian monetary policy has accommodated technology shocks.
Topic:
Economics, International Trade and Finance, and Science and Technology
Political Geography:
Canada and North America

54865. Precautionary Savings and the Wealth Distribution with Illiquid Durables

Author:
Joseph W. Gruber and Robert F. Martin
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We study the role an illiquid durable consumption good plays in determining the level of precautionary savings and the distribution of wealth in a standard Aiyagari model (i.e. a model with heterogeneous agents, idiosyncratic uncertainty, and borrowing constraints). Transactions costs induce an inaction region over which the durable stock and the associated user cost are not adjusted in response to changes in income, increasing, on average, the volatility of non-durable consumption. The volatility of total consumption is then a function of the share of the durable good in the utility function and the width of the inaction region. We are particularly interested in parameterizations which increase the precautionary motive for saving through an increase in "committed expenditure risk." We find, for an empirically relevant share of durable consumption and for all transaction costs below an upper threshold, that the level of precautionary savings is increasing in the transaction costs. Transaction costs have only a modest impact on the degree of wealth dispersion, as measured by the Gini index, as the associated increase in savings is close to linear in wealth. While we are unable to match the dispersion of wealth in the data, we increase the dispersion over a single asset model (Gini index of .71 for financial assets and .37 for total wealth) and we are able to match the relative dispersion of financial to durable assets, i.e. we find financial assets much more unequal than durable assets. We also match the ratio of housing wealth to total wealth for the median agent. We calibrate the model to data from the PSID, the CES, and the SCF.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Science and Technology

54866. The USA and UNESCO: Building Knowledge, Building Cultures

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The United Nations Educational, Scientific and Cultural Organization, UNESCO, was founded after World War II to contribute to peace and security. Collaboration among nations through education, science and culture remains a cornerstone of a peaceful world order. The founders of UNESCO believed that the rule of law, respect for human rights, and freedom of expression would be strengthened through international cooperation. The need for the world community to renew its efforts to advance these principles has never been more urgent. American leadership in the service of peace and security can help mobilize multilateral institutions, including UNESCO, to stand up for common values that promote tolerance and thwart terrorism. The sanctity of human life must be a common commitment.
Topic:
International Relations, Treaties and Agreements, and United Nations
Political Geography:
United States

54867. The Effect of Exchange Rates on Prices, Wages, and Profits: A Case Study of the United Kingdom in the 1990s

Author:
Joseph E. Gagon
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
During the 1990s the United Kingdom experienced large and sudden exchange rate movements that had no apparent impact on overall consumer prices. This paper shows that the stability of U.K. consumer prices was made possible in part by offsetting movements in the price-cost margins of foreign exporters and in part by offsetting price-cost margins in the U.K. distribution sector. At the same time, U.K. manufacturers experienced margin swings in the opposite direction, largely due to their role as exporters. Thus, sterling depreciation boosted the profits of U.K. manufacturers and squeezed the profits of U.K. distributors, while sterling appreciation had the opposite effects.
Topic:
Economics, International Trade and Finance, and Science and Technology
Political Geography:
United Nations

54868. News or Noise? An Analysis of Brazilian GDP Announcements

Author:
Rebeca de la Rocque Palis, Roberto Luis Olinto Ramos, and Patrice Robitaille
Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Revisions to GDP announcements in many countries are often large, and Faust, Rogers, and Wright (2003) have found that G-7 GDP revisions are predictable to varying degrees. In this paper, we extend FRW to study revisions to Brazilian GDP announcements. We document that revisions to Brazilian GDP are large relative to those of G-7 countries. Brazilian GDP revisions are also predictable, which is consistent with the view that GDP revisions correct errors in preliminary GDP rather than reflect news. However, GDP revisions are far from being entirely predictable. Although GDP revisions are largest only one year following the initial GDP release, those revisions are nearly unpredictable.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Brazil and South America

54869. The Effect of Exchange Rate Fluctuations on Multinationals' Returns

Author:
Jane Ihrig and David Prior
Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
<p>This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates. All told, we find about 1 in 4 firms' returns is significantly affected by movement in the exchange rate between 1995 and 1999. </p><blockquote><p> </p> </blockquote><p> </p><p> </p>
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

54870. SARS: Down But Still a Threat

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This Intelligence Community Assessment (ICA) was requested by Secretary of Health and Human Services Tommy Thompson and Ambassador Jack Chow, Deputy Assistant Secretary of State for International Health Affairs. It highlights the evolution of Severe Acute Respiratory Syndrome (SARS) and the potential implications of the disease for the United States under several scenarios; this paper does not attempt to provide a scientific assessment of the epidemiology of SARS. Even though SARS has infected and killed far fewer people than other common infectious diseases such as influenza, malaria, tuberculosis, and HIV/AIDS, it has had a disproportionately large economic and political impact because it spread in areas with broad international commercial links and received intense media attention as a mysterious new illness that seemed able to go anywhere and hit anyone.
Topic:
International Relations, Human Welfare, Poverty, and Third World
Political Geography:
United States