A guide to FRB/Global
This paper describes the structure and illustrates the key features of FRB/Global, a large-scale macroeconomic model used in analyzing exogenous shocks and alternative policy responses in foreign economies and in examining the impact of these external shocks on the U.S. economy. FRB/Global imposes fiscal and national solvency constraints and utilizes error-correction mechanisms in the behavioral equations to ensure the long-run stability of the model. In FRB/Global, expectations play an important role in determining financial market variables and domestic expenditures. Simulations can be ...
Legal structure, financial structure, and the monetary policy transmission mechanism
Among the many challenges facing the new Eurosystem - the European Central Bank and the central banks of the eleven members of the European Monetary Union - is the possibility that participating countries will respond differently to interest rate changes. This paper provides evidence that differences in financial structure are the proximate cause for these national asymmetries in monetary policy transmission and that these differences in financial structure are a result of differences in legal structure. The author concludes that unless legal structures are harmonized across Europe, the ...
Using option prices to estimate realignment probabilities in the European Monetary System
Risk reversals are a combination of options from which price information about market expectations of future exchange rates can be extracted. This paper describes a procedure for estimating the market's perceived probability distribution of future exchange rates from the prices of risk reversals and other currency options. This procedure is used to estimate the ex ante probability of a realignment of the French franc and pound sterling. The procedure for estimating the realignment probabilities relies on the jump-diffusion model of exchange rate behavior and the resulting option pricing ...
Fiscal policy coordination and flexibility under European Monetary Union: implications for macroeconomic stabilization
Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest ...
Does exchange rate stability increase trade and capital flows?
On the eve of a major change in the world monetary system, the adoption of a single currency in Europe, our theoretical understanding of the implications of the exchange rate regime for trade and capital flows is still limited. We argue that two key model ingredients are essential to address this question: a general equilibrium setup and deviations from purchasing power parity. By developing a simple benchmark monetary model that contains these two ingredients, we find the following main results. First, the level of trade is not necessarily higher under a fixed exchange rate regime. Second, ...
The role of the euro as an international currency
The creation of the euro will link an economy that is nearly as large and as open as the United States. Does this imply that the euro will rival the role of the dollar as an international currency? This paper addresses this question through an examination of the determinants of the use of an international currency. It examines both the prospects of the euro becoming an international currency and the implications for the European Union and the United States.