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Bank:Federal Reserve Bank of Dallas  Series:Globalization Institute Working Papers 

Working Paper
Portfolio Rebalancing in Times of Stress

This paper investigates time variation in the dynamics of international portfolio equity flows. We extend the empirical model of Hau and Rey (2004) by embedding a two-state Markov regime-switching model into the structural VAR. The model is estimated using monthly data, 1995-2015, on equity returns, exchange rate returns and equity flows between the United States and advanced and emerging economies. We find that the data are consistent with portfolio rebalancing. The estimated states match periods of low and high financial stress. Our main result is that for equity flows between the United ...
Globalization Institute Working Papers , Paper 322

Working Paper
Exchange rate pass-through in a competitive model of pricing-to-market

This paper extends the Mussa and Rosen (1978) model of quality-pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response ...
Globalization Institute Working Papers , Paper 23

Working Paper
Real exchange rate forecasting and ppp: this time the random walk loses

This paper brings four new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP (HL) model is able to forecast real exchange rates better than the random walk (RW) model at both short and long-term horizons. Second, we find that this result holds if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Third, we find that it is preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP. Fourth, for most currencies in our sample, the HL model ...
Globalization Institute Working Papers , Paper 229

Working Paper
Optimal monetary policy under financial sector risk

We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in ...
Globalization Institute Working Papers , Paper 85

Working Paper
Oil Curse, Economic Growth and Trade Openness

An important economic paradox that frequently arises in the economic literature is that countries with abundant natural resources are poor in terms of real gross domestic product per capita. This paradox, known as the ?resource curse,? is contrary to the conventional intuition that natural resources help to improve economic growth and prosperity. Using panel data for 95 countries, this study revisits the resource curse paradox in terms of oil resource abundance for the period 1980?2017. In addition, the study examines the role of trade openness in influencing the relationship between oil ...
Globalization Institute Working Papers , Paper 370

Working Paper
Cross-border returns differentials

Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond ...
Globalization Institute Working Papers , Paper 04

Working Paper
exuber: Recursive Right-Tailed Unit Root Testing with R

This paper introduces the R package exuber for testing and date-stamping periods of mildly explosive dynamics (exuberance) in time series. The package computes test statistics for the supremum ADF test (SADF) of Phillips, Wu and Yu (2011), the generalized SADF (GSADF) of Phillips, Shi and Yu (2015a,b), and the panel GSADF proposed by Pavlidis, Yusupova, Paya, Peel, Martínez-García, Mack and Grossman (2016); generates finite-sample critical values based on Monte Carlo and bootstrap methods; and implements the corresponding date-stamping procedures. The recursive least-squares algorithm that ...
Globalization Institute Working Papers , Paper 383

Working Paper
Non-Gravity Trade

This paper examines the relationship between countries’ bilateral trade with the United States that is not due to gravity (non-gravity trade) and the distribution of income within countries. In countries where only a small share of the population is educated, an increase in non-gravity trade is associated with a significant increase in income inequality. As education of the population increases, the correlation between non-gravity trade and income inequality becomes smaller. Non-gravity trade has no significant effect on income inequality in countries that are world leaders in education.
Globalization Institute Working Papers , Paper 388

Working Paper
Embedded Supervision: How to Build Regulation into Blockchain Finance

The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market?s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled ...
Globalization Institute Working Papers , Paper 371

Working Paper
Trade barriers and the relative price tradables

In this paper I quantitatively address the role of trade barriers in explaining why prices of services relative to tradables are positively correlated with levels of development across countries. I argue that trade barriers play a crucial role in shaping the cross-country pattern of specialization across many heterogenous tradable goods. The pattern of specialization feeds into cross-country productivity differences in the tradables sector and is reflected in the relative price of services. I show that the existing pattern of specialization implies that the tradables-sector productivity gap ...
Globalization Institute Working Papers , Paper 139

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