Showing papers by "Federal Reserve Bank of St. Louis published in 2000"
TL;DR: In this article, the authors employ a Bayesian dynamic latent factor model to estimate common components in main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world.
Abstract: The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions and the world. We employ a Bayesian dynamic latent factor model to estimate common components in main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. In particular, we simultaneously estimate (i) a dynamic factor common to all aggregates/regions/countries (the world factor); (ii) a set of 7 regional dynamic factors common across aggregates within a region; (iii) 60 country factors to capture dynamic comovement across aggregates within each country; (iv) and a component for each aggregate that captures idiosyncratic dynamics. We decompose the volatility in each aggregate into the fraction due to the world, region, country, and idiosyncratic components. The results indicate that the world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that the region-specific factor plays only a minor role in explaining fluctuations in economic activity. While the world and regional factors together account for a larger share of fluctuations in output than in consumption, the country factor along with the idiosyncratic factor play a much larger role in explaining investment dynamics. We also compare and contrast how the three aggregates in each country relate to the world, region and country factors, and document similarities and differences across regions, countries and aggregates. We link the empirical results to the economic structure of the countries in the sample.
967 citations
TL;DR: The authors empirically investigated the influence of German universal banks on the performance of German firms and found that bank control rights from equity ownership significantly improved firm performance beyond what nonbank blockholders can achieve.
452 citations
TL;DR: This paper reviewed methods of foreign exchange intervention and then presented evidence-focusing on survey results-on the mechanics of such intervention, instruments, timing, amounts, motivation, secrecy and perceptions of efficacy.
Abstract: This article first reviews methods of foreign exchange intervention and then presents evidence-focusing on survey results-on the mechanics of such intervention. Types of intervention, instruments, timing, amounts, motivation, secrecy and perceptions of efficacy are discussed.
195 citations
TL;DR: In this article, the authors distinguish between three different strategies for estimating forecasting equations with real-time data and argue that the most popular approach should generally be avoided and compare favorably with that of the Blue Chip consensus.
Abstract: We distinguish between three different strategies for estimating forecasting equations with real-time data and argue that the most popular approach should generally be avoided. The point is illustrated with a model that uses current-quarter monthly industrial production, employment, and retail sales data to predict real GDP growth. When the model is estimated using either of our two alternative methods, its out-of-sample forecasting performance is superior to that obtained using conventional estimation and compares favorably with that of the Blue Chip consensus.
185 citations
TL;DR: This paper argued that monetary policy should be conducted in such a way that the market can predict policy actions, and the market success in predicting policy actions is that interest rates move ahead of the policy actions and such a timing relationship may appear to some as the central bank following the market instead of leading it.
Abstract: The rational expectations revolution made clear that a complete macro model requires a specification of the government's economic policy. We argue that monetary policy should be conducted in such a way that the market can predict policy actions. An implication of market success in predicting policy actions is that interest rates move ahead of the policy actions, and such a timing relationship may appear to some as the central bank following the market instead of leading it. Another implication of the market predicting policy actions is that nominal interest rate changes provide no useful information to the central bank about the strength of aggregate demand or inflationary expectations. Finally, failure of the market to predict policy actions reflects a problem that needs to be addressed.
146 citations
TL;DR: In this article, the authors show how monetary policy inertia can help alleviate problems of indeterminacy and non-existence of stationary equilibrium observed for some commonly studied monetary policy rules and also find that inertia promotes learnability of equilibrium.
Abstract: We show how monetary policy inertia can help alleviate problems of indeterminacy and non-existence of stationary equilibrium observed for some commonly studied monetary policy rules. We also find that inertia promotes learnability of equilibrium. The context is a simple, forward-looking model of the macroeconomy widely used in the rapidly expanding literature in this area. We conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions.
142 citations
TL;DR: The authors found strong evidence of a stable money demand relationship for MZM and M2M through the 1990s, supporting the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds.
110 citations
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TL;DR: In this paper, exchange rate determination under a nominal interest peg in a two-country cash-in-advance model was studied and it was shown that there is a continuum of equilibria, each consistent with different nominal exchange rates and real resource allocations.
Abstract: This paper addresses exchange rate determination under a nominal interest peg in a two-country cash-in-advance model. Under two types of cash-in-advance constraints, if both governments peg the nominal interest rate on domestic bonds, there is a continuum of equilibria, each consistent with different nominal exchange rates and real resource allocations. The well-known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi-country, multi-currency setting.
98 citations
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TL;DR: In this article, the authors investigate the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption, and identify a common stochastic trend and a common transitory component by embedding the permanent income hypothesis within a simple growth model.
Abstract: This paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We first identify a common stochastic trend and a common transitory component by embedding the permanent income hypothesis within a simple growth model. We then investigate two types of asymmetry commonly identified in U.S. business cycle dynamics: (1) Infrequent negative permanent shocks, modeled as shifts in the growth rate of the common stochastic trend and (2) infrequent negative transitory shocks, modeled as \"plucking\" deviations from the common stochastic trend. Tests of marginal significance suggest both types of asymmetry were present in post-war recessions, although the shifts in trend are less severe than the received literature suggests.
80 citations
TL;DR: This article found that the trade liberalization associated with NAFTA has affected the pattern of state exports by altering the origin as well as the destination of merchandise exports, and that although many states have seen large increases in exports to both Mexico and Canada, others have seen very large decreases.
Abstract: The trade liberalization associated with NAFTA has affected the pattern of state exports by altering the origin as well as the destination of merchandise exports. We find that NAFTA has increased US merchandise exports to Mexico and Canada by just over 15%, and has increased total US merchandise exports by nearly 8%. We also find that although many states have seen large increases in exports to both Mexico and Canada, others have seen large decreases. NAFTA has also affected states’ exports to non-NAFTA regions of the world, tending to decrease exports to Europe and Latin America and increase exports to Asia. States in the northeast regions of the United States have seen the smallest increases in exports in the wake of NAFTA.
79 citations
TL;DR: In this paper, the authors show that the same property of base money holds for total output (relative to trend or potential) in both the United States and the United Kingdom and that the standard optimising IS-LM model cannot account for this result, but it can once the longterm nominal interest rate is included in the money demand function.
Abstract: Meltzer (1999a) shows that real monetary base growth is a significant determinant of consumption growth in the United States, controlling for the short-term real interest rate. In this paper, I show that the same property of base money holds for total output (relative to trend or potential) in both the United States and the United Kingdom. The standard optimising IS-LM model cannot account for this result, but I show that it can once the long-term nominal interest rate is included in the money demand function. Because the long-term real rate matters for aggregate demand, the presence of the long-term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky.
TL;DR: A dynamic general equilibrium model in which privately-issued liabilities may circulate, either by themselves, or alongside a stock of outside money, supports Friedman's (1960) idea that circulating private liabilities as associated with endogenous (or "excess") volatility.
TL;DR: The authors characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss and U.S. data to investigate whether intervention generates technical trading rule profits, disproving the hypothesis that intervention generates inefficiencies from which technical rules profit.
Abstract: This paper characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss and U.S. data to investigate whether intervention generates technical trading rule profits. High frequency data show that abnormally high trading rule returns precede German, Swiss and U.S. intervention, disproving the hypothesis that intervention generates inefficiencies from which technical rules profit. Australian intervention precedes high trading rule returns, but trading/intervention patterns make it implausible that intervention actually generates those returns. Rather, intervention responds to exchange rate trends from which trading rules have recently profited.
TL;DR: In this article, the EH is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement Wednesdays, the last day of bank reserve maintenance period.
Abstract: The expectations hypothesis (EH) of the term structure plays an important role in the analysis of monetary policy, where shorter-term rates are assumed to be determined by the market’s expectation for the overnight federal funds rate. With two exceptions, tests using the effective federal funds rate as the short-term rate easily reject the EH. These exceptions are when the EH is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement Wednesdays – the last day of bank reserve maintenance period. This paper argues that these exceptions are anomalous: in the former case, the failure to reject the EH occurs when economic analysis suggests that the market should be less able to forecast the federal funds rate. In the latter case, it occurs when there are sharp spikes in the funds rate that cannot improve materially the market’s ability to forecast the funds rate. Additional analysis shows that these anomalous results are a consequence of the procedure used to test the EH.
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TL;DR: In this article, weitverbreitete Ansicht, dass the Fed den Zielzinssatz fur Tagesgeld (Funds Rate) steuert, indem sie bei einer Anderung ihres Ziels fur den Federal Funds Satz den Druck am Geld-Markt uber Offenmarktgeschafte erhoht oder vermindert.
Abstract: Es herrscht die weitverbreitete Ansicht, dass die Fed den Zielzinssatz fur Tagesgeld (Funds Rate) steuert, indem sie bei einer Anderung ihres Ziels fur den Federal Funds Satz den Druck am Geld-Markt uber Offenmarktgeschafte erhoht oder vermindert Mehrere Okonomen auserten allerdings in letzter Zeit die Ansicht, dass Offenmarktgeschafte zur Steuerung der Funds Rate nicht erforderlich seien und die Fed vielmehr ihren Leitzins uber eine Politik des 'Offenen Mundes' steuern sollte Dabei wurde von der Fed lediglich angedeutet, dass sie eine Anderung des Leitzinses wunsche, und der Rest werde vom Markt selbst erledigt Diese Arbeit untersucht, inwieweit die enge Wechselbeziehung zwischen der Federal Funds Rate und ihrem Zielwert auf Offenmarkt- bzw 'Offenmund'-Operationen zuruckzufuhren ist Nachdem sich allerdings nur wenig Belege finden, mit denen sich die Offenmarkt- oder die 'Offenmund'-Hypothese untermauern liese, wird kurz auf die Moglichkeit einer Anpassung des Zielwertes als Reaktion der Fed auf Veranderungen der Marktzinssatze eingegangen
TL;DR: In this paper, the authors develop a framework for evaluating conditions under which a debt default might occur, based on the assumption that higher interest rates increase the probability of debt default, which may have anti-orthodox effects.
TL;DR: In this article, the authors extend the genetic programming techniques developed in Neely, Weller and Dittmar (1997) to provide some evidence that information about U.S. foreign exchange intervention can improve technical trading rules' profitability for two of four exchange rates over part of the out-of-sample period.
Abstract: This paper extends the genetic programming techniques developed in Neely, Weller and Dittmar (1997) to provide some evidence that information about U.S. foreign exchange intervention can improve technical trading rules' profitability for two of four exchange rates over part of the out-of-sample period. Rules tend to take positions contrary to official intervention and are unusually profitable on days prior to intervention, indicating that intervention is intended to check or reverse predictable trends. Intervention seems to be more successful in checking predictable trends in the out-of-sample (1981-1998) period than in the in-sample (1975-1980) period. We conjecture that instability in the intervention process prevents more consistent improvement in the excess returns to rules. We find that the improvement in performance results from more precise estimation of the information in the past exchange rate series, rather than from information about contemporaneous intervention.
TL;DR: In this paper, the authors investigated whether the services of the Federal Reserve System improved the efficiency of the system in the United States for collecting checks relative to the system used by banks just prior to the formation of the Fed.
TL;DR: The authors showed that the test they employ tends to generate results that are more favorable to the expectations hypothesis during periods when there is extreme volatility in the short-term rate, and that the failure of the expectation hypothesis after the Fed's founding was due to the practice of smoothing shortterm interest rates.
Abstract: One of the most influential tests of the expectations hypothesis is Mankiw and Miron [Q. J. Econ. 101 (1986) 211], who found that the spread between the long-term and short-term rates provided predictive power for the short-term rate before the Fed's founding but not after. They suggested that the failure of the expectations hypothesis after the Fed's founding was due to the Fed's practice of smoothing short-term interest rates. We show that their finding that the expectations hypothesis fares better prior to the Fed's founding is due to the fact that the test they employ tends to generate results that are more favorable to the expectations hypothesis during periods when there is extreme volatility in the short-term rate.
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TL;DR: In this article, the authors present empirical evidence on the hypothesis that aggregate price disturbances cause or worsen financial instability, and construct two annual indexes of financial conditions for the United States covering 1790-1997, and estimate the effect of aggregate price shocks on each index using a dynamic ordered probit model.
Abstract: This paper presents empirical evidence on the hypothesis that aggregate price disturbances cause or worsen financial instability. We construct two annual indexes of financial conditions for the United States covering 1790-1997, and estimate the effect of aggregate price shocks on each index using a dynamic ordered probit model. We find that price level shocks contributed to financial instability during 1790-1933, and that inflation rate shocks contributed to financial instability during 1980-97. Our research indicates that the size of the aggregate price shocks needed to substantially alter financial conditions depends on the institutional environment, but that a monetary policy focused on price stability would be conducive to financial stability.
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TL;DR: In this article, the authors distinguish between three different ways of using real-time data to estimate forecasting equations and argue that the most frequently used approach should generally be avoided and compare favorably with that of the Blue-Chip consensus.
Abstract: We distinguish between three different ways of using real-time data to estimate forecasting equations and argue that the most frequently used approach should generally be avoided. The point is illustrated with a model that uses monthly observations of industrial production, employment, and retail sales to predict real GDP growth. When the model is estimated using our preferred method, its out-of-sample forecasting performance is clearly superior to that obtained using conventional estimation, and compares favorably with that of the Blue-Chip consensus.
TL;DR: In this article, the authors study the Taylor rule in the context of dynamic economies and find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor policy.
Abstract: The US economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity, and calculate the optimal monetary policy rule in the altered environment We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model
TL;DR: The authors found that although many states have seen large increases in exports to both Mexico and Canada, others have seen a large decrease in their exports to non-NAFTA regions of the world, tending to decrease exports to Europe and Latin America.
Abstract: This study finds that NAFTA has increased U.S. merchandise exports to Mexico and Canada by just over 15 percent, and has increased total U.S. merchandise exports by nearly 8 percent. We also find that although many states have seen large increases in exports to both Mexico and Canada, others have seen large decreases. NAFTA has also affected states' exports to non-NAFTA regions of the world, tending to decrease exports to Europe and Latin America, and increase exports to Asia. States in the northeast regions of the United States have seen the smallest increases in exports in the wake of NAFTA.
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TL;DR: This article examined the extent and causes of interdependency between Japanese banks' domestic and US lending and concluded that economic and regulatory conditions in Japan strongly influence the extent of Japanese banks" US lending, while the unique information role of banks as financial intermediaries leads to complementarity between their domestic and international lending.
Abstract: The central issues addressed are the extent and causes of interdependency between Japanese banks' domestic and US lending. We examine hypotheses that domestic and US credit allocations by Japanese banks during the late 1980s and early 1990s are related through their mutual dependence on capital availability, and that the unique information role of banks as financial intermediaries leads to complementarity between their domestic and international lending. Both hypotheses receive support. Related conclusions are that economic and regulatory conditions in Japan strongly influence the extent of Japanese banks' US lending.
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TL;DR: This paper showed that an export subsidy is optimal for a unionized Bertrand duopoly with both firms being unionized and both governments pursuing active trade policies, except for a narrow range of extreme substitutability between products.
Abstract: The paper reports that an export subsidy is optimal for a unionized Bertrand duopoly. Following results published by Brander and Spencer (Journal of International Economics, 1988, pp. 217-34), this establishes the robustness of export subsidization to the mode of competition (Cournot or Bertrand), and contrasts with nonunion results in the literature. If both firms are unionized and both governments pursue active trade policies, a subsidy remains optimal except for a narrow range of extreme substitutability between products. Nations with a lower opportunity cost of labor employ more aggressive policies in equilibrium.
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TL;DR: In this paper, the degree of corruption in a hierarchical model of government is studied and it is shown that when the after tax relative profitability of the formal sector as compared to that of the informal sector is high enough, adding a layer of government does in fact increase the total amount of corruption, while for high enough public wages and/or an efficient monitoring technology of the bureaucratic system, centralization of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level but actually reduces total corruption in the process.
Abstract: We study the degree of corruption in a hierarchical model of government. In particular, we explore the question of whether adding a layer of government simply increases the total amount of corruption or generates an organizational efficiency (via a principal-agent relationship between levels of government) that reduces the total amount of corruption. It is shown that when the after tax relative profitability of the formal sector as compared to that of the informal sector is high enough, adding a layer of government does in fact increase the total amount of corruption. On the other hand, for high enough public wages and/or an efficient monitoring technology of the bureaucratic system, 'centralization' of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level but actually reduces total corruption in the process.
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TL;DR: The authors examined the effects of tax policies on an aging economy and found that if the quality of the education system is sufficiently high then shifting tax resources away from social security and toward education is both growth and welfare enhancing.
Abstract: In the last few decades in the United States birth rates have declined and longevity has risen while productivity growth has slowed. Given such changes, the increasing burden of funding programs for the elderly is likely to shift resources away from the young and toward the elderly. This paper uses an overlapping generations framework to examine the effects of tax policies on an aging economy. We find that if the quality of the education system is sufficiently high then shifting tax resources away from social security and toward education is both growth and welfare enhancing.