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Working Paper
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 ...
Working Paper
The quantitative role of capital-goods imports in U.S. growth
Over the last 40 years, an increasing share of U.S. aggregate E&S investment expenditure has been allocated to capital-goods imports. While capital-goods imports were only 3.5 percent of E&S investment in 1967, by 2008 their share had risen tenfold to 36 percent. The goal of this paper is to measure the contribution of capital-goods imports to growth in U.S. output per hour using a simple growth accounting exercise. We find that capital-goods imports have contributed 20 to 30 percent to growth in U.S. output per hour between 1967 and 2008. More importantly, we find that capital-goods imports ...
Working Paper
Measuring oil-price shocks using market-based information
We study the effects of oil-price shocks on the U.S economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to ...
Journal Article
To float or not to float? exchange rate regimes and shocks
Recent research has reconsidered the stabilization properties of a flexible exchange rate regime when exchange rate movements affect financial conditions, and these, in turn, influence economic activity. This Economic Letter summarizes some of the findings of these studies and their policy prescriptions for the choice of the exchange rate regime.
Journal Article
Oil prices and the U.S. trade deficit
With the price of oil in world energy markets having nearly quadrupled over the last four years, it is little surprise that U.S. import prices have soared. One concern about these higher import prices relates to their implications for the U.S. trade balance, which turned to a deficit in 1992 and has been deteriorating ever since. ; This Economic Letter explores the relation between the surge in oil prices and the trade deficit by first reviewing data on U.S. international trade in goods and services. It then discusses a recent study that examines how the U.S. trade deficit might evolve in ...
Journal Article
International financial integration and the current account balance
This Economic Letter first reviews some predictions about the exchange rate implications of a return of the U.S. current account into balance. It then presents a recent study that considers the role of greater financial integration and the resulting importance of valuation effects. Finally, it evaluates the impact of valuation effects for those countries that have purchased the bulk of liabilities issued by the U.S. in recent years.
Journal Article
Understanding the twin deficits: new approaches, new results
Since 2002, the U.S. has seen the emergence of twin deficits?that is, a growing budget deficit along with a growing current account deficit, which reflects increasing U.S. borrowing from abroad. To some analysts, this situation seems very reminiscent of the early 1980s. In the earlier episode, there were significant tax rate cuts that were not matched by spending cuts, and between 1981 and 1986, the U.S. budget deficit went from 2.5% of GDP to about 5% of GDP and the current account went from being roughly in balance to a deficit of 3.3% of GDP. In 2001, there were tax rate cuts that were not ...
Journal Article
Oil prices and inflation
This Economic Letter examines the impact of rising oil prices on core inflation over the last decade for four economies: the U.S., the euro area, Canada, and the U.K.
Journal Article
Interest rates, carry trades, and exchange rate movements
The U.S. dollar has seen some remarkable swings against major currencies recently. For example, over most of 2005, it gained nearly 18% against the yen and 13% against the euro, while between March and May 2006, it depreciated sharply against these currencies, losing almost 10% of its value. Many observers have related these swings to what is known as the carry trade. This is a strategy widely used by investors in international financial markets that is based on exploiting the existence of interest rate differentials across countries. ; The use of this strategy by investors is puzzling, as ...
Journal Article
Exchange rate movements and the U.S. international balance sheet
Recent research has examined the evolution of the NIIP and has found that current account deficits and the associated net financial inflows are not the only factors influencing it; rather, research finds that changes in asset prices and especially in exchange rates have played an important role recently because of their effect on the values of the stocks of assets and liabilities that make up the NIIP. ; In this Economic Letter, I review this literature, discuss these determinants of the NIIP, and provide some evidence on their relative quantitative importance. In particular, the evidence ...