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Working Paper
The Evolution of the Federal Reserve Swap Lines since 1962
In this paper, we describe the evolution of the Federal Reserve?s swap lines from their inception in 1962 as a mechanism to forestall claims on US gold reserves under Bretton Woods to their use during the Great Recession as a means of extending emergency dollar liquidity. We describe the Federal Reserve?s successes and failures. We argue that swaps calm crisis situations by both supplementing foreign countries? dollar reserves and by signaling central-bank cooperation. We show how swaps exposed the Federal Reserve to conditionality and raised fears that they bypassed the Congressional appropriations process.
AUTHORS: Humpage, Owen F.; Bordo, Michael D.; Schwartz, Anna J.
DATE: 2014-10-02

Working Paper
Even Keel and the Great Inflation
Using IV-GMM techniques and real-time data, we estimate a forward looking, Taylor-type reaction function incorporating dummy variables for even-keel operations and a variable for foreign official pressures on the U.S. gold stock during the Great Inflation. We show that when the Federal Reserve undertook even-keel operations to assist U.S. Treasury security sales, the FOMC tended to delay monetary-policy adjustments and to inject small amounts of reserves into the banking system. The operations, however, did not contribute significantly to the Great Inflation, because they occurred during periods of both monetary ease and monetary tightness, at least in the FOMC?s view. Consequently, the average federal funds rate during months containing even-keel events was no different than the average federal funds rate in other months, suggesting that even keel had no effect on the thrust of monetary policy. We also show that prospective gold losses had no effect on the FOMC?s monetary-policy decisions in the 1960s and early 1970s.
AUTHORS: Mukherjee, Sanchita; Humpage, Owen F.
DATE: 2015-12-21

Working Paper
The response of multinationals’ foreign exchange rate exposure to macroeconomic news
We use intraday data to estimate the daily foreign exchange exposure of U.S. multinationals and show that macroeconomic news affects these firms? foreign exchange exposure. News creates a substantial shift in the joint distribution of stock and exchange rate returns that has both a transitory and a persistent component. For example, a positive domestic demand surprise, as reflected in higher-than-expected nonfarm payroll, increases the value of the low-exposure domestic activities and results in a persistent decrease in foreign exchange exposure.
AUTHORS: Boudt, Kris; Neely, Christopher J.; Sercu, Piet; Wauters, Marjan
DATE: 2017-07-31

Working Paper
International R&D Spillovers and Asset Prices
We study the international propagation of long-run risk in the context of a general equilibrium model with endogenous growth. Innovation and international diffusion of technologies are the channels at the core of our mechanism. A calibrated version of the model matches several asset pricing and macroeconomic quantity moments, alleviating some of the puzzles highlighted in the international macro-finance literature. Our model predicts that country-pairs that share more R&D have less volatile exchange rates and more correlated stock market returns. Using data from a sample of 19 developed countries, we provide suggestive empirical evidence in favor of our model?s predictions.
AUTHORS: Gavazzoni, Federico ; Santacreu, Ana Maria
DATE: 2015-12-02

Working Paper
The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico
Puerto Rico's unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth declines in government demand and external finance dependent industries. An additional real effect of default anticipation is that heightened default risk Granger causes Puerto Rico's austerity measures. An event study analysis using government bond yields and stock returns confirms that news of increased default risk increases the cost of capital for the Puerto Rican government and for publicly traded Puerto Rican firms.
AUTHORS: Phan, Toan; Leary, Ryan; Chari, Anusha
DATE: 2018-02-17

Report
External and Public Debt Crises
The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.
AUTHORS: Wright, Mark L. J.; Atkeson, Andrew; Arellano, Cristina
DATE: 2015-07-07

Report
Who bears the cost of a change in the exchange rate? The case of imported beer
This paper quantifies the welfare effects of a change in the nominal exchange rate using the example of the beer market. I estimate a structural econometric model that makes it possible to compute manufacturers' and retailers' pass-through of a nominal exchange-rate change, without observing wholesale prices or firms' marginal costs. I conduct counterfactual experiments to quantify how the change affects domestic and foreign firms' profits and domestic consumer welfare. The counterfactual experiments show that foreign manufacturers bear more of the cost of an exchange-rate change than do domestic consumers, domestic manufacturers, or a domestic retailer. The model can be applied to other markets and can serve as a tool to assess the welfare effects of various exchange-rate policies.
AUTHORS: Hellerstein, Rebecca
DATE: 2004-02-01

Report
Financial-sector foreign direct investment and host countries: new and old lessons
Many of the lessons from foreign direct investment (FDI) research on manufacturing and extractive resource industries are applicable to FDI research on the financial sector. This paper summarizes the main findings and policy themes of FDI research, with a primary focus on the implications of FDI for host countries, especially emerging market economies. I review evidence of technology transfers, productivity spillovers, wage effects, macroeconomic growth, and fiscal and tax concerns. Throughout this paper, I stress that parallel findings often arise from studies of general FDI and studies of financial-sector FDI. I also emphasize important differences between the effects of FDI in these sectors, especially with regard to local institution building and business cycles. These differences-more so than the similarities-should be the focus of research efforts.
AUTHORS: Goldberg, Linda S.
DATE: 2004-04-01

Report
Trade invoicing in the accession countries: are they suited to the Euro?
Countries aspiring to join the euro area-the so-called accession countries-are increasingly binding their economic activity, external and internal, to the euro-area countries. This phenomenon is observed in the currency invoicing of international trade transactions, where accession countries have reduced their use of the U.S. dollar in invoicing such transactions. According to theory, the optimal invoicing choice for an accession country depends on its composition of exports and imports and on the macroeconomic fluctuations faced by its trade partners, with both factors bearing out the role of herding and hedging considerations within exporter profitability. These considerations yield country-specific estimates of the optimal degree of euro-denominated invoicing of exports. I find that the exporters in some accession countries might be pricing too much of their trade in euros rather than in U.S. dollars, even in their trade transactions with the euro-area and other European Union countries, and thus may be taking on excessive risk in international markets.
AUTHORS: Goldberg, Linda S.
DATE: 2005-10-01

Report
China’s evolving managed float: an exploration of the roles of the fix and broad dollar movements in explaining daily exchange rate changes
We investigate the drivers of daily changes in the exchange value of the Chinese currency (CNY) since early 2016, when a new regime was introduced for setting the fix?the midpoint of the CNY?s daily trading range against the U.S. dollar. Daily changes in the fix, which is announced just prior to the onset of onshore trading, are shown to be highly predictable and very responsive to the change in the CNY/USD rate during the previous day?s onshore trading session and to changes in dollar cross rates. While highly predictable, the fix is shown to have uneven predictive power for the subsequent evolution of the currency?s exchange value. Daily changes in the closing value of the exchange rate have centered on the changes implied by the fix to a much greater extent in months with higher intervention intensity, but less over the course of 2017, as intervention has waned. We document ways in which the short-run behavior of the CNY/USD exchange rate has evolved to more closely resemble behavior generally observed in freely floating currencies, even as the CNY continues to exhibit unusually low daily volatility. On days of broad dollar strengthening, the CNY is found to depreciate against the dollar but appreciate against the CFETS index, the authorities? main reference basket; the CNY now typically appreciates less than half as much as previously, when the currency was being managed primarily against the dollar.
AUTHORS: Clark, John
DATE: 2017-11-01

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