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Series:International Finance Discussion Papers  Bank:Board of Governors of the Federal Reserve System (U.S.) 

Working Paper
Exact utilities under alternative monetary rules in a simple macro model with optimizing agents

We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, ...
International Finance Discussion Papers , Paper 635

Working Paper
Interpreting long-horizon estimates in predictive regressions

This paper analyzes the asymptotic properties of long-horizon estimators under both the null hypothesis and an alternative of predictability. Asymptotically, under the null of no predictability, the long-run estimator is an increasing deterministic function of the short-run estimate and the forecasting horizon. Under the alternative of predictability, the conditional distribution of the long-run estimator, given the short-run estimate, is no longer degenerate and the expected pattern of coefficient estimates across horizons differs from that under the null. Importantly, however, under the ...
International Finance Discussion Papers , Paper 928

Working Paper
How Biased Are U.S. Government Forecasts of the Federal Debt?

Government debt and forecasts thereof attracted considerable attention during the recent financial crisis. The current paper analyzes potential biases in different U.S. government agencies? one-year-ahead forecasts of U.S. gross federal debt over 1984-2012. Standard tests typically fail to detect biases in these forecasts. However, impulse indicator saturation (IIS) detects economically large and highly significant time-varying biases, particularly at turning points in the business cycle. These biases do not appear to be politically related. IIS defines a generic procedure for examining ...
International Finance Discussion Papers , Paper 1189

Working Paper
Friends or foes? The stock price impact of sovereign wealth fund investments and the price of keeping secrets

This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements. The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure. In addition, target firms' ...
International Finance Discussion Papers , Paper 940

Working Paper
Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps

We consider monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There may also be below-target equilibria (BTE) with inflation always below target and constant, asymptotically approaching or eventually reaching a below-target value, or oscillating. Liquidity traps are neither necessary nor sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary rules that preclude BTE when fiscal ...
International Finance Discussion Papers , Paper 795

Working Paper
International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals?

We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. ...
International Finance Discussion Papers , Paper 1135

Working Paper
Exchange-rate exposure of multinationals: focusing on exchange-rate issues

This paper examines exchange-rate exposure of multinationals (MNEs) in light of detailed exchange rate data. Specifically, using MNE-specific exchange rates and accounting for the possibility that exchange-rate crises may impact a firm differently than periods of normal fluctuations, estimates suggest 1/4 of all MNEs had significant exchange rate exposure between 1995 and 1999. On average, significant exposure is estimated to be 0.68, indicating that a firm's monthly return falls, on average, by 0.68 percentage points when the dollar appreciates one percent. This encompasses periods where ...
International Finance Discussion Papers , Paper 709

Working Paper
Monthly estimates of U.S. cross-border securities positions

This paper reports monthly estimates of U.S. cross-border securities positions obtained by combining the (now) annual TIC surveys with monthly transactions data adjusted for various differences in the two reporting standards. Our approach is similar to that of Thomas, Warnock, and Wongswan (2004), but in addition to having a somewhat larger dataset we are able to make some simplifications to the numerical procedure used and we incorporate additional adjustments to the transactions data. This paper describes the procedure used and presents the monthly results. In addition, we discuss how the ...
International Finance Discussion Papers , Paper 910

Working Paper
U.S. monetary policy and econometric modeling: tales from the FOMC transcripts 1984-1991

This paper uses the transcripts from the FOMC meetings to characterize the interactions between policymakers and macro models in the formulation of U.S. monetary policy. We develop a taxonomy of these interactions and present two case studies. The first case focuses on the debate on the choice of monetary target and the second case focuses on the 1990/1991 recession. The analysis reveals that U.S. monetary policy relies on models for information. Models give estimates of both the outlook and the response of the economy to policy changes. Models also evolve to recognize the changing context in ...
International Finance Discussion Papers , Paper 607

Working Paper
Macroeconomic and Financial Risks: A Tale of Mean and Volatility

We study the joint conditional distribution of GDP growth and corporate credit spreads using a stochastic volatility VAR. Our estimates display significant cyclical co-movement in uncertainty (the volatility implied by the conditional distributions), and risk (the probability of tail events) between the two variables. We also find that the interaction between two shocks--a main business cycle shock as in Angeletos et al. (2020) and a main financial shock--is crucial to account for the variation in uncertainty and risk, especially around crises. Our results highlight the importance of using ...
International Finance Discussion Papers , Paper 1326

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