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31. Productivity Growth and the Phillips Curve in Canada

Author:
Joseph W. Gruber
Publication Date:
11-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This study examines the impact of productivity growth on the relationship between inflation and unemployment in Canada. Recently it has been suggested that higher productivity growth is responsible for a shift in the U.S. Phillips curve that occurred in the late 1990s. This paper examines whether the Phillips curve in Canada shifted in a manner similar to that of the United States, and the degree to which higher productivity growth explains this shift.
Topic:
International Relations, Economics, and Industrial Policy
Political Geography:
Canada and North America

32. The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements

Author:
John H. Rogers, Jonathan H. Wright, Jon Faust, and Shing-Yi B. Wang
Publication Date:
10-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.
Topic:
International Relations, Economics, Government, and International Trade and Finance
Political Geography:
United States

33. Market Power and Inflation

Author:
David Bowman
Publication Date:
10-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the extent to which a decline in market power could have contributed to the general decline in inflation rates experienced in developed countries during the 1990s.
Topic:
International Relations, Economics, Government, and International Trade and Finance

34. 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

35. Report of the Defense Science Board Task Force on The Role and Status of Red Teaming Activities

Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Task Force was charged to examine the use of red teams in the Department of Defense and recommend ways that such teams could be of greater value to the department. Our Terms of Reference and task force membership are provided in Appendices 1 and 2.
Topic:
International Relations, Security, and Defense Policy
Political Geography:
United States

36. Forecasting U.S. Inflation by Bayesian Model Averaging

Author:
Jonathan H. Wright
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Recent empirical work has considered the prediction of inflation by combining the information in a large number of time series. One such method that has been found to give consistently good results consists of simple equal weighted averaging of the forecasts over a large number of different models, each of which is a linear regression model that relates inflation to a single predictor and a lagged dependent variable. In this paper, I consider using Bayesian Model Averaging for pseudo out-of-sample prediction of US inflation, and find that it gives more accurate forecasts than simple equal weighted averaging. This superior performance is consistent across subsamples and inflation measures. Meanwhile, both methods substantially outperform a naive time series benchmark of predicting inflation by an autoregression.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

37. Bayesian Model Averaging and Exchange Rate Forecasts

Author:
Jonathan H. Wright
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Exchange rate forecasting is hard and the seminal result of Meese and Rogoff (1983) that the exchange rate is well approximated by a driftless random walk, at least for prediction purposes, has never really been overturned despite much effort at constructing other forecasting models. However, in several other macro and financial forecasting applications, researchers in recent years have considered methods for forecasting that combine the information in a large number of time series. One method that has been found to be remarkably useful for out-of-sample prediction is simple averaging of the forecasts of different models. This often seems to work better than the forecasts from any one model. Bayesian Model Averaging is a closely related method that has also been found to be useful for out-of-sample prediction. This starts out with many possible models and prior beliefs about the probability that each model is the true one. It then involves computing the posterior probability that each model is the true one, and averages the forecasts from the different models, weighting them by these posterior probabilities. This is effectively a shrinkage methodology, but with shrinkage over models not just over parameters. I apply this Bayesian Model Averaging approach to pseudo-out-of-sample exchange rate forecasting over the last ten years. I find that it compares quite favorably to a driftless random walk forecast. Depending on the currency-horizon pair, the Bayesian Model Averaging forecasts sometimes do quite a bit better than the random walk benchmark (in terms of mean square prediction error), while they never do much worse. The forecasts generated by this model averaging methodology are however very close to (but not identical to) those from the random walk forecast.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

38. Revisiting the Border: An Assessment of the Law of One Price Using Very Disaggregated Consumer Price Data

Author:
John H. Rogers, Shing-Yi B. Wang, and Charles M. Engels
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We reexamine the evidence for border effects in deviations from the law of one price, using data for consumer prices from Canadian and U.S. cities. The study parallels Engel and Rogers (1996), except that this study uses actual price data rather than price index data. We find evidence of border effects both in the levels of prices and the percentage change in prices. Even accounting for distance between cities and relative population sizes, we find that the absolute difference between prices in the U.S. and Canada in our data (annual from 1990 to 2002) is greater than seven percent. This difference exists among tradables and nontradables, though for some categories of tradables (clothing and durables) the difference is smaller. The findings are similar for annual changes, though the magnitude is smaller: the border accounts for a difference in 1.5 percent in annual (log) price changes. Relative population sizes and distance are helpful in explaining price level differences (between Canadian and U.S. cities) for traded goods, but are less helpful in explaining price level differences for nontraded goods or for accounting for differences in price changes for either traded or nontraded goods.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Canada and North America

39. Contagion: An Empirical Test

Author:
Jon Wongswan
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using the conditional Capital Asset Pricing Model (CAPM), this paper tests for the existence and pattern of contagion and capital market integration in global equity markets. Contagion is defined as significant excess conditional correlation among different countries' asset returns above what could be explained by economic fundamentals (systematic risks). Capital market integration is defined as the situation in which only systematic risks are priced. The paper uses a panel of sixteen countries, divided into three blocs: Asia, Latin America, and Germany-U.K.-U.S., for the period from 1990 through 1999. The results show evidence of contagion and capital market integration. In addition, contagion is found to be a regional phenomenon.
Topic:
International Relations, Economics, Globalization, and International Trade and Finance
Political Geography:
United States, United Kingdom, Asia, Germany, and Latin America

40. Key Judgments (from October 2002 NIE) - Iraq's Continuing Programs for Weapons of Mass Destruction

Publication Date:
10-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We judge that Iraq has continued its weapons of mass destruction (WMD) programs in defiance of UN resolutions and restrictions. Baghdad has chemical and biological weapons as well as missiles with ranges in excess of UN restrictions; if left unchecked, it probably will have a nuclear weapon during this decade. (See INR alternative view at the end of these Key Judgments.)
Topic:
International Relations, United Nations, and Weapons of Mass Destruction
Political Geography:
Iraq and Middle East