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Working Paper
Global versus country-specific productivity shocks and the current account
For G-7 countries over the period 1961-1990, there appears to be a strong and stable negative correlation between annual changes in the current account and investment. Here we explore this correlation using a highly tractable empirical model that distinguishes between global and country-specific shocks. This distinction turns out to be quite important empirically, as global shocks account for roughly fifty percent of the overall variance of productivity. An apparent puzzle, however, is that the current account seems to respond by much less than investment to country-specific productivity ...
Working Paper
Global versus country-specific productivity shocks and the current account
The intertemporal approach to the current account is often regarded as theoretically elegant but of limited empirical significance. This paper derives highly tractable current account and investment specifications that we estimate without resorting to calibration or simulation methods. In time-series data for eight industrialized countries, we find that country-specific productivity shocks tend to worsen the current account, whereas global shocks have little effect. Both types of shock raise investment. It is a puzzle, however, for the intertemporal model that long-lasting local productivity ...
Working Paper
The mirage of fixed exchange rates
This paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets. Contrary to popular wisdom, industrialized-country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack. But if their commitment to use those resources lacks credibility with markets, the costs to the broader economy of defending an exchange-rate peg can be very high. The dynamic interplay between credibility and commitment is illustrated by the 1992 Swedish and British crises.
Working Paper
Capital controls: myth and reality, a portfolio balance approach to capital controls
The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology--furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings ...
Working Paper
Was it real? : the exchange rate-interest differential relation, 1973 - 1984
The main result of Meese and Rogoff [1983 a,b] is that small structural exchange rate models forecast major dollar exchange rates no better than a naive random walk model. This result obtains even when the model forecasts are based on actual realized values of the explanatory variables. Here we improve our methodology by implementing a new test of out-of-sample fit; the test is valid even for overlapping long-horizon forecasts. We find that the dollar exchange rate models perform somewhat less badly over the recent Reagan regime period than over the episodes studied previously. The ...