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Working Paper
The Effect of the China Connect
We document the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more ...
Working Paper
Deviations from purchasing power parity: causes and welfare costs
We explore deviations from short-run purchasing power parity across European cities, attempting to move beyond a "first-generation" of papers that document very large border effects. We document two very distinct types of border effects embedded in relative prices. The first is a "real barriers effect," caused by various barriers to market integration. The second is a sticky-consumer-price cum volatile exchange-rate effect. Both are shown to be important empirically, the second type especially so. We argue that the two effects are very different from each other. For the first type of ...
Working Paper
Convertibility risk, default risk, and the Mexdollar anomaly
Rogers (l992a,b) I put forth the convertibility risk hypothesis in order to explain the anomalous n~gative relationship between the expected rate of Mexican peso depreciation and the ratio of Mexdollars to peso denominated demand deposits. Recently, Gruben and Welch (1994) examine the effect of deteriorating bank loan quality on the variables I consider. Using a cointegration framework, the authors find (i) a negative relationship between non-performing loans and the dollarization ratio and (ii) the conventional positive relationship between expected peso depreciation and dollarization. The ...
Working Paper
Political competition, causal relationships between taxes and spending, and their influence on government size: evidence from state-level data
Theories of fiscal illusion and political competition have different implications for (i) the causal relationships between taxes and spending, and (ii) government size. These are tested using data from u.s. states from 1950 to 1990. We find evidence that greater political competition generally encourages bigger government, the Democratic Party is associated with bigger government, and state governments which "tax first, spend later" are more likely to be large. Other factors related to the fiscal illusion and political competition theories also appear to be important determinants of ...
Discussion Paper
Measuring Cross Country Monetary Policy Uncertainty
In previous work, we constructed a news-based index of U.S. monetary policy uncertainty (MPU) that captures the degree of uncertainty the public perceives about Federal Reserve policy actions and their consequences. In this note, we extend that work to Canada, the Euro Area, Japan, and United Kingdom.
Journal Article
Evaluating International Economic Policy with the Federal Reserve's Global Model
FRB/Global is a large-scale macroeconomic model developed and maintained by the Board's staff. This article provides a historical perspective on the development of the model, gives an overview of its structure, and highlights its dynamic properties with three simulation experiments: a reduction in U.S. government purchases; a depreciation of the U.S. dollar; and an increase in the price of oil exported by OPEC. The article illustrates other uses of FRB/Global by examining the spillover effects of fiscal and monetary policy under alternative European monetary policy regimes.
Working Paper
How wide is the border?
Failures of the law of one price explain much of the variation in real C.P.I. exchange rates. We use C.P.I. data for U.S. cities and Canadian cities for 14 categories of consumer prices to examine the nature of the deviations from the law of one price. The distance between cities explains a significant amount of the variation in the prices of similar goods in different cities. But, the variation of the price is much higher for two cities located in different countries than for two equidistant cities in the same country. By our most conservative measure, crossing the border adds as much to the ...
Working Paper
Exchange rates and fundamentals: a generalization
Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW ...
Working Paper
Exchange rate forecasting: the errors we've really made
We examine the forecasting performance of standard macro models of exchange rates in real time, using dozens of different vintages of the OECD's Main Economic Indicators database. We calculate out-of-sample forecasts as they would have been made at the time, and compare them to a random walk alternative. The resulting "time series" of forecast performance indicates that both data revisions and changes in the sample period typically have large effects on exchange rate predictability. We show that the favorable evidence of long-horizon exchange rate predictability for the DM and Yen in Mark ...
Working Paper
How wide is the border?
Previous tests of stock index arbitrage models have rejected the no-arbitrage constraint imposed by these models. This paper provides a detailed analysis of actual S&P 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models. An analysis of arbitrage trades suggests that (i) short sale rules are unlikely to restrict arbitrage, (ii) the opportunity cost of arbitrage funds exceeds the Treasury Bill rate, and (iii) the average price discrepancy captured by arbitrage trades is small. Tests of the models provide some support for a version of the arbitrage ...