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471. Individual Price Adjustment Along the Extensive Margin

Author:
Etienne Gagnon, David López-Salido, and Nicholas Vincent
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level.
Topic:
Economics, Business, Inflation, Macroeconomics, and Price
Political Geography:
Global Focus

472. Commodity Price Movements in a General Equilibrium Model of Storage

Author:
David M. Arseneau and Sylvain Leduc
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We embed the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the non-linear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. Our main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared to a model in which the real interest rate is fixed, we find that storage in general equilibrium leads to more persistence in commodity prices and somewhat lower volatility. Moreover, the frequency of stockouts is lower in general equilibrium. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochasic equilibrium. Finally, the model is used to examine the macroeconomic effects of both biofuel subsidies for ethanol producers and, separately, subsidies designed to insulate households from high food prices.
Topic:
Economics, Food, Commodities, Economic Theory, and Price
Political Geography:
Global Focus

473. 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

474. 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

475. Interest Rates and the Volatility and Correlation of Commodity Prices

Author:
Joseph W. Gruber and Robert J. Vigfusson
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we show that price correlation can increase as a result of a decline in interest rates. More generally, we examine the effect of interest rates on the volatility and correlation of commodity prices, theoretically through the framework of Deaton and Laroque (1992) and empirically via a panel GARCH model. In theory, we show that lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and can increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, as predicted by theory, we find that price volatility attributable to transitory shocks declines with interest rates, while, particularly for metals prices, price correlation increases as interest rates decline.
Topic:
Economics, Commodities, Interest Rates, and Price
Political Geography:
Global Focus

476. Do Recessions Affect Potential Output?

Author:
Jane T. Haltmaier
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A number of previous studies have looked at the effect of financial crises on actual output several years beyond the crisis. The purpose of this paper is to examine whether the growth of potential output also is affected by recessions, whether or not they include financial crises. Trend per capita output growth is calculated using HP filters, and average growth is compared for the two years preceding a recession, the two years immediately following a recession peak, and the two years after that. Panel regressions are run to determine whether characteristics of recessions, including depth, length, extent to which they are synchronized across countries, and whether or not they include a financial crisis, can explain the cumulative four-year loss in the level of potential output following an output peak preceding a recession. The main result is that the depth of a recession has a significant effect on the loss of potential for advanced countries, while the length is important for emerging markets. These results imply that the Great Recession might have resulted in declines in trend output growth averaging about 3 percent for the advanced economies, but appear to have had little effect on emerging market trend growth.
Topic:
Economics, Global Recession, Global Markets, and Economic Growth
Political Geography:
Global Focus

477. Variance Risk Premiums and the Forward Premium Puzzle

Author:
Juan M. Londono and Hao Zhou
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper presents evidence that the foreign exchange appreciation is predictable by the currency variance risk premium at a medium 6-month horizon and by the stock variance risk premium at a short 1-month horizon. Although currency variance risk premiums are highly correlated with each other over longer horizons, their correlations with stock variance risk premiums are quite low. Interestingly the currency variance risk premium has no predictive power for stock returns. We rationalize these findings in a consumption-based asset pricing model with orthogonal local and global economic uncertainties. In our model the market is incomplete in the sense that the global uncertainty is not priced by local stock markets and is therefore a forex-specific phenomenon—the currency uncertainty’s effects on the expected stock return are off-setting between the cash flow channel and the volatility channel.
Topic:
Economics, Risk, Currency, and Stock Markets
Political Geography:
Global Focus

478. Firm Characteristics and Em

Author:
Leonid Kogan and Mary Tian
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
"A three-factor model using the standardized-unexpected-earnings and cashflow-to-price factors explains 15 well-known asset pricing anomalies." Our data-mining experiment provides a backdrop against which such claims can be evaluated. We construct three-factor linear pricing models that match return spreads associated with as many as 15 out of 27 commonly used firm characteristics over the 1971-2011 sample. We form target assets by sorting firms into ten portfolios on each of the chosen characteristics and form candidate pricing factors as long-short positions in the extreme decile portfolios. Our analysis exhausts all possible 351 three-factor models, consisting of two characteristic-based factors in addition to the market portfolio. 65% of the examined factor models match a larger fraction of the target return cross-sections than the CAPM or the Fama-French three-factor model. We find that the relative performance of the complete set of three-factor models is highly sensitive to the sample choice and the factor construction methodology. Our results highlight the challenges of evaluating empirical factor models.
Topic:
Economics, Markets, Economic Theory, Data, and Models
Political Geography:
Global Focus

479. Beyond the Global Financial Crisis: Structural Continuities as Impediments to a Sustainable Recovery

Author:
Ziya Önis and Mustafa Kutlay
Publication Date:
01-2012
Content Type:
Journal Article
Journal:
All Azimuth: A Journal of Foreign Policy and Peace
Institution:
Center for Foreign Policy and Peace Research
Abstract:
There has scarcely been a day in the last three years when we have not read depressing headlines in the newspapers about the global economic crisis. The current turmoil, which many experts concur in seeing as the worst jolt to the world economy since the Great Depression, is pushing the parameters of the established system to its limits. One could say that we see, in the short-term measures taken against the crisis at the time, an effective anti-crisis strategy. But ironically, the promptness with which these short-term measures were enacted prevented adequate questioning of the dominant paradigm which had caused the crisis. As a result, the structural problems leading to the crisis were not reduced. Despite the occurrence of the deepest economic crisis to be experienced since the Great Depression, the present economic emergency did not shake the neoclassical economic paradigm as strongly as was needed. A puzzle that this study aims to solve arises here: Why and how has the conventional wisdom survived and reproduced its intellectual hegemony even after the “most devastating economic crisis” since the Great Depression?
Topic:
Economics, Economic structure, Global Financial Crisis, Recovery, Lobbying, and Regulatory Capture
Political Geography:
Global Focus

480. Economic Consequence of War on the US Economy

Author:
Institute for Economics and Peace (IEP)
Publication Date:
02-2012
Content Type:
Special Report
Institution:
Institute for Economics & Peace (IEP)
Abstract:
An overview of the macroeconomic effects of government spending on war and the military since World War II. It specifically examines five periods: World War II, the Korean War, the Vietnam War, and the Iraq/Afghanistan Wars, summarizing the effect of financing the wars on consumption, investment, taxes, government deficits and inflation.
Topic:
Economics, War, History, Tax Systems, Inflation, World War II, Macroeconomics, Vietnam War, and Korean War
Political Geography:
Global Focus