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/2013/1080/default.htm Ricardo Nunes. The Federal Reserve through the Federal Open Market Committee (FOMC) regularly releases macroeconomic forecasts to the general public and the US congress with the purpose of explaining the likely evolution of the economy and the appropriate stance of monetary policy. Immediately before doing so, the FOMC receives a forecast produced by the Federal Reserve staff which remains private for five years. The literature has pointed out that, despite the informational advantage of the FOMC, its forecast differs from and is not always more accurate than the staff forecast. This finding has raised concerns regarding the loss of relevant information and the usefulness of the FOMC forecasts. This paper brings evidence that the FOMC forecast also incorporates other publicly available forecasts and views, and that the weight attributed to public forecasts is larger than what is optimal given a mean squared error objective. These findings are consistent with i) the institutional role of the FOMC in being representative of a variety of public views, ii) the academic literature recommendation to use equal weights and not to overfit specific forecasts based on past performance. The statistical model can also account for several empirical regularities of the forecasts. 2013-05-23T11:45:46-04:00 en Do Central Banks� Forecasts Take Into Account Public Opinion and Views? 2013-05-23T11:09:55-04:00 FRB Monetary policy design Central banks� forecasts IFDP1080: Do Central Banks� Forecasts Take Into Account Public Opinion and Views? http://www.federalreserve.gov/pubs/ifdp/2013/1080/ifdp1080.pdf PDF version Ricardo Nunes 2013-05-23T11:09:55-04:00 1080 E52 E58 E31 http://www.federalreserve.gov/pubs/ifdp/2013/1079/default.htm Brendan Epstein and Ryan Nunn. A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities. 2013-05-23T11:45:47-04:00 en Taxation, Match Quality and Social Welfare 2013-05-01T08:14:09-04:00 FRB Taxable income elasticity endogenous amenities match quality deadweight loss IFDP1079: Taxation, Match Quality and Social Welfare http://www.federalreserve.gov/pubs/ifdp/2013/1079/ifdp1079.pdf PDF version Brendan Epstein and Ryan Nunn 2013-05-01T08:14:09-04:00 1079 H21 J32 J63 http://www.federalreserve.gov/pubs/ifdp/2013/1078/default.htm Torben G. Andersen, Dobrislav Dobrev, and Ernst Schaumburg. We provide a first in-depth look at robust estimation of integrated quarticity (IQ) based on high frequency data. IQ is the key ingredient enabling inference about volatility and the presence of jumps in financial time series and is thus of considerable interest in applications. We document the significant empirical challenges for IQ estimation posed by commonly encountered data imperfections and set forth three complementary approaches for improving IQ based inference. First, we show that many common deviations from the jump diffusive null can be dealt with by a novel filtering scheme that generalizes truncation of individual returns to truncation of arbitrary functionals on return blocks. Second, we propose a new family of efficient robust neighborhood truncation (RNT) estimators for integrated power variation based on order statistics of a set of unbiased local power variation estimators on a block of returns. Third, we find that ratio-based inference, originally proposed in this context by Barndorff-Nielsen and Shephard (2002), has desirable robustness properties in the face of regularly occurring data imperfections and thus is well suited for empirical applications. We confirm that the proposed filtering scheme and the RNT estimators perform well in our extensive simulation designs and in an application to the individual Dow Jones 30 stocks. 2013-05-23T11:45:47-04:00 en A Robust Neighborhood Truncation Approach to Estimation of Integrated Quarticity 2013-04-08T11:20:31-04:00 FRB Robust neighborhood truncation estimator functional filtering integrated quarticity inference on integrated variance inference on jumps high-frequency data IFDP1078: A Robust Neighborhood Truncation Approach to Estimation of Integrated Quarticity http://www.federalreserve.gov/pubs/ifdp/2013/1078/ifdp1078.pdf PDF version Torben G. Andersen, Dobrislav Dobrev, and Ernst Schaumburg 2013-04-08T11:20:31-04:00 1078 C14 C15 C22 C80 G10 http://www.federalreserve.gov/pubs/ifdp/2013/1077/default.htm Stephanie E. Curcuru, Charles P. Thomas, and Francis E. Warnock. Estimates of U.S. returns differentials have ranged from exorbitant to quite small, in part because of their volatility coupled with the relatively short time series available. We shed light on underlying drivers of returns differentials by presenting a number of decompositions: a by-asset-class decomposition into yields and capital gains, the Gourinchas and Rey (2007a) composition and return effects, and further decompositions of capital gains that focus on exchange rate effects. While each decomposition informs thinking about returns differentials, one constant is evident throughout: to date the existing differential favoring the U.S. has owed primarily to one factor, a differential in direct investment yields. We discuss how our analysis informs the income puzzle (of positive net income flows to the U.S. even as its net international investment position is negative and substantial) and the position puzzle (of a sizeable gap between the reported U.S. net international position and cumulated current account deficits), provide an initial assessment of the literature on the dynamics of returns differentials, and present a framework to guide a forward-looking view of how returns differentials might evolve in the future. 2013-05-23T11:45:47-04:00 en On Returns Differentials 2013-04-08T11:10:22-04:00 FRB Current account international investment position direct investment IFDP1077: On Returns Differentials http://www.federalreserve.gov/pubs/ifdp/2013/1077/ifdp1077.pdf PDF version Stephanie E. Curcuru, Charles P. Thomas, and Francis E. Warnock 2013-04-08T11:10:22-04:00 1077 F3 G15 http://www.federalreserve.gov/pubs/ifdp/2013/1076/default.htm Carlos Arteta, Mark Carey, Ricardo Correa, and Jason Kotter. We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks. 2013-05-23T11:45:47-04:00 en Revenge of the Steamroller: ABCP as a Window on Risk Choices 2013-04-03T13:39:10-04:00 FRB Risk decisions systemic risk bank runs financial crisis commercial paper IFDP1076: Revenge of the Steamroller: ABCP as a Window on Risk Choices http://www.federalreserve.gov/pubs/ifdp/2013/1076/ifdp1076.pdf PDF version Carlos Arteta, Mark Carey, Ricardo Correa, and Jason Kotter 2013-04-03T13:39:10-04:00 1076 G20 G01 G32 G38 http://www.federalreserve.gov/pubs/ifdp/2013/1075/default.htm Daniel O. Beltran, Larry Cordell, and Charles P. Thomas. A key feature of the 2007 financial crisis is that for some classes of securities trade has practically ceased. And where trade has occurred, it appears that market prices are well below their intrinsic values. This seems especially true for those securities where the payoff streams are particularly complex, for example, structured finance ABS CDOs. One explanation for this is that information about these securities' intrinsic values since the crisis has been asymmetric, with current holders having better information than potential buyers. We first characterize the information asymmetries that were present in the structured finance ABS CDO market. Because many of the CDO dealers had partially or fully integrated the pipeline from mortgage originations through CDO issuance, they had informational advantages over potential buyers that could well have disrupted trading in CDOs as the crisis took hold in August of 2007. Using a "workhorse" model for pricing securities under asymmetric information and a novel dataset for the intrinsic values of ABS CDOs, we show how the resulting adverse selection problem could explain why the bulk of these securities either trade at significant discounts to their intrinsic values or do not trade at all. 2013-05-23T11:45:47-04:00 en Asymmetric Information and the Death of ABS CDOs 2013-03-28T14:11:56-04:00 FRB CDO securitization asymmetric lemons IFDP1075: Asymmetric Information and the Death of ABS CDOs http://www.federalreserve.gov/pubs/ifdp/2013/1075/ifdp1075.pdf PDF version Daniel O. Beltran, Larry Cordell, and Charles P. Thomas 2013-03-28T14:11:56-04:00 1075 C63 D82 D43 http://www.federalreserve.gov/pubs/ifdp/2013/1074/default.htm Toshihiko Mukoyama. This paper analyzes the job-to-job transitions of workers in the United States. I propose a new method of correcting the time-aggregation bias. The bias-corrected series from 1996 to 2011 reveals a procyclical pattern of job-to-job transition and a large decline since the beginning of the 2000s. I construct a model of on-the-job search and explore the implications of this phenomenon. The calibrated model shows that the decline in the reallocation of workers through job-to-job transitions has had a substantial effect on total factor productivity (TFP). From 2009 to 2011, the model accounts for about 0.5%-0.7% annual decline in TFP. 2013-05-23T11:45:47-04:00 en The Cyclicality of Job-to-Job Transitions and Its Implications for Aggregate Productivity 2013-03-11T13:38:20-04:00 FRB Job-to-job transition time-aggregation bias on-the-job search IFDP1074: The Cyclicality of Job-to-Job Transitions and Its Implications for Aggregate Productivity http://www.federalreserve.gov/pubs/ifdp/2013/1074/ifdp1074.pdf PDF version Toshihiko Mukoyama 2013-03-11T13:38:20-04:00 1074 E24 E32 J62 http://www.federalreserve.gov/pubs/ifdp/2013/1073/default.htm Sewon Hur and Illenin O. Kondo. Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies. 2013-05-23T11:45:47-04:00 en A Theory of Rollover Risk, Sudden Stops, and Foreign Reserves 2013-03-11T13:33:39-04:00 FRB Rollover risk reserves sudden stops IFDP1073: A Theory of Rollover Risk, Sudden Stops, and Foreign Reserves http://www.federalreserve.gov/pubs/ifdp/2013/1073/ifdp1073.pdf PDF version Sewon Hur and Illenin O. Kondo 2013-03-11T13:33:39-04:00 1073 F42 F34 H63 http://www.federalreserve.gov/pubs/ifdp/2013/1072/default.htm Jane Haltmaier. The Chinese economy has been growing at a rapid pace for over thirty years. Most of this growth has come from higher labor productivity, while growth of employment has diminished along with a slower rate of increase in the working-age population. This paper looks at the challenges that China will face over the next two decades in maintaining its rapid pace of economic growth, especially as working-age population growth slows further and then begins to decline. Key questions include whether China will be able to continue to devote nearly half of its GDP to investment, whether such investment will become less productive as the capital-labor ratio continues to rise, whether labor participation and employment rates will fall as the population becomes less rural, and whether future shifts out of rural employment will go more toward the services rather than the manufacturing sector, where productivity is higher. In the baseline scenario economic growth falls gradually from its current pace of about 10 percent to near 6� percent by 2030. However, a combination of less optimistic, but still reasonable assumptions, results in a reduction in the growth rate to about 1� percent by 2030. 2013-05-23T11:45:47-04:00 en Challenges for the Future of Chinese Economic Growth 2013-03-11T13:28:01-04:00 FRB China growth potential IFDP1072: Challenges for the Future of Chinese Economic Growth http://www.federalreserve.gov/pubs/ifdp/2013/1072/ifdp1072.pdf PDF version Jane Haltmaier 2013-03-11T13:28:01-04:00 1072 E27 O47 http://www.federalreserve.gov/pubs/ifdp/2012/1071/default.htm Fang Cai, Song Han, and Dan Li. We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in the post-herding quarters, especially for sell herding and for junk bonds. Price reversal is most prominent when funds herd to sell illiquid bonds, which suggests that temporary price pressure is the reason behind price reversal. 2013-04-08T15:56:05-04:00 en Institutional Herding in the Corporate Bond Market 2013-01-18T10:20:45-04:00 FRB Corporate bond herding liquidity institutional investors IFDP1071: Institutional Herding in the Corporate Bond Market http://www.federalreserve.gov/pubs/ifdp/2012/1071/ifdp1071.pdf PDF version Fang Cai, Song Han, and Dan Li 2013-01-18T10:20:45-04:00 1071 F21 G11 G14 G15 http://www.federalreserve.gov/pubs/ifdp/2012/1070/default.htm Leonid Kogan and Mary Tian. 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. 2013-04-08T15:56:05-04:00 en Firm Characteristics and Empirical Factor Models: A Data-Mining Experiment 2013-01-18T10:15:23-04:00 FRB Anomalies factor model data-mining firm characteristic IFDP1070: Firm Characteristics and Empirical Factor Models: A Data-Mining Experiment http://www.federalreserve.gov/pubs/ifdp/2012/1070/ifdp1070.pdf PDF version Leonid Kogan and Mary Tian 2013-01-18T10:15:23-04:00 1070 G12 http://www.federalreserve.gov/pubs/ifdp/2012/1069/default.htm Ricardo Correa, Kuan-Hui Lee, Horacio Sapriza, and Gustavo Suarez. We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better-positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees. 2013-04-08T15:56:05-04:00 en Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns Around the World 2013-01-18T09:48:28-04:00 FRB Sovereign bond credit rating bank stock returns government guarantees IFDP1069: Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns Around the World http://www.federalreserve.gov/pubs/ifdp/2012/1069/ifdp1069.pdf PDF version Ricardo Correa, Kuan-Hui Lee, Horacio Sapriza, and Gustavo Suarez 2013-01-18T09:48:28-04:00 1069 G21 G24 H63 G14 http://www.federalreserve.gov/pubs/ifdp/2012/1068/default.htm Juan M. Londono and Hao Zhou. 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. 2013-04-08T15:56:05-04:00 en Variance Risk Premiums and the Forward Premium Puzzle 2012-12-14T13:58:19-04:00 FRB Forward premium puzzle currency variance risk premium stock variance risk premium unspanned currency uncertainty forex return predictability IFDP1068: Variance Risk Premiums and the Forward Premium Puzzle http://www.federalreserve.gov/pubs/ifdp/2012/1068/ifdp1068.pdf PDF version Juan M. Londono and Hao Zhou 2012-12-14T13:58:19-04:00 1068 G12 G15 F31 http://www.federalreserve.gov/pubs/ifdp/2012/1067/default.htm Luca Guerrieri, Matteo Iacoviello, and Raoul Minetti. This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector. 2013-04-08T15:56:05-04:00 en Banks, Sovereign Debt and the International Transmission of Business Cycles 2012-12-14T13:38:01-04:00 FRB Sovereign default spillover effects DSGE model banks IFDP1067: Banks, Sovereign Debt and the International Transmission of Business Cycles http://www.federalreserve.gov/pubs/ifdp/2012/1067/ifdp1067.pdf PDF version Luca Guerrieri, Matteo Iacoviello, and Raoul Minetti 2012-12-14T13:38:01-04:00 1067 E44 F34 G15 http://www.federalreserve.gov/pubs/ifdp/2012/1066/default.htm Jane Haltmaier. 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. 2013-04-08T15:56:05-04:00 en Do Recessions Affect Potential Output? 2012-12-14T13:35:15-04:00 FRB Growth potential cycles IFDP1066: Do Recessions Affect Potential Output? http://www.federalreserve.gov/pubs/ifdp/2012/1066/ifdp1066.pdf PDF version Jane Haltmaier 2012-12-14T13:35:15-04:00 1066 E32 O40