Reserve Adequacy Explains Emerging-Market Sensitivity to U.S. Monetary Policy
Emerging economies that borrow in U.S. dollars are sensitive to U.S. monetary policy due to changing exchange rates. However, the marginal effect of this sensitivity is determined by the relative amount of U.S. dollars held in reserve.
Central bank communications: a case study
Over the past twenty five years, central bank communications have undergone a major revolution. Central banks that previously shrouded themselves in mystery now embrace social media to get their message out to the widest audience. The Federal Reserve System has not always been at the forefront of these changes, but the volume of information about monetary policy that the Federal Open Market Committee (FOMC) now releases dwarfs what it was releasing a quarter century ago. In this paper we focus on just one channel of FOMC communications, the post-meeting statement. We document how it has ...
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 ...
Inflation expectations have become more anchored over time
The Organization of Arab Petroleum Exporting Countries imposed an oil embargo on the United States in October 1973 in response to U.S. support of Israel during the Yom Kippur War. The embargo was lifted in March 1974, and although it lasted less than six months, the effects on inflation and inflation expectations in the United States would persist for a decade.
China’s Capital Controls Appear to Arrest Flight, Stabilize Currency
China?s yuan and balance of payments appear to have stabilized by early 2017. Controls on capital outflows may have been a key factor that averted a full-blown financial crisis in the country.
The cyclicality of (bilateral) capital inflows and outflows
Recent research has shown that gross capital inflows and outflows are positively correlated and highly procyclical. This poses a puzzle since most theory predicts that capital inflows and outflows should be negatively correlated, and while capital inflows should be procyclical, capital outflows should be countercyclical. This previous work has examined the behavior of aggregate capital inflows and outflows (capital flows between a country and the rest of the world). This paper shows that bilateral capital inflows and outflows (flows between a pair of countries) are also positively correlated ...
A Theory of the Global Financial Cycle
We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In ...
Don’t Look to the 2013 Tantrum for the Effect of Tapering on Emerging Markets
Many emerging markets have improved their external balance sheets since the volatility evidenced during the "taper tantrum" of 2013 and would be much less vulnerable to Federal Reserve tapering today.
External debt sheds light on drivers of exchange rate fluctuations
During a financial panic, a major driver of exchange rate fluctuations is a country?s amount of external debt, or funds borrowed from foreign lenders. However, not all debt has the same impact on rate movements.
Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts
Using survey data of inflation expectations across a 36 developed and developing countries, this paper examines whether the adoption of inflation targeting has helped to anchor inflation expectations. We examine the response of inflation expectations following a shock to inflation, inflation expectations, and oil prices. For the 13 countries that adopted inflation targeting midway through the time period used in this study, there is a significant difference in the responses between the earlier and the later subperiods. A shock leads to a positive, significant, and persistent increase ...