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Report
Growth uncertainty and risksharing
We propose a new methodology to evaluate the gains from global risksharing that is closely connected to the empirical growth literature. We obtain estimates of residual risk (growth uncertainty) at various horizons from regressions of country-specific deviations from world growth on a wide set of variables in the information set. Since this residual risk can be entirely hedged, we use it to obtain a measure of welfare gain that can be achieved by a representative country. We find that nations can reap very large benefits from engaging in such risksharing arrangements. Using post-war data, the ...
Working Paper
Global Drivers of Gross and Net Capital Flows
While prior to the global financial crisis, the empirical international capital flow literature has focused on net capital flows (the current account), since the crisis there has been an increased focus on gross flows. In this paper we jointly analyze global drivers of gross flows (outflows plus inflows) and net flows (outflows minus inflows) by estimating a latent factor model. We find evidence of two global factors, which we call the GFC (global financial cycle) factor and a commodity price factor as they closely track respectively the Miranda-Agrippino and Rey asset price factor and an ...
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
Borders and business cycles
We document that business cycles of U.S. Census regions are substantially more synchronized than those of European Union countries, both over the past four decades and the past two decades. Data from regions within the four largest European countries confirm the presence of a European border effect --within-country correlations are substantially larger than cross-country correlations. These results continue to hold after controlling for exogenous factors such as distance and size. We consider the role of four factors that have received a lot of attention in the debate about EMU: sectoral ...
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.
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 ...
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 ...
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 ...
Working Paper
A Theory of Capital Flow Retrenchment
The empirical literature shows that gross capital inflows and outflows both decline following a negative global shock. However, to generate a positive co-movement between gross inflows and outflows, the theoretical literature relies on asymmetric shocks across countries. We present a model where there is heterogeneity across investors within countries, but there are no asymmetries across countries. We show that a negative global shock (rise in global risk-aversion) generates an identical drop in gross inflows and outflows. The within-country heterogeneity relates to the willingness of ...
Report
Borders and business cycles
We document that business cycles of U.S. Census regions are substantially more synchronized than those of European Union countries, both over the past four decades and the past two decades. Data from regions within the four largest European countries confirm the presence of a European border effect ? within-country correlations are substantially larger than cross-country correlations. These results continue to hold after controlling for exogenous factors such as distance and size. We consider the role of four factors that have received a lot of attention in the debate about EMU: sectoral ...