Search

Begin New Search Topic Economics Author Joseph E. Gagnon

11. Lehman Died, Bagehot Lives: Why Did the Fed and Treasury Let a Major Wall Street Bank Fail?

Author:
William R. Cline and Joseph E. Gagnon
Publication Date:
09-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Five years after the Federal Reserve and the Treasury allowed the investment bank Lehman Brothers to fail, their actions (or inaction) remain a focus of debate. Some argue that it was an inconsistent policy to have let Lehman fail while making emergency loans to save other large financial institutions in the same time frame. In this Policy Brief we present evidence that the Fed and Treasury had a sound reason to have bailed out other institutions while letting Lehman fail. Simply put, Lehman was insolvent—probably deeply so—whereas the other institutions arguably were solvent. In addition, the other institutions had abundant collateral to pledge, whereas what little collateral Lehman had to pledge was of questionable quality and scattered across many affiliated entities. Thus, federal officials, at least in hindsight, appear to have followed the dictum of Walter Bagehot (cited above), which has guided central banks for almost 150 years.
Topic:
Debt, Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States

12. Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis

Author:
Joseph E. Gagnon
Publication Date:
11-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
There is a long-standing debate among economists and policymakers on the benefits of flexible versus fixed exchange rates (Klein and Shambaugh 2010). In principle, flexible exchange rates allow a country's central bank to focus on stabilizing economic growth and inflation, which are the ultimate goals of monetary policy. However, some argue that in practice central banks often do not use their powers wisely and it may be better to restrict their freedom by requiring them to peg their currency to that of an important trading partner. Others note that flexible exchange rates are far more volatile than fundamental factors can explain (Flood and Rose 1995), raising the possibility that they may introduce wasteful cross-sectoral fluctuations in economic activity. One common viewpoint is that flexible exchange rates may be fine for large countries but that the smallest countries are better off with fixed exchange rates (Åslund 2010).
Topic:
Economics, Foreign Exchange, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States, Japan, China, and United Kingdom

13. Currency Manipulation, the US Economy, and the Global Economic Order

Author:
C. Fred Bergsten and Joseph E. Gagnon
Publication Date:
12-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
More than 20 countries have increased their aggregate foreign exchange reserves and other official foreign assets by an annual average of nearly $1 trillion in recent years. This buildup of official assets—mainly through intervention in the foreign exchange markets—keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world, but the largest share of the loss centers on the United States, whose trade deficit has increased by $200 billion to $500 billion per year as a result. The United States has lost 1 million to 5 million jobs due to this foreign currency manipulation.
Topic:
Economics, Globalization, International Cooperation, International Trade and Finance, and World Trade Organization
Political Geography:
United States

14. Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks

Author:
Joseph E. Gagnon
Publication Date:
03-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Over the past 10 years, central banks and governments throughout the developing world have accumulated foreign exchange reserves and other official assets at an unprecedented rate. This paper shows that this official asset accumulation has driven a substantial portion of the recent large global current account imbalances. These net official capital flows have become large relative to the size of the industrial economies, and they are a significant factor contributing to the weakness of the economic recovery in the major industrial economies.
Topic:
Development, Economics, Emerging Markets, Globalization, Markets, Monetary Policy, and Financial Crisis

15. Predicting Sharp Depreciations in Industrial Country Exchange Rates

Author:
Jonathan H. Wright and Joseph E. Gagnon
Publication Date:
11-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper considers the prediction of large depreciations (both nominal and real) in a panel of industrialized countries using a probit methodology. The current account balance/GDP ratio has a modest but statistically significant effect on the estimated probability of a large depreciation, and gives slight predictive power in an outof- sample forecasting exercise. The CPI inflation rate also has a modest but statistically significant effect in predicting nominal depreciations and has slight predictive power, but this effect is not present for real exchange rates. The GDP growth rate occasionally has a significant effect. A higher current account balance (surplus) tends to reduce the probability of a sharp depreciation; a higher inflation rate tends to increase the probability of a sharp depreciation; and a higher GDP growth rate perhaps tends to reduce the probability of a sharp depreciation.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets

16. Growth-Led Exports: Is Variety the Spice of Trade?

Author:
Joseph E. Gagnon
Publication Date:
11-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts the standard Armington trade model, which predicts that fast-growing countries can experience rapid export growth only to the extent that they accept declining terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in long-run export growth of many countries in the post-war era.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

17. Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance

Author:
Joseph E. Gagnon
Publication Date:
10-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Most macroeconomic models imply that faster output growth tends to lower a country's trade balance by raising its imports with little change to its exports. Krugman (1989) proposed a model in which countries grow by producing new varieties of goods. In his model, faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of U.S. imports from different source countries and finds strong support for Krugman's model.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

18. Long-Run Supply Effects and the Elasticities Approach to Trade

Author:
Joseph E. Gagnon
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Krugman (1989) argued that differences across countries in estimated income elasticities of import demand are due to omission of an exporter supply effect. He showed that such an effect can be derived in a theoretical model with economies of scale in production and a taste for variety in consumption. In his model, countries grow by producing new varieties of goods, and they are able to export these goods without suffering any deterioration in their terms of trade. This paper analyzes U.S. import demand from different source countries and finds strong evidence of a supply effect of roughly half the magnitude (0.75) of the income elasticity (1.5). Price elasticities for the most part are estimated close to -1, which is typical for the literature. Exclusion of the supply effect leads to overestimation of the income elasticity. Results based on U.S. exports to different destinations are less robust, but largely corroborate these findings.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

19. International Coordination of Macroeconomic Policies: Still Alive in the New Millennium?

Author:
Joseph E. Gagnon, Dale W. Henderson, Brian M. Doyle, and Laurence H. Meyer
Publication Date:
04-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper we provide two building blocks for an analysis of international policy coordination: (1) a survey of models of policy coordination, and (2) an account of experience with policy coordination among the G-7 countries and within Europe since the breakdown of the Bretton Woods System. Using these building blocks, we investigate the correspondence between the models and experience and attempt to draw lessons for both the modelers and the practitioners. We find that the correspondence is close enough that the models help in analyzing several instances of actual policy coordination, but that the correspondence could be even closer. As for lessons for modelers, we suggest that they devote more attention to the analysis of information exchange, a key feature of practical policy coordination; to the coordination of different types of policies; to the ramifications of political divisions within countries; and to the implications of market irrationality and speculative bubbles. As for lessons for policy makers, we suggest that they give more consideration to the choice of their ultimate objectives, in particular to whether the current account should always be close to balance; to achieving better internal policies; and to the greater use of fiscal policy as a stabilization tool.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
Europe