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Working Paper
Purchasing power parity: three stakes through the heart of the unit root null
We provide a comprehensive analysis of the purchasing power parity hypothesis, relying on a linear panel data framework. First, we consider two panel unit root tests, based on transformations of country-specific statistics, which allow for parameter heterogeneity across countries. Using GLS techniques, we modify the two tests to eliminate the upward size distortion induced by cross-sectional dependence among contemporaneous real exchange rate innovations. Second, we consider two tests based on a fixed-effects specification: these tests allow for cross-sectional dependence but impose parameter homogeneity. Three of the four tests provide emphatic support for real exchange rate stationary during the post-Bretton Woods era among relatively open economies. Monte Carlo experiments indicate that the three tests have considerable power against the unit root null. One test allowing parameter heterogeneity provides mixed support for stationarity, but has only limited power against the null.
AUTHORS: Higgins, Matthew; Zakrajsek, Egon
DATE: 2000
Journal Article
Saving imbalances and the euro area sovereign debt crisis
For several years prior to 2010, countries in the euro area periphery engaged in heavy borrowing from foreign private investors, allowing domestic spending to outpace incomes. Now these countries face debt crises reflecting a loss of investor confidence in the sustainability of their finances. The result has been an abrupt halt in private foreign lending to these economies. This study explains how the periphery countries became dependent on foreign borrowing and considers the challenges they face reigniting growth while adjusting to greatly reduced access to foreign capital.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew
DATE: 2011-09
Journal Article
Recycling petrodollars
In recent years, oil-exporting countries have experienced windfall gains with the rise in the price of oil. A look at how oil exporters "recycle" their revenues reveals that roughly half of the petrodollar windfall has gone to purchase foreign goods, especially from Europe and China, while the remainder has been invested in foreign assets. Although it is difficult to determine where the funds are first invested, the evidence suggests that the bulk are ending up, directly or indirectly, in the United States.
AUTHORS: Klitgaard, Thomas; Lerman, Robert; Higgins, Matthew
DATE: 2006-12
Journal Article
The balance of payments crisis in the euro area periphery
Countries in the euro area periphery borrowed heavily from abroad in the years leading up to the sovereign debt crisis, largely to finance increased consumption and housing investment. When the crisis hit in 2010, capital flight by private investors forced these countries to bring domestic spending back into line with domestic incomes?the same adjustment required of countries facing a typical balance of payments crisis. Nevertheless, adjustment to the pullback of private capital was not as harsh as might have been expected, owing to the workings of the euro area?s system for managing cross-border payment imbalances between regional commercial banks. This system, known as Target2, offset much of the capital flight with credits extended collectively by euro area central banks to central banks in the periphery.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew
DATE: 2014
Journal Article
Financial globalization and the U.S. current account deficit
Despite heavy borrowing in recent years, the United States has financed its large current account deficits without experiencing an unusual buildup in foreign investors' holdings of U.S. assets. A new analysis suggests that this somewhat surprising development is attributable largely to rapid financial globalization, with cross-border flows worldwide rising as fast as flows into the United States. However, it could be harder for the country to sustain large deficits on favorable terms if the current wave of globalization subsided or the rate at which U.S. investors buy foreign assets increased.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew
DATE: 2007-12
Journal Article
Second district housing prices: why so weak in the 1990s?
Between 1990 and 1997, poor economic fundamentals and a prolonged hangover from excessively rapid growth in the 1980s caused house prices in the New York metropolitan area to grow much more slowly than prices nationwide; these factors played a smaller role in the decline of upstate New York's house prices relative to the nation's.
AUTHORS: Osler, Carol L.; Sridhar, Anjali; Higgins, Matthew
DATE: 1999-01
Journal Article
Reserve accumulation: implications for global capital flows and financial markets
Many central banks-particularly those in Japan and the emerging Asian nations-have been building up their holdings of foreign currency assets. These holdings, known as foreign exchange reserves, may help countries stabilize their currencies, but they can also lead to investment losses for the central banks. The large share of dollar assets among reserve holdings has made foreign central banks important players in U.S. financial markets.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew
DATE: 2004-09
Journal Article
Viewing the current account deficit as a capital inflow
With the 1998 current account deficit approaching $225 billion, attention is again focusing on the deficit's impact on U.S. jobs. Although a high deficit does adversely affect employment in export- and import-competing industries, it also means that considerable foreign capital is flowing into the United States, supporting domestic investment spending that stimulates growth and creates jobs.
AUTHORS: Higgins, Matthew; Klitgaard, Thomas
DATE: 1998-12
Journal Article
The income implications of rising U.S. international liabilities
Although the United States has seen its net liabilities surge in recent years, its investment income balance has remained positive-largely because U.S. firms operating abroad earn a higher rate of return than do foreign firms operating here. The continuing buildup in liabilities, however, should soon push the U.S. income balance below zero. In that event, net income flows will begin to boost the nation's current account deficit instead of reducing it.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew; Tille, Cedric
DATE: 2005-12
Journal Article
Asia's trade performance after the currency crisis
The Asian countries hit by the 1997-98 currency crisis experienced a sharp reversal of capital flows that forced their current account balances to move from deficit to surplus. This study of the trade flows of Indonesia, Malaysia, South Korea, and Thailand finds that steep declines in imports, measured in dollar terms, accounted for almost all of the improvements in current account balances. However, a fuller picture emerges when the authors analyze the trade flows according to the volume of goods being shipped and the prices of these goods. The analysis shows that several factors contributed to the current account adjustment: higher export volumes in response to increased foreign demand outside of Asia, lower dollar import prices in line with declining world export prices, and the collapse in import volumes due to sharp declines in domestic economic activity.
AUTHORS: Klitgaard, Thomas; Higgins, Matthew
DATE: 2000-09