Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?

Abstract: Exchange rate regime optimality, as well as monetary policy effectiveness, depends on the tightness of the link between exchange rate movements and import prices. Recent debates hinge on whether producer-currency-pricing (PCP) or local currency pricing (LCP) of imports is more prevalent, and on whether exchange rate passthrough rates are endogenous to a country’s macroeconomic conditions. We provide cross-country and time series evidence on both of these issues for the imports of twenty-five OECD countries. Across the OECD and especially within manufacturing industries, there is compelling evidence of partial pass-through in the short-run– rejecting both PCP and LCP. Over the long run, PCP is more prevalent for many types of imported goods. Higher inflation and exchange rate volatility are weakly associated with higher pass-through of exchange rates into import prices. However, for OECD countries, the most important determinants of changes in pass-through over time are microeconomic and relate to the industry composition of a country’s import bundle.

The pre-FOMC announcement drift

Abstract: We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre-FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre-FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory.

Understanding the Great Recession

Abstract: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)

Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?

Abstract: The volatility of U.S. real GDP growth since 1984 has been markedlylowerthanoverthepreviousquartercentury.Weutilizefrequency-domain and VAR methods to distinguish among competing explanations for this reduction: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility, suggesting that good luck is the most likely explanation. Good practices and good policy appear to have played a more important role in explaining the post-1984 decline in the volatility of consumer price inflation.

Exchange-Rate Hedging: Financial versus Operational Strategies

Abstract: Exchange-rate exposure is an important source of risk for multinational corporations. To mitigate the impact of exchange-rate fluctuations, it has been claimed that multinational corporations can employ risk-management strategies not only through financial derivatives, but also through operational hedges. For example, Schering-Plough in its 1995 annual report (p. 25) argues in support of exclusive use of operational hedges: “To date, management has not deemed it cost-effective to engage in a formula-based program of hedging the profitability of these operations using derivative financial instruments. Some of the reasons for this conclusion are: The Company operates in a large number of foreign countries; the currencies of these countries generally do not move in the same direction at the same time.” Conversely, many corporations with large worldwide networks, such as IBM or Coca Cola, make extensive use of derivative financial instruments. This paper investigates both financial and operational exchange-rate risk-management strategies of multinational firms. While several studies have examined either firms’ financial hedging or firms’ operational hedging activities, no study thus far has examined financial and operational hedging simultaneously for a large cross section of firms. To the extent that the decision to use financial hedging strategies is related to (and affected by) the operational strategies that a firm employs, it is important to examine how each strategy contributes to the overall goal of mitigating risk and improving shareholder value. Using a sample of U.S. multinational nonfinancial firms during 1996–1998, we find that operational hedging is not an effective substitute for financial risk management. However, we find that the more geographically dispersed a firm is, the more likely it is to use financial hedges. The end result on firm value is that operational hedging strategies benefit shareholders only when used in combination with financial hedging strategies.