Search Results
Report
Risksharing within the United States: what have financial markets and fiscal federalism accomplished?
We document aggregate income growth uncertainty at the state level, and the extent to which this uncertainty is reduced by risksharing through financial markets and federal fiscal policy. A methodology is adopted that is closely connected to the empirical growth literature. It does not rely on assumptions about a model or stochastic process of income. This is important because estimated gains from international risksharing have been found to be very sensitive to the assumed model or income process. We only make assumptions about the information set used to predict growth, which is sufficient ...
Discussion Paper
Alternative specifications for consumption and the estimation of the intertemporal elasticity of substitution
This paper documents several advantages associated with using state level consumption data to examine consumption behavior and especially to estimate the Intertemporal Elasticity of Substitution (IES). In contrast to the results of Hall (1988) and Campbell and Mankiw (1989), we provide substantial evidence indicating that the IES is significantly different from zero and probably close to one. Since the overidentifying restrictions of the standard Euler equation are generally rejected, we use these data to explore the nature of these rejections and evaluate an alternative specification of ...
Working Paper
Exchange Rate Determination Under Limits to CIP Arbitrage
Recent theories of exchange rate determination have emphasized limited UIP arbitrage by international financial institutions. New regulations since 2008 have also led to imperfect CIP arbitrage. We show that under limited CIP arbitrage the exchange rate and CIP deviation are jointly determined by equilibrium in the FX spot and swap markets. The model is used to investigate the impact of a wide range of financial shocks. The exchange rate is affected by a new set of financial shocks that operate through the swap market, which have no effect under perfect CIP arbitrage. More familiar financial ...
Working Paper
A Theory of Net Capital Flows over the Global Financial Cycle
We develop a theory to account for changes in net capital flows of safe and risky assets over the global financial cycle. We show empirically that countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt) during a downturn in the global financial cycle. This is accomplished through a rise in total net outflows and a drop in net outflows of risky assets. We develop a multi-country portfolio choice model that can account for these facts. The theory relies on cross-country heterogeneity in the share of an investor's ...
Working Paper
Dollar Shortages, CIP Deviations and the Safe Haven Role of the Dollar
Since 2007, an increase in risk or risk aversion has resulted in a U.S. dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007) and (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the ...
Report
How big are potential welfare gains from international risksharing?
There is extensive evidence that the degree of risksharing accomplished by international financial markets is low. Some have argued that this is the result of small potential benefits from risksharing. The gains from riskpooling that have been reported in the literature range from negligible to enormous. This paper documents to what extent the results are sensitive to the parameterization of preferences, and assumptions about the stochastic process and measurement of the endowment. We find that for realistic assumptions about the underlying factors, the potential gains from risksharing are ...
Asset Prices, Leverage and Portfolio Rebalancing Drive Global Capital Flows Cycle
The amount of leverage—borrowed funds relative to the value of underlying assets—increases for risky holdings during downturns, motivating their ultimate sale to achieve a more secure financial position. The opposite occurs during upswings, as risky assets gain favor.
Report
International capital flows
The sharp increase in both gross and net international capital flows over the past two decades has prompted renewed interest in their determinants. Most existing theories of international capital flows are based on one-asset models, which have implications only for net capital flows, not for gross flows. Moreover, because there is no portfolio choice, these models allow no role for capital flows as a result of assets? changing expected returns and risk characteristics. In this paper, we develop a method for solving dynamic stochastic general equilibrium open-economy models with portfolio ...
Working Paper
A theory of the currency denomination of international trade
Nominal rigidities due to menu costs have become a standard element in closed economy macroeconomic modeling. The "New Open Economy Macroeconomics" literature has investigated the implications of nominal rigidities in an open economy context and found that the currency in which prices are set has significant macroeconomic and policy implications. In this paper we solve for the optimal invoicing choice by integrating this microeconomic decision at the firm level into a general equilibrium open economy model. Strategic interactions between firms play a critical role in the analysis. We find ...