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/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 http://www.federalreserve.gov/pubs/ifdp/2011/1033/default.htm Brett Berger and Robert F. Martin. Over the past decade, Chinese exports have boomed, increasing far faster than GDP growth. What can account for this explosion? Our paper uses finely detailed Chinese export data (8-digit HS codes) combined with U.S. trade data to explore this question. Although exchange rate policy clearly boosted the trade surplus, and the structure of the economy, e.g. abundant cheap labor, encouraged investment, these alone cannot account for the changing composition and acceleration of exports. We find that the growth in exports is most likely a product of effective Chinese industrial policy and fortuitous timing. The detailed trade data reveal that key new technology goods, such as cell phones, LCD screens, and laptops played a critical role. Finally, we use the data to examine the relationship between Chinese exports and global manufacturing, in particular U.S. manufacturing employment. We find that increased Chinese competition in both domestic and U.S. export markets likely lowered U.S. manufacturing employment between 2000 and 2007. Chinese policy is not, however, wholly responsible. Some job losses, such as in textile production, were no doubt the result of Chinas natural comparative advantages, while other U.S. job losses are attributable to relatively low investment and slow GDP growth in the United States following the 2001 recession. 2012-01-09T12:50:43-04:00 en The Growth of Chinese Exports: An Examination of the Detailed Trade Data 2011-12-02T11:01:36-04:00 FRB China trade manufacturing IFDP1033: The Growth of Chinese Exports: An Examination of the Detailed Trade Data http://www.federalreserve.gov/pubs/ifdp/2011/1033/ifdp1033.pdf PDF version Brett Berger and Robert F. Martin 2011-12-02T11:01:36-04:00 1033 F12 F40 E65 http://www.federalreserve.gov/pubs/ifdp/2011/1032/default.htm Matteo Iacoviello and Marina Pavan. We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age pro.les of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and .nd that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical financial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks. 2012-01-09T12:50:43-04:00 en Housing and Debt Over the Life Cycle and Over the Business Cycle 2011-11-23T13:33:40-04:00 FRB Housing housing investment mortgage debt life-cycle models income risk homeownership precautionary savings borrowing constraints IFDP1032: Housing and Debt Over the Life Cycle and Over the Business Cycle http://www.federalreserve.gov/pubs/ifdp/2011/1032/ifdp1032.pdf PDF version Matteo Iacoviello and Marina Pavan 2011-11-23T13:33:40-04:00 1032 E22 E32 E44 E51 D92 R21 http://www.federalreserve.gov/pubs/ifdp/2011/1031/default.htm Martin Bodenstein and Luca Guerrieri. The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but have modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not. 2012-01-09T12:50:43-04:00 en Oil Efficiency, Demand, and Prices: A Tale of Ups and Downs 2011-11-09T16:23:52-04:00 FRB Oil shocks DSGE models maximum likelihood IFDP1031: Oil Efficiency, Demand, and Prices: A Tale of Ups and Downs http://www.federalreserve.gov/pubs/ifdp/2011/1031/ifdp1031.pdf PDF version Martin Bodenstein and Luca Guerrieri 2011-11-09T16:23:52-04:00 1031 F32 F41 http://www.federalreserve.gov/pubs/ifdp/2011/1030/default.htm Jane Haltmaier. This paper uses an adaptation of Vahid and Engle's common trend/common cycle analysis to estimate trend and cyclical export elasticities for trading partner income and real exchange rates for 36 countries. For the countries for which both types of income elasticities can be identified, the cyclical elasticity is on average more than twice as large as the trend elasticity. The methodology is applied to forecasting exports during the recent cycle and it appears to improve on simpler models for about half of the countries. For an aggregate of all of the countries for which separate elasticities can be identified, the RMSE is about half as large for the trend/cycle model as for the simple model. 2012-01-09T12:50:43-04:00 en Empirical Estimation of Trend and Cyclical Export Elasticities 2011-09-28T15:14:32-04:00 FRB Exports cycles forecasting IFDP1030: Empirical Estimation of Trend and Cyclical Export Elasticities http://www.federalreserve.gov/pubs/ifdp/2011/1030/ifdp1030.pdf PDF version Jane Haltmaier 2011-09-28T15:14:32-04:00 1030 E32 F17 http://www.federalreserve.gov/pubs/ifdp/2011/1029/default.htm Tor Jacobson, Jesper Linde, and Kasper Roszbach. This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms' relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level. 2012-01-09T12:50:43-04:00 en Firm Default and Aggregate Fluctuations 2011-09-06T14:51:41-04:00 FRB Default default-risk model business cycles aggregate fluctuations micro-data logit firm-specific variables macroeconomic variables IFDP1029: Firm Default and Aggregate Fluctuations http://www.federalreserve.gov/pubs/ifdp/2011/1029/ifdp1029.pdf PDF version Tor Jacobson, Jesper Linde, and Kasper Roszbach 2011-09-06T14:51:41-04:00 1029 C35 C52 E44 G33 http://www.federalreserve.gov/pubs/ifdp/2011/1028/default.htm Carol Bertaut, Laurie Pounder DeMarco, Steve Kamin, and Ralph Tryon. The "global saving glut" (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates. 2012-01-09T12:50:43-04:00 en ABS Inflows to the United States and the Global Financial Crisis 2011-08-17T13:37:50-04:00 FRB Capital flows global saving glut financial crisis asset-backed securities interest rates IFDP1028: ABS Inflows to the United States and the Global Financial Crisis http://www.federalreserve.gov/pubs/ifdp/2011/1028/ifdp1028.pdf PDF version Carol Bertaut, Laurie Pounder DeMarco, Steve Kamin, and Ralph Tryon 2011-08-17T13:37:50-04:00 1028 F3 G1 http://www.federalreserve.gov/pubs/ifdp/2011/1027/default.htm Matteo Iacoviello. Housing wealth is about one half of household net worth, and consumption is a considerable fraction (about two thirds) of Gross Domestic Product in the United States. Empirically, movements in housing wealth are associated with movements in consumption in the same direction. This observation has led many economists, commentators and policy makers to study how housing wealth and consumption are linked together. A sizeable portion of the comovement between housing wealth and consumption reflects common factors driving both variables, rather than the "wealth effect" of the former on the latter; however, a growing body of evidence suggests that the comovement is larger in developed financial markets and in the presence of liquidity constraints. 2012-01-09T12:50:43-04:00 en Housing Wealth and Consumption 2011-08-16T13:00:36-04:00 FRB Borrowing constraints consumption consumption function household budget IFDP1027: Housing Wealth and Consumption http://www.federalreserve.gov/pubs/ifdp/2011/1027/ifdp1027.pdf PDF version Matteo Iacoviello 2011-08-16T13:00:36-04:00 1027 C2 E2 G1 R2 http://www.federalreserve.gov/pubs/ifdp/2011/1026/default.htm Massimo Del Gatto, Filippo de Mauro, Joseph Gruber, and Benjamin R. Mandel. The U.S. share of world merchandise exports has declined sharply over the last decade. Using data at the level of detailed industries, this paper analyzes the decline in U.S. share against the backdrop of alternative measures of the competitiveness of the U.S. economy. We document the following facts: (i) only a few industries contributed to the decline in any meaningful way, (ii) a large part of the drop was driven by the changing size of U.S. export industries and not the size of U.S. sales within those industries, (iii) in a gravity framework, the majority of the decline in the U.S. export share within industries was due to the declining U.S. share of world income, and (iv) in a computed structural measure of firm productivity, average U.S. export productivity has generally maintained its high level versus other countries over time. Overall, our analysis suggests that the dismal performance of the U.S. market share is not a sufficient statistic for competitiveness. 2012-01-09T12:50:43-04:00 en The Revealed Competitiveness of U.S. Exports 2011-08-15T16:20:03-04:00 FRB Trade competitiveness gravity model firm productivity IFDP1026: The Revealed Competitiveness of U.S. Exports http://www.federalreserve.gov/pubs/ifdp/2011/1026/ifdp1026.pdf PDF version Massimo Del Gatto, Filippo de Mauro, Joseph Gruber, and Benjamin R. Mandel 2011-08-15T16:20:03-04:00 1026 F14 F17 http://www.federalreserve.gov/pubs/ifdp/2011/1025/default.htm Trevor A. Reeve and Robert J. Vigfusson. Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices. 2012-01-09T12:50:43-04:00 en Evaluating the Forecasting Performance of Commodity Futures Prices 2011-08-12T15:21:53-04:00 FRB Financial markets forecasting commodities IFDP1025: Evaluating the Forecasting Performance of Commodity Futures Prices http://www.federalreserve.gov/pubs/ifdp/2011/1025/ifdp1025.pdf PDF version Trevor A. Reeve and Robert J. Vigfusson 2011-08-12T15:21:53-04:00 1025 G13 E37 Q47