http://www.federalreserve.gov/pubs/ifdp/default.htm Staff working papers in the International Finance Discussion Paper (IFDP) series are preliminary matierials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the International Finance Discussion Paper series (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers http://www.federalreserve.gov/pubs/ifdp/gifjpg/newbig.gif http://www.federalreserve.gov/pubs/ifdp/ http://www.federalreserve.gov/pubs/ifdp/2012/1048/default.htm Mathias Trabandt and Harald Uhlig. We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation. 2012-05-23T10:34:09-04:00 en How Do Laffer Curves Differ Across Countries? 2012-05-23T10:01:37-04:00 FRB Laffer curve taxation corss country comparison debt sustainability fiscal limits quantitative endogenous growth human capital and labor taxation IFDP1048: How Do Laffer Curves Differ Across Countries? http://www.federalreserve.gov/pubs/ifdp/2012/1048/ifdp1048.pdf PDF version Mathias Trabandt and Harald Uhlig 2012-05-23T10:01:37-04:00 1048 E0 E13 E2 E3 E62 H0 H2 H3 H6 http://www.federalreserve.gov/pubs/ifdp/2012/1047/default.htm Nathan Foley-Fisher. I construct a database that maps the timing of sovereign default decisions into elected politicians' terms of office, that provides an empirical means of investigating political economy theories of sovereign default. I find no robust patterns in the timing of default decisions over terms of office. I also find no evidence in support of the political reputation theory of sovereign debt repayment. Finally, there is some tentative evidence that elected leaders who default are also those more likely to be re-elected. Motivated by anecdotal evidence, I use a stylised model of political leaders with career concerns to demonstrate how this can occur when politicians care about re-election. 2012-05-23T10:34:09-04:00 en The Timing of Sovereign Defaults Over Electoral Terms 2012-05-23T09:52:04-04:00 FRB Sovereign default electoral cycles career concerns IFDP1047: The Timing of Sovereign Defaults Over Electoral Terms http://www.federalreserve.gov/pubs/ifdp/2012/1047/ifdp1047.pdf PDF version Nathan Foley-Fisher 2012-05-23T09:52:04-04:00 1047 F34 H63 http://www.federalreserve.gov/pubs/ifdp/2012/1046/default.htm Christopher J. Erceg and Jesper Linde. This paper uses a New Keynesian DSGE model of a small open economy to compare how the e�ects of fiscal consolidation di�er depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important di�erences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation. 2012-05-23T10:34:09-04:00 en Fiscal Consolidation in an Open Economy 2012-05-02T14:55:47-04:00 FRB Monetary policy currency union fiscal policy zero lower bound constraint new Keynesian small open economy DSGE model IFDP1046: Fiscal Consolidation in an Open Economy http://www.federalreserve.gov/pubs/ifdp/2012/1046/ifdp1046.pdf PDF version Christopher J. Erceg and Jesper Linde 2012-05-02T14:55:47-04:00 1046 E52 E58 http://www.federalreserve.gov/pubs/ifdp/2012/1045/default.htm Tara Rice and Jonathan Rose. In September 2008, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship and dividend payments on common and preferred shares were suspended. As a result, share prices fell to nearly zero and many banks across the country lost the value of their investments in the preferred shares. We estimate more than 600 depository institutions in the United States were exposed to at least $8 billion in investment losses from these securities. In addition, fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover. Since these GSE investments were considered to be safe investments by banks, regulators, and rating agencies, we consider these losses to be exogenous shocks to bank capital, and use this event to examine the relationship between community bank condition and lending during this crisis. We find that in the quarter following the takeover of Fannie Mae and Freddie Mac, the measured Tier 1 capital ratio at exposed banks fell about three percent on average, and loan growth at exposed banks with median capitalization was about 2 percentage points lower compared to other banks in the following quarter. Consequently, considering the set of community banks that incurred about $2 billion in GSE-related losses, and assuming that each bank reduced loan growth by 2 percentage points, the estimated aggregate lending drop among these banks would be roughly $4 billion. 2012-05-23T10:34:09-04:00 en When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover 2012-03-23T13:43:08-04:00 FRB Banking financial crisis government sponsored enterprise credit contraction IFDP1045: When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover http://www.federalreserve.gov/pubs/ifdp/2012/1045/ifdp1045.pdf PDF version Tara Rice and Jonathan Rose 2012-03-23T13:43:08-04:00 1045 G21 G28 E61 http://www.federalreserve.gov/pubs/ifdp/2012/1044/default.htm John Ammer, Sara B. Holland, David C. Smith, and Francis E. Warnock. U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show that our firm-level analysis has implications for country-level studies, suggesting that research investigating equity investment patterns at the country-level should include cross-listing as an endogenous control variable. We describe easy-to-implement methods for including the importance of cross-listing at the country level. 2012-05-23T10:34:09-04:00 en U.S. International Equity Investment 2012-03-19T10:54:29-04:00 FRB Home bias portfolio choice financial disclosure corporate governance IFDP1044: U.S. International Equity Investment http://www.federalreserve.gov/pubs/ifdp/2012/1044/ifdp1044.pdf PDF version John Ammer, Sara B. Holland, David C. Smith, and Francis E. Warnock 2012-03-19T10:54:29-04:00 1044 G11 F21 C35 http://www.federalreserve.gov/pubs/ifdp/2012/1043/default.htm Lamont Black and Lieu Hazelwood. One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk taking by analyzing the risk ratings of banks� commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending. 2012-05-23T10:34:09-04:00 en The Effect of TARP on Bank Risk-Taking 2012-03-06T12:47:35-04:00 FRB Banking government regulation macroeconomic stabilization policy IFDP1043: The Effect of TARP on Bank Risk-Taking http://www.federalreserve.gov/pubs/ifdp/2012/1043/ifdp1043.pdf PDF version Lamont Black and Lieu Hazelwood 2012-03-06T12:47:35-04:00 1043 G21 G28 E61 http://www.federalreserve.gov/pubs/ifdp/2012/1042/default.htm Brahima Coulibaly. During the 2008-2009 global financial crisis, emerging market economies (EMEs) loosened monetary policy considerably to cushion the shock. In previous crises episodes, by contrast, EMEs generally had to tighten monetary policy to defend the value of their currencies, to contain capital flight, and to bolster policy credibility. Our study aims to understand the factors that enabled this remarkable shift in monetary policy, and also to assess whether this marks a new era in which EMEs can now conduct countercyclical policy, more in line with advanced economies. The results indicate statistically significant linkages between some characteristics of the economies and their ability to conduct countercyclical monetary policy. We find that macroeconomic fundamentals and lower vulnerabilities, openness to trade, and international capital flows, financial reforms, and the adoption of inflation targeting all facilitated the conduct of countercyclical policy. Of these factors, the most important have been the financial reforms achieved over the past decades and the adoption of inflation targeting. As long as EMEs maintain these strong economic fundamentals, continue to reform their financial sector, and adopt credible and transparent monetary policy frameworks such as inflation targeting, the conduct of countercyclical monetary policy will likely be sustainable. 2012-05-23T10:34:09-04:00 en Monetary Policy in Emerging Market Economies: What Lessons From the Global Financial Crisis? 2012-02-27T11:44:30-04:00 FRB Monetary policy crises macroeconomic stabilization IFDP1042: Monetary Policy in Emerging Market Economies: What Lessons From the Global Financial Crisis? http://www.federalreserve.gov/pubs/ifdp/2012/1042/ifdp1042.pdf PDF version Brahima Coulibaly 2012-02-27T11:44:30-04:00 1042 E52 E58 E63 http://www.federalreserve.gov/pubs/ifdp/2012/1041/default.htm Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas. Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40-60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points. 2012-05-23T10:34:09-04:00 en Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields 2012-02-27T11:36:42-04:00 FRB Foreign official inflows Treasury yields reserves capital flows IFDP1041: Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields http://www.federalreserve.gov/pubs/ifdp/2012/1041/ifdp1041.pdf PDF version Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas 2012-02-27T11:36:42-04:00 1041 F31 F32 F34 http://www.federalreserve.gov/pubs/ifdp/2012/1040/default.htm Etienne Gagnon, Benjamin R. Mandel, and Robert J. Vigfusson. 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 do not materially alter the literature�s view that pass-through to U.S. import prices is low over the short to medium term horizons that are most useful for both forecasting and differentiating amongst economic models. 2012-05-23T10:34:09-04:00 en The Hitchhiker's Guide to Missing Import Price Changes and Pass-Through 2012-02-13T12:17:54-04:00 FRB Exchange rate pass-through import prices item replacement IFDP1040: The Hitchhiker's Guide to Missing Import Price Changes and Pass-Through http://www.federalreserve.gov/pubs/ifdp/2012/1040/ifdp1040.pdf PDF version Etienne Gagnon, Benjamin R. Mandel, and Robert J. Vigfusson 2012-02-13T12:17:54-04:00 1040 F31 F41 E30 E01 C81 http://www.federalreserve.gov/pubs/ifdp/2011/1039/default.htm Lee E. Ohanian and Andrea Raffo. 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. 2012-01-09T12:50:43-04:00 en Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles 2012-01-09T12:31:37-04:00 FRB Hours worked great recession labor wedge IFDP1039: Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles http://www.federalreserve.gov/pubs/ifdp/2011/1039/ifdp1039.pdf PDF version Lee E. Ohanian and Andrea Raffo 2012-01-09T12:31:37-04:00 1039 E32 F44 J20 http://www.federalreserve.gov/pubs/ifdp/2011/1038/default.htm Logan T. Lewis. This paper examines how nominal uncertainty affects the choice firms face to serve a foreign market through exports or to produce abroad as a multinational. I develop a two-country, stochastic general equilibrium model in which firms make production and pricing decisions in advance, and I consider its implications on this relative choice. For foreign firms, both exports and multinational production are priced in the destination currency, and this uncertainty has no effect on the relative decision. In the data, U.S. firms set nearly all of their export prices in dollars. Therefore, home firms price exports in their own currency in the model. Home exporters gain an advantage over home multinationals: during a foreign contraction, the foreign exchange rate appreciates, causing exported goods from the home country to be relatively cheaper. This pricing advantage affects exporters non-linearly through demand, which translates to convex profits. As foreign volatility rises, the model implies that the home country should serve the foreign country relatively more through exports. I take this implication to bilateral U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that higher inflation volatility is associated with a significantly lower ratio of multinational production to total foreign sales. 2012-01-09T12:50:43-04:00 en Exports Versus Multinational Production Under Nominal Uncertainty 2011-12-06T16:36:42-04:00 FRB Multinational production international trade nominal uncertainty proximity-concentration IFDP1038: Exports Versus Multinational Production Under Nominal Uncertainty http://www.federalreserve.gov/pubs/ifdp/2011/1038/ifdp1038.pdf PDF version Logan T. Lewis 2011-12-06T16:36:42-04:00 1038 F12 F23 F41 http://www.federalreserve.gov/pubs/ifdp/2011/1037/default.htm Greg Howard, Robert Martin, and Beth Anne Wilson. 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. 2012-01-09T12:50:43-04:00 en Are Recoveries from Banking and Financial Crises Really So Different? 2011-12-06T10:09:12-04:00 FRB International business cycles recoveries labor markets potential output United States IFDP1037: Are Recoveries from Banking and Financial Crises Really So Different? http://www.federalreserve.gov/pubs/ifdp/2011/1037/ifdp1037.pdf PDF version Greg Howard, Robert Martin, and Beth Anne Wilson 2011-12-06T10:09:12-04:00 1037 E32 E20 F44 http://www.federalreserve.gov/pubs/ifdp/2011/1036/default.htm Davide Debortoli and Ricardo Nunes. 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. 2012-01-09T12:50:43-04:00 en Monetary Regime Switches and Unstable Objectives 2011-12-02T12:13:55-04:00 FRB Monetary policy regime switches unstable objectives IFDP1036: Monetary Regime Switches and Unstable Objectives http://www.federalreserve.gov/pubs/ifdp/2011/1036/ifdp1036.pdf PDF version Davide Debortoli and Ricardo Nunes 2011-12-02T12:13:55-04:00 1036 E32 E42 E52 http://www.federalreserve.gov/pubs/ifdp/2011/1035/default.htm Juan M. Londono. 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. 2012-01-09T12:50:43-04:00 en The Variance Risk Premium Around the World 2011-12-02T11:50:23-04:00 FRB Variance risk premium economic uncertainty interdependence international integration co-movements return predictability IFDP1035: The Variance Risk Premium Around the World http://www.federalreserve.gov/pubs/ifdp/2011/1035/ifdp1035.pdf PDF version Juan M. Londono 2011-12-02T11:50:23-04:00 1035 E44 F36 G12 G13 G15 http://www.federalreserve.gov/pubs/ifdp/2011/1034/default.htm Davide Debortoli, Junior Maih, and Ricardo Nunes. 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. 2012-01-09T12:50:43-04:00 en Loose Commitment in Medium-Scale Macroeconomic Models: Theory and Applications 2011-12-02T11:43:12-04:00 FRB Commitment discretion monetary policy IFDP1034: Loose Commitment in Medium-Scale Macroeconomic Models: Theory and Applications http://www.federalreserve.gov/pubs/ifdp/2011/1034/ifdp1034.pdf PDF version Davide Debortoli, Junior Maih, and Ricardo Nunes 2011-12-02T11:43:12-04:00 1034 C32 E58 E61