Search

Begin New Search Political Geography North America Publishing Institution Board of Governors of the Federal Reserve System

1. How Did a Domestic Housing Slump Turn into a Global Financial Crisis?

Author:
Steven B. Kamin and Laurie Pounder DeMarco
Publication Date:
01-2010
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such “direct contagion” from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion’s share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of “indirect contagion” may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.
Topic:
Financial Crisis, Global Financial Crisis, and Housing
Political Geography:
United States and North America

2. Biofuels Impact on Crop and Food Prices: Using an Interactive Spreadsheet

Author:
Scott Baier, Mark Clements, and Jane Ihrig
Publication Date:
03-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the effect that biofuels production has had on commodity and global food prices. The innovative contribution of this paper is the interactive spreadsheet that allows the reader to choose the assumptions behind the estimates. By allowing the reader to choose the country, time period, supply and demand elasticities, and the size of indirect effects we explicitly illustrate the sensitivity of the estimated effect of biofuels production on prices. Our best estimates suggest that the increase in biofuels production over the past two years has had a sizeable impact on corn, sugar, barley and soybean prices, but a much smaller impact on global food prices. Over the past two years (ending June 2008), we estimate that the increase in worldwide biofuels production pushed up corn, soybean and sugar prices by 27, 21 and 12 percentage points respectively. The countries that account for most of the upward pressure on these prices are the United States and Brazil. Our best estimates suggest that the increase in U.S. biofuels production (ethanol and biodiesel) pushed up corn prices by more than 22 percentage points and soybean prices (soybeans and soybean oil) by more than 15 percentage points, while the increase in EU biofuels production pushed corn and soybean prices up around 3 percentage points. Brazil’s increase in sugar-based ethanol production accounts for the entire rise in the price of sugar. Although biofuels had a noticeable impact on individual crop prices, they had a much smaller impact on global food prices. Our best estimate suggests that the increase in worldwide biofuels production over the past two years accounts for just over 12 percent of the rise in the IMF’s food price index. The increase in U.S. biofuels production accounts for roughly 60 percent of this effect, while Brazil accounts for 14 percent and the EU accounts for 15 percent. The key take- away point is that nearly 90 percent of the rise in global food prices comes from factors other than biofuels.
Topic:
Energy Policy, Food, Biofuels, and Ethanol
Political Geography:
United States, Brazil, South America, and North America

3. The Impact of Macroeconomic Announcements on Real Time Foreign Exchange Rates in Emerging Markets

Author:
Fang Cai and Hyunsoo Joo
Publication Date:
05-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news.
Topic:
Emerging Markets, Exchange Rate Policy, and Macroeconomics
Political Geography:
North America and United States of America

4. Did Easy Money in the Dollar Bloc Fuel the Global Commodity Boom?

Author:
Christopher Erceg, Luca Guerrieri, and Steven B. Kamin
Publication Date:
08-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff’s forward-looking, multi- country, dynamic general equilibrium model, SIGMA. We find that even if many developing country currencies were pegged to the dollar, an easing of U.S. monetary policy would lead to only a transitory runup in oil prices. Instead, strong economic growth in many developing economies, as well as shortfalls in oil production, better explain the sustained runup in oil prices observed until earlier this year. Moreover, a closer look at exchange rates and interest rates around the world suggests that the monetary policies of many developing economies, including in East Asia, are less closely influenced by U.S. policies than is frequently assumed.
Topic:
Energy Policy, Oil, Commodities, and Interest Rates
Political Geography:
United States and North America

5. Foreign Exposure to Asset-Backed Securities of U.S. Origin

Author:
Daniel O. Beltran, Laurie Pounder, and Charles Thomas
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners’ holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.
Topic:
Economics, Financial Crisis, Financial Markets, and Mortgages
Political Geography:
United States and North America

6. Escape from New York: The Market Impact of SEC Rule 12h-6

Author:
Nuno Fernandes, Uger Lel, and Darius P. Miller
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We examine the stock market impact of SEC Rule 12h-6 which eased the ability of foreign firms to deregister with the SEC and as a result terminate their U.S. disclosure obligations under the 1934 Securities Exchange Act. We document that the market reacted negatively to the ability of firms from weak disclosure and governance countries to more easily opt out of the stringent U.S. reporting and legal environment. Our findings suggest that shareholders of non-U.S firms place significant value on U.S. securities regulations, especially when the home country investor protections are weak.
Topic:
International Trade and Finance, Regulation, Legal Theory, and SEC
Political Geography:
United States and North America

7. Emerging Market Business Cycles with Remittance Fluctuations

Author:
Ceyhun Bora Durdu and Serdar Sayan
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops.
Topic:
Debt, Economics, and Credit
Political Geography:
Europe, Turkey, Asia, North America, and Mexico

8. Current Account Sustainability and Relative Reliability

Author:
Stephanie E. Curcuru and Charles P. Thomas
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is cursory; from a relative reliability perspective, it fails as it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Similarly, the best data currently available suggest that U.S. returns differentials are much smaller than implied by the exorbitant privilege theory. Our analysis opens up questions about potential inconsistencies in the international accounts, which we address by providing rough estimates of various holes in the accounts.
Topic:
International Trade and Finance, Markets, and Investment
Political Geography:
United States and North America

9. Assessing the Potential for Further Foreign Demand for U.S. Assets: Has Financing U.S. Current Account Deficits Made Foreign Investors Overweight in U.S. Securities?

Author:
Carol C. Bertaut
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Since 2001, foreign investors have acquired roughly $5 trillion in U.S. securities – more than doubling their holdings of U.S. equities and bonds – as both official and private inflows have financed record U.S. current account deficits. Although the rapid growth of foreign holdings of U.S. securities raises concerns that foreign investors may have become too heavily weighted in U.S. assets, foreign investors have not in fact materially changed the relative allocations between U.S. and other foreign securities in their portfolios in recent years. Based on data from the most recent comprehensive surveys of foreign portfolio investment, the 2006 IMF Coordinated Portfolio Investment Surveys (CPIS), most foreign investors remain relatively more underweight in both U.S. equities and bonds than they do in foreign securities in general. Although the underweight position suggests that there remains potential for foreign investors to continue to acquire U.S. securities, econometric evidence indicates that the underweight position itself reflects a preference by foreign investors for securities of countries with which they have strong economic or cultural ties, consistent with recent research that suggests “location” or “information” preferences in both domestic and international portfolios. As securities markets abroad continue to deepen, such factors are likely to continue to attract investment from “nearby” markets, especially from European investors.
Topic:
Investment, Securities, Bonds, and International Portfolios
Political Geography:
United States, Europe, and North America

10. Do Fundamentals Explain the International Impact of U.S. Interest Rates? Evidence at the Firm Level

Author:
John Ammer, Clara Vega, and Jon Wongswan
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm’s CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms’ responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.
Topic:
Monetary Policy, Investment, Interest Rates, and Credit
Political Geography:
United States and North America