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Russia Counters Sanctions’ Impact with Currency Controls, Averts Crisis (for Now)
The Russian central bank responded to unprecedented sanctions with strict capital controls that have stabilized the value of its currency—the ruble.
Working Paper
Learning, adaptive expectations, and technology shocks
This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model. When rational expectations are replaced by adaptive expectations, we show that the self-confirming equilibrium is the same as the steady-state rational expectations equilibrium for all admissible parameters but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003). As a ...
Working Paper
International real business cycles with endogenous markup variability
The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for ...
Working Paper
Foreign Exchange Reserves as a Tool for Capital Account Management
Many recent theoretical papers have argued that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But at the same time many empirical papers have argued that only rarely do we observe these cyclical capital taxes used in practice. In this paper we construct a small open economy model where the central bank can engage in sterilized foreign exchange intervention. When private agents can freely buy and sell foreign bonds, sterilized foreign exchange intervention has no effect. But we analytically ...
Working Paper
Optimal monetary policy under financial sector risk
We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in ...
Working Paper
Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets
The collateral channel, whereby an increase in residential house prices leads to an increase in commercial property prices, loosening firm borrowing constraints and leading to higher firm investment, is weaker when residential and commercial real estate are imperfect substitutes. We first show in a reduced form regression with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then modify the DSGE model of the collateral channel in Liu, Wang, and Zha ...
Working Paper
Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy
Changes in housing demand can have a macroeconomic effect through the collateral channel, where the change in residential real estate prices is associated with a change in commercial real estate prices, affecting firm collateral and thus firm investment. We argue that this channel is weaker when residential and commercial real estate are poor substitutes. Using cross-state heterogeneity in the strength of zoning regulations as a proxy for heterogeneity in the substitutability of residential and commercial real estate, we first show with firm level data that the strength of local zoning ...
Working Paper
Optimal Foreign Reserve Intervention and Financial Development
We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high levels adjust little. A model with borrowing constraints and foreign-currency debt rationalizes these findings. Optimal FX reserve policy faces a tradeoff between the rate of return on capital outflows and a pecuniary externality linked to foreign currency debt in the borrowing constraints. This ...
Working Paper
Optimal Foreign Reserve Intervention and Financial Development
We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial ...
Working Paper
Optimal Foreign Reserve Intervention and Financial Development
We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial ...