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Begin New Search Topic Fiscal Policy Publishing Institution Board of Governors of the Federal Reserve System

11. Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields

Author:
Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles Thomas
Publication Date:
01-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40-60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points.
Topic:
Economics, International Cooperation, Foreign Direct Investment, and Fiscal Policy
Political Geography:
North America and United States of America

12. Fiscal Consolidation in an Open Economy

Author:
Christopher J. Erceg and Jesper Linde
Publication Date:
04-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a New Keynesian DSGE model of a small open economy to compare how the e¤ects of fiscal consolidation di¤er depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important di¤erences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
Topic:
Economics, Economic Theory, Fiscal Policy, and Consolidation
Political Geography:
Global Focus

13. The Timing of Sovereign Defaults Over Electoral Terms

Author:
Nathan Foley-Fisher
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
I construct a database that maps the timing of sovereign default decisions into elected politicians' terms of office, that provides an empirical means of investigating political economy theories of sovereign default. I find no robust patterns in the timing of default decisions over terms of office. I also find no evidence in support of the political reputation theory of sovereign debt repayment. Finally, there is some tentative evidence that elected leaders who default are also those more likely to be re-elected. Motivated by anecdotal evidence, I use a stylised model of political leaders with career concerns to demonstrate how this can occur when politicians care about re-election.
Topic:
Sovereignty, Elections, Leadership, Economic Theory, and Fiscal Policy
Political Geography:
Global Focus

14. How Do Laffer Curves Differ Across Countries?

Author:
Mathias Trabandt and Harald Uhlig
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
Topic:
Economics, Economic Theory, Human Capital, and Fiscal Policy
Political Geography:
Global Focus

15. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Author:
Samir Jahjah, Bin Wei, and Vivian Zhanwei Yue
Publication Date:
06-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.
Topic:
Development, Exchange Rate Policy, Fiscal Policy, and Bonds
Political Geography:
Global Focus

16. U.S. Real Interest Rates and Default Risk in Emerging Economies

Author:
Nathan Foley-Fisher and Bernardo Guimaraes
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper empirically investigates the impact of changes in U.S. real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy-induced increases in U.S. interest rates starkly raise default risk in emerging market economies. However, the overall correlation between U.S. real interest rates and the risk of default is negative, demonstrating that the effects of other variables dominate the anterior relationship.
Topic:
Economics, Interest Rates, Risk, and Fiscal Policy
Political Geography:
North America and United States of America

17. Evaluating a Global Vector Autoregression for Forecasting

Author:
Neil R. Ericsson and Erica L. Reisman
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Global vector autoregressions (GVARs) have several attractive features: multiple potential channels for the international transmission of macroeconomic and financial shocks, a standardized economically appealing choice of variables for each country or region examined, systematic treatment of long-run properties through cointegration analysis, and flexible dynamic specification through vector error correction modeling. Pesaran, Schuermann, and Smith (2009) generate and evaluate forecasts from a paradigm GVAR with 26 countries, based on Dées, di Mauro, Pesaran, and Smith (2007). The current paper empirically assesses the GVAR in Dées, di Mauro, Pesaran, and Smith (2007) with impulse indicator saturation (IIS)—a new generic procedure for evaluating parameter constancy, which is a central element in model-based forecasting. The empirical results indicate substantial room for an improved, more robust specification of that GVAR. Some tests are suggestive of how to achieve such improvements.
Topic:
Economics, Economic Theory, Macroeconomics, and Fiscal Policy
Political Geography:
Global Focus

18. Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes

Author:
Christopher J. Erceg and Jesper Linde
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
Topic:
Economics, Monetary Policy, Tax Systems, Macroeconomics, Fiscal Policy, Public Spending, and Liquidity
Political Geography:
Global Focus

19. Foreign Banks in the U.S.: A Primer

Author:
William Goulding and Daniel E. Nolle
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper describes the foreign banking landscape in the United States. It begins by establishing a vocabulary for discussion of the subject, and then identifies a number of important data-related issues. With that information in hand, the remainder of the paper focuses on identifying the most important underlying trends on both sides of the balance sheets of foreign-owned banks' U.S. operations. At each step, the investigation considers how foreign-owned banks compare to U.S.-owned domestic banks, and how two types of foreign banks operations in the U.S. -- branches and agencies of foreign banks (FBAs), and foreign-owned subsidiary banks (FSUBs) -- compare to each other. The banking sector in the U.S. experienced substantial swings in performance and stability over the decade surrounding the 2008-2009 financial crisis and changes in every major dimension of foreign-owned banks' assets and liabilities were even larger than for domestic banks. Changes were especially large at FBAs. For example, cash balances came to dominate the assets side of FBAs’ aggregate balance sheet, with the absolute level of cash balances larger than those of domestic U.S. banks beginning in 2011, despite the fact that total assets of domestic U.S. banks are five times the assets of FBAs. Further, the recent unprecedented build-up of cash balances by FBAs was almost entirely composed of excess reserves. Changes in FBAs' liabilities-side activities have also been large, with much funding coming from large wholesale deposits and net borrowing from their foreign parents and related offices abroad.
Topic:
Foreign Direct Investment, Fiscal Policy, Capital, Banking, and Funding
Political Geography:
North America and United States of America

20. The Variance Risk Premium Around the World

Author:
Juan M. Londono
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper investigates the variance risk premium in an international setting. First, I provide new evidence on the basic stylized facts traditionally documented for the US. I show that while the variance premiums in several other countries are, on average, positive and display significant time variation, they do not predict local equity returns. Then, I extend the domestic model in Bollerslev, Tauchen and Zhou (2009) to an international setting. In light of the qualitative implications of my model, I provide empirical evidence that the US variance premium outperforms that of all other countries in predicting local and foreign equity returns.
Topic:
Economics, Risk, Fiscal Policy, and Equity
Political Geography:
North America and United States of America