We investigate whether differences in individuals’ experiences of macro-economic shocks affect longterm risk attitudes, as is often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, we find that birth-cohorts that have experienced high stock market returns throughout their life report lower risk aversion, are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. We also find that cohorts that have experience high inflation are less likely to hold bonds. These results are estimated controlling for age, year effects, and a broad set of household characteristics. Our estimates indicate that stock market returns and inflation early in life affect risk-taking several decades later. However, more recent returns have a stronger effect, which fades away slowly as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals’ life affects subsequent risk-taking. Our results explain, for example, the relatively low rates of stock market participation among young households in the early 1980s (following the disappointing stock market returns in the 1970s depression) and the relatively high participation rates of young investors in the late 1990s (following the boom years in the 1990s).

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Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?*

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication-mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication, can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication, strategies across central banks suggests that a. consensus has yet to emerge, on what constitutes an optimal communication strategy.

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Central bank communication and monetary policy: A survey of theory and evidence

Using a new dataset consisting of six years of real-time exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and the Euro. In particular, we find that announcement surprises (that is, divergences between expectations and realizations, or “news”) produce conditional mean jumps; hence high-frequency exchange rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery.

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Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange *

Historically, the fields of exchange-rate economics and microstructure finance have progressed independently of each other. Recent interaction, however, has given rise to a microstructure approach to exchange rates. This book focuses on the economics of financial information and how microstructure tools help to clarify the types of information most relevant to exchange rates. The microstructure approach views exchange rates from the perspective of the trading room, the place where exchange rates are actually determined. Emphasizing information economics over institutional issues, the approach departs from three unrealistic assumptions common to previous approaches: that all information relevant to exchange rates is publicly available, that all market participants are alike in their goals or in how they view information, and that how trading is organized is inconsequential for exchange rates. The book shows how exchange-rate behavior previously thought to be particularly puzzling can be explained using the microstructure approach. It contains a combination of theoretical and empirical work.

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The Microstructure Approach to Exchange Rates

A long literature since Feldstein and Horioka's seminal contribution documents the strong correlation of domestic saving and investment rates since the 1960s. According to conventional wisdom, the result provides evidence of international capital market imperfections. The macroeconomic theory of small open economies prescribes a relationship between the composition of aggregate demand and its relative price structure, a linkage hitherto ignored in the saving-investment literature. Theory and evidence also suggest a role for growth and demographic effects, well known in previous studies. If one controls for these effects, the standard correlation of saving and investment disappears. International capital markets may be better integrated than once thought, and the former correlations may have been spurious. The pattern of domestic investment rates is better explained by domestic price distortions and other variables than by domestic saving constraints.

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Domestic Saving and International Capital Flows Reconsidered

Central bank intervention and exchange rate volatility

Until recently, there was an unusual degree of consensus among economists that intervention by central banks in the foreign-exchange market did not offer an effective or lasting instrument for affecting the exchange rate, at least not independently of monetary policy. This consensus was largely shared among policymakers and participants in the financial markets as well. The 1982 G-7 economic summit at Versailles commissioned a study of intervention, known as the Jurgenson report, which found that the effects were small and transitory at most.' We think that the time is ripe for new statistical testing of the question. Many policymakers and foreign-exchange traders believe that the intervention operations that have taken place since the Plaza Agreement of September 1985 have had an effect, especially when operations are coordinated. Moreover, the theoretical case against the effectiveness of intervention is not as clear as a reading of the economics literature might suggest. The academic literature is predicated on the distinction between intervention operations that are sterilized and those that are allowed to affect the money supply. We study the intervention operations that actually took place between 1982 and 1988, regardless of whether they were sterilized. However, we do begin in Section I with a review of the issues involved.2 There are two possible channels through which intervention (whether sterilized or not) can influence the foreign-exchange rate: the portfolio and the expectations channels. Intervention can, even if sterilized, influence exchange rates through the portfolio channel, provided foreign and domestic bonds are considered imperfect substitutes in investors' portfolios. Intervention operations that, for example, increase the current relative supply of mark to dollar assets which private investors are obliged to accept into their portfolios, will force a decrease in the relative price of mark assets.3 Intervention can also influence exchange rates, regardless of whether foreign and domestic bonds are imperfect substitutes, through the expectations channel. The public information that central banks are intervening in support of a currency (or are planning to intervene in the future) may, under certain conditions, cause speculators to expect an increase in the price of that currency in the future. Speculators react to this information by buying the currency today, bringing about the change in the exchange rate today. In Sections II and III we describe the econometric problems that arise in the standard portfolio-balance estimation equation. We derive an alternative portfolio-balance *Dominguez: Kennedy School of Government, Harvard University, 79 J. F. Kennedy Street, Cambridge, MA 02138; Frankel: Department of Economics, University of California, 787 Evans Hall, Berkeley, CA 94720. We thank three anonymous referees for valuable comments and suggestions; Julia Marsh and Julia Lowell for research assistance; and Franz Scholl at the Bundesbank, Jean-Pierre Roth at the Swiss National Bank, and officials at the U.S. Treasury and the Board of Governors of the Federal Reserve System for making the daily intervention data available. 1Many of the econometric results, finding little or no effect, were reported in Kenneth S. Rogoff (1984) and Dale W. Henderson and Stephanie Sampson (1983). 2For authoritative statements, see Henderson (1984) or Maurice Obstfeld (1990). 3The exchange-rate reaction to an increase in the relative supply of outside foreign assets may be reduced if there is an increase in their expected rate of return that induces a corresponding increase in demand.

Does foreign-exchange intervention matter? The portfolio effect

https://www.nber.org/system/files/working_papers/w8453/w8453.pdf

Exchange rate exposure

Following the Versailles G-7 summit of 1982, most government officials and academic analysts downplayed the potential impact of exchange market intervention unless such intervention was permitted to affect national monetary policies. This study challenges the conventional wisdom. Using previously unavailable data on daily intervention by the US Federal Reserve and the German Bundesbank, the authors find to the contrary that even "sterilized" intervention can have an effect, especially if it is known to the markets. Implications are drawn for intervention policy and its role in the international coordination process.

Does Foreign Exchange Intervention Work

One of the great unknowns in international finance is the process by which new information influences exchange rate behavior. Until recently, data constraints have limited our ability to examine this issue. The Olsen and Associates high-frequency spot market data greatly expand the range of testable hypotheses regarding the influence of information. This paper focuses on one important source of information to the foreign exchange markets, the intervention operations of the G-3 central banks. Previous studies using daily and weekly foreign exchange rate data suggest that central bank intervention operations can influence both the level and variance of exchange rates, but little is known about how exactly traders learn about these operations and whether intra-daily market conditions influence their effectiveness. Using high-frequency data, this paper will examine the relationship between the efficacy of intervention operations and the "state of the market" at the moment that the operation is made public to traders.

Kathryn M.E. Dominguez

Papers

Central bank intervention and exchange rate volatility

Does foreign-exchange intervention matter? The portfolio effect

Exchange rate exposure

Does Foreign Exchange Intervention Work

The Market Microstructure of Central Bank Intervention