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Jel Classification:F32 

Report
Macroeconomic Volatility and External Imbalances

Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this ...
Staff Report , Paper 512

Report
The Effects of the saving and banking glut on the U.S. economy

We use a quantitative equilibrium model with houses, collateralized debt, and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one-fourth and one-third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
Staff Reports , Paper 648

Working Paper
Banking crises, external crises and gross capital flows

In this paper, we study the relationship between banking crises, external financial crises and gross international capital flows. First, we confirm that banking and external crises are correlated. Then, as we explore the role of gross capital flows, we find that declines of external liabilities in the balance of payments ? a proxy for foreign capital repatriation we call gross foreign investment reversals (GIR) ? predict banking as well as external crises. Finally, we estimate the effects of GIR-associated banking crises on the risk of currency and sudden stop crises in an ...
Globalization Institute Working Papers , Paper 273

Working Paper
The Federal Reserve engages the world (1970-2000): an insider's narrative of the transition to managed floating and financial turbulence

This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve?s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
Globalization Institute Working Papers , Paper 210

Working Paper
Credit booms, banking crises, and the current account

What is the marginal effect of an increase in the private sector debt-to-GDP ratio on the probability of a banking crisis? This paper shows that the marginal effect of rising debt levels depends on an economy's external position. When the current account is in surplus or in balance, the marginal effect of an increase in debt is rather small; a 10 percentage point increase in the private sector debt-to-GDP ratio increases the probability of a crisis by about 1 to 2 percentage points. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ...
Globalization Institute Working Papers , Paper 178

Journal Article
U.S. Cross-Border Derivatives Data: A User's Guide

The global derivatives market has grown rapidly in the past decade. By one measure of market size--the notional value, which is used to determine the payments made on a derivatives contract--the derivatives market expanded from $87 trillion in June 1998 to $454 trillion in June 2006. Measured by the price at which a derivatives contract can be purchased in a current transaction, or the market value, the derivatives market grew from $3 trillion in June 1998 to $10 trillion as of June 2006.
Federal Reserve Bulletin , Volume 93 , Issue May , Pages pp. A1-A16

Working Paper
Differential Treatment in the Bond Market: Sovereign Risk and Mutual Fund Portfolios

How does sovereign risk affect investors' behavior? We answer this question using a novel database that combines sovereign default probabilities for 27 developed and emerging markets with monthly data on the portfolios of individual bond mutual funds. We first show that changes in yields do not fully compensate investors for additional sovereign risk, so that bond funds reduce their exposure to a country's assets when its sovereign default risk increases. However, the magnitude of the response varies widely across countries. Fund managers aggressively reduce their exposure to high-debt ...
International Finance Discussion Papers , Paper 1261

Working Paper
Catalytic IMF? a gross flows approach

The financial assistance the International Monetary Fund (IMF) provides is assumed to catalyze fresh investment. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF?s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we find significant differences in how resident and foreign investors react to IMF programs as well as in inward and outward flows. While IMF lending does not catalyze ...
Globalization Institute Working Papers , Paper 254

Working Paper
Large Capital Inflows, Sectoral Allocation, and Economic Performance

This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are ...
International Finance Discussion Papers , Paper 1132

Working Paper
Thousands of models, one story: current account imbalances in the global economy

The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any firm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. The chance that current accounts were aligned with fundamentals prior to the financial crisis appears to be minimal.
Globalization Institute Working Papers , Paper 100

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