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Bank:Federal Reserve Bank of New York  Series:Research Paper 

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Are exchange rates excessively volatile? And what does \\"excessively volatile\\" mean, anyway?

Using data for the major currencies from 1973 to 1994, we apply recent tests of asset price volatility to reexamine whether exchange rates have been "excessively" volatile with respect to the predictions of the monetary model of the exchange rate and of standard extensions that allow for sticky prices, sluggish money adjustment, and time-varying risk premia. Consistent with previous evidence from regression-based tests, most of the models that we examine are rejected by our volatility-based tests. In general, however, we find that exchange rates have not been excessively volatile relative ...
Research Paper , Paper 9601

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Exchange rate cointegration across central bank regime shifts

Foreign exchange rates are examined using cointegration tests over various time periods linked to regime shifts in central bank behavior. The number of cointegrating vectors seems to vary across these regime changes within the foreign exchange market. For example, cointegration is not generally found prior to the Plaza Agreement of September 22, 1985, but it is present after that date. The significance of these changes is evaluated using a likelihood ratio procedure proposed by Quintos (1993). The changing nature of the cointegrating relationships indicate that certain aspects of central bank ...
Research Paper , Paper 9602

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Consumer payments over open computer networks

The increasing prospects for large volumes of commerce taking place over open computer networks has created considerable interest in the security and technology of open computer network commerce. In this paper, we explain how the basic encryption technology for sending secure messages works, and how this technology can be used to create electronic payment instruments, including cash, credit card, and check payments. We also review briefly the necessary elements required to support encryption technology: (1) a certification authority, (2) mathematical complexity of the encryption formulas, (3) ...
Research Paper , Paper 9603

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American employer salary surveys and labor economics research: issues and contributions

This paper reviews the uses of U.S. employer salary surveys for labor market research. Recent computational, theoretical, and econometric advances render these surveys ripe for exploitation. It summarize theories of employer wage effects and then describe salary surveys and their preparation for analysis. Then, the surveys and the methodological issues they raise are contrasted with household data. Finally, the paper summarizes the techniques used and contributions made in some salary survey-based studies.
Research Paper , Paper 9604

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European integration and asymmetry in the EMS

The empirical literature offers conflicting views of German dominance in the European Monetary System. We examine the validity of the German dominance hypothesis (GDH) by analyzing the responses of the European central banks and the money markets to monetary innovations originating both in Europe (European asymmetry) and abroad (international asymmetry). Our results reconcile the conflicting views in the literature. The GDH is confirmed when the analysis is conducted with intervention rates before the German unification. Results support European asymmetry with short rates before 1990 but not ...
Research Paper , Paper 9605

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Determinants and impacts of sovereign credit ratings

In this article, we present the first systematic analysis of the sovereign credit ratings of the two leading agencies, Moody's and Standard & Poor's (S&P). We find that the ordering of risks they imply is broadly consistent with macroeconomic fundamentals. While the agencies cite a large number of criteria in their assignment of sovereign ratings, a regression using only eight factors explains more than 90 percent of the cross-sectional variation in the ratings. In particular, a country's rating appears largely determined by its per capita income, external debt burden, inflation experience, ...
Research Paper , Paper 9608

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Predicting U.S. recessions: financial variables as leading indicators

This article examines the performance of various financial variables as predictors of U.S. recessions. Series such as interest rates and spreads, stock prices, currencies, and monetary aggregates are evaluated individually and in comparison with other financial and non-financial indicators. The analysis focuses on out-of-sample performance from 1 to 8 quarters ahead. Results show that stock prices are useful with 1-3 quarter horizons, as are some well-known macroeconomic indicators. Beyond 1 quarter, however, the slope of the yield curve emerges as the clear individual choice and typically ...
Research Paper , Paper 9609

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Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?

The return of private capital to highly indebted less-developed countries (LDCs) in the late 1980s was accompanied by widening current account deficits in the recipient countries, which were primarily attributed to a consumption boom in Latin America and an investment surge in East Asia. Interpreting the return as an increase in the external debt ceiling, the maximum amount that can be borrowed, this paper analyzes and compares the different response of the two regions using the conceptual framework of a borrowing-constrained agent. According to it, an increase in the debt ceiling can reduce ...
Research Paper , Paper 9610

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Did the good guys lose?: heterogeneous traders and regulatory restrictions on dual trading

We study the effect of restrictions on dual trading in futures contracts. Previous studies have found that dual trading restrictions can have a positive, negative, or neutral effect on market liquidity. In this paper, we propose that trader heterogeneity may explain these conflicting results. We find that, for contracts affected by restrictions, the change in market activity following restrictions differs between contracts. More important, the effect of a restriction varies among dual traders in the same market. For example, dual traders who ceased trading the S&P 500 index futures ...
Research Paper , Paper 9611

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Volatility and liquidity in futures markets

We study the provision of liquidity in futures markets as price volatility changes. For both active and inactive contracts, customer trading costs do not increase with volatility. However, for three of the four contracts studied, the nature of liquidity supply changes with volatility. Specifically, for relatively inactive contracts, customers as a group trade more with each other (and less with market makers) on higher volatility days. By contrast, for the most active contract, trading between customers and market makers increases with volatility. We also find that market makers' income per ...
Research Paper , Paper 9612

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