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51. PPP Rules, Macroeconomic (In)stability and Learning

Author:
Luis-Felipe Zanna
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Governments in emerging economies have pursued real exchange rate targeting through Purchasing Power Parity (PPP) rules that link the nominal depreciation rate to either the deviation of the real exchange rate from its long run level or to the difference between the domestic and the foreign CPI-inflation rates. In this paper we disentangle the conditions under which these rules may lead to endogenous fluctuations due to self-fulfilling expectations in a small open economy that faces nominal rigidities. We find that besides the specification of the rule, structural parameters such as the share of traded goods (that measures the degree of openness of the economy) and the degrees of imperfect competition and price stickiness in the non-traded sector play a crucial role in the determinacy of equilibrium. To evaluate the relevance of the real (in)determinacy results we pursue a learnability (E-stability) analysis for the aforementioned PPP rules. We show that for rules that guarantee a unique equilibrium, the fundamental solution that represents this equilibrium is learnable in the E-stability sense. Similarly we show that for PPP rules that open the possibility of sunspot equilibria, a common factor representation that describes these equilibria is also E-stable. In this sense sunspot equilibria and therefore aggregate instability are more likely to occur due to PPP rules than previously recognized.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

52. Is The Corporate Loan Market Globally Integrated? A Pricing Puzzle

Author:
Mark Carey and Gregory P. Nini
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home “bias.” This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home “bias” appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States and Europe

53. The President's Management Agenda: Results for the Department of Defense

Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The mission of the Department of Defense is to defend the nation and when necessary, defeat its enemies. Very few endeavors in life are so focused and results oriented. While we continue this primary mission of prosecuting the global war on terrorism and simultaneously defending our nation, we cannot overlook the fact that we must more effectively and efficiently manage the Department.
Topic:
Defense Policy, National Security, Terrorism, and War
Political Geography:
United States

54. Final Report of the Independent Panel to Review DoD Detention Operations

Author:
Harold Brown, James R. Schlesinger, Tillie K. Fowler, Charles A. Horner, and James A. Jr. Blackwell
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The events of October through December 2003 on the night shift of Tier at Abu Ghraib prison were acts of brutality and purposeless sadism. We now know these abuses occurred at the hands of both military police and military intelligence personnel. The pictured abuses, unacceptable even in wartime, were not part of authorized interrogations nor were they were even directed at intelligence targets. They represent deviant behavior and a failure of military leadership and discipline. However, we do know that some of the egregious abuses at Abu Ghraib which were not photographed did occur during interrogation sessions and that abuses during the interrogation sessions occurred elsewhere.
Topic:
Crime and War
Political Geography:
United States and Middle East

55. Report of the Defense Science Board Task Force on Enabling Joint Force Capabilities: Phase II

Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Events of the past decade provide compelling evidence that the national security environment continues to evolve at a rapid pace and in unpredictable directions. Further, it is clear that meeting the demands of the evolving environment calls for new levels of adaptable military capabilities that, in turn, demand joint forces that are responsive and effective across a range of operations from small scale operations through major theater conflict. In the two most recent major contingencies – Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF) - we have seen new levels of understanding of the need for truly integrated joint capabilities and new levels of innovation in leveraging existing capabilities to achieve the needed level of effectiveness. Lessons Learned activities have verified important shifts in focus leading to a series of emerging concepts for more effectively integrating capabilities.
Topic:
Defense Policy, Environment, and National Security
Political Geography:
United States

56. Does Monetary Policy Keep Up with the Joneses? Optimal Interest-Rate Smoothing with Consumption Externalities

Author:
Sanjay Chugh
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon- separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustments in consumption. We also extend our basic model to investigate the effects of capital formation and nominal rigidities on the dynamics of optimal monetary policy. Optimal policy responses continue to be gradual in the presence of capital and sticky prices, with a size and speed that are in line with empirical findings for the U.S. economy. Our results emphasize that gradualism in monetary policy may be needed simply to guide the economy on an optimally smooth path.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

57. The ET Interview: Professor David F. Hendry

Author:
Neil R. Ericsson
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This interview for Econometric Theory explores David Hendry's research. Issues discussed include estimation and inference for nonstationary time series; econometric methodology; strategies, concepts, and criteria for empirical modeling; the general-to-specific approach, as implemented in the computer packages PcGive and PcGets; computer-automated model selection procedures; David's textbook Dynamic Econometrics; Monte Carlo techniques (PcNaive); evaluation of these developments in simulation studies and in empirical investigations of consumer expenditure, money demand, inflation, and the housing and mortgage markets; economic forecasting and policy analysis; the history of econometric thought; and the use of computers for live empirical and Monte Carlo econometrics.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

58. Good News Is No News? The Impact of Credit Rating Changes on the Pricing of Asset-Backed Securities

Author:
John Ammer and Nathanael Clinton
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.
Topic:
Security, Economics, and International Trade and Finance
Political Geography:
United States

59. The Vertical Lift Industrial Base: Outlook 2004-2014

Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The vertical lift industrial base still is being shaped by government and industry responses to the Nunn-McCurdy cost breaches of 2001 and the unintended consequences of Department-endorsed teaming arrangements that resulted in an interlocked industrial base that restricted Department and industry flexibility. The Department's budget-driven remanufacture strategy in the 1990s produced a series of sole-sourced relationships, leaving few real competitive opportunities among the helicopter prime contractors to force technology refresh cycles. With limited competition, few new platform contracts, and declining government technology investments, industry was left little incentive to invest in independent research.
Topic:
Defense Policy, Industrial Policy, and Science and Technology
Political Geography:
United States

60. 9-11 Commission Final Report

Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We present the narrative of this report and the recommendations that flow from it to the President of the United States, the United States Congress, and the American people for their consideration. Ten Commissioners—five Republicans and five Democrats chosen by elected leaders from our nation's capital at a time of great partisan division—have come together to present this report without dissent.
Topic:
Foreign Policy, Diplomacy, and Government
Political Geography:
United States