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2441. Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets

Author:
Jason Kotter and Uger Lel
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements. The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure. In addition, target firms’ profitability, growth, and governance do not change significantly in the three-year period following the SWF investment relative to a control sample. These results are robust to a battery of tests. Overall, our findings suggest that SWF investments convey a positive signal to market participants about the target firm, increased SWF transparency
Topic:
International Trade and Finance, Global Markets, Financial Markets, and Investment
Political Geography:
Global Focus

2442. Optimal Monetary Policy with Distinct Core and Headline Inflation Rates

Author:
Martin Bodenstein, Christopher J. Erceg, and Luca Guerrieri
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well-approximated by policies that stabilize the output gap, but also by a wide array of “dual mandate” policies that are not overly aggressive in stabilizing core inflation. Finally, policies that react to a forecast of headline inflation following a temporary energy shock imply markedly different effects than policies that react to a forecast of core, with the former inducing greater volatility in core inflation and the output gap.
Topic:
Economics, Energy Policy, Inflation, and Supply
Political Geography:
Global Focus

2443. The Macroeconomic Effects of External Pressures on Monetary Policy

Author:
Davide Debortoli and Ricardo Nunes
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy ob- jectives, the degree of commitment and the timing of external pressures. The possibility to adopt “more liberal” objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even “more conservative” in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt “more liberal” objectives may be aiming. We also discuss the opposite case, where objectives may become “more conservative” in the future, which may be the relevant case for countries considering the adoption of inflation targeting.
Topic:
Finance, Banks, Inflation, and Central Bank
Political Geography:
Global Focus

2444. Exchange Rates and Fundamentals: A Generalization

Author:
James M. Nason and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian--U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar--U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks.
Topic:
Economics, Finance, and Exchange Rate Policy
Political Geography:
Global Focus

2445. Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

Author:
Charles Engel and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.
Topic:
Economics, Finance, Interest Rates, and Credit
Political Geography:
Global Focus

2446. Soft Information in Earnings Announcements: News or Noise?

Author:
Elizabeth Demers and Clara Vega
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines whether the “soft” information contained in the text of management’s quarterly earnings press releases is incrementally informative over the company’s reported “hard” earnings news. We use Diction, a textual-analysis program, to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers’ language affects announcement period abnormal returns and predicts post- earnings announcement drift. We find that it takes longer for the market to understand the implications of soft information than those of hard information. We also find that the market response varies by firm size, turnover, media and analyst coverage, and the extent to which the standard accounting model captures the underlying economics of the firm. We also show that the second moment of soft information, the level of certainty in the text, is an important determinant of contemporaneous idiosyncratic volatility, and it predicts future idiosyncratic volatility.
Topic:
Economics and Finance
Political Geography:
Global Focus

2447. Testing the Expectations Hypothesis When Interest Rates are Near Integrated

Author:
Meredith Beechey, Erik Hjalmarsson, and Par Osterholm
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is similar across countries. However, the parameters di§er from those suggested by theory. We relate our Öndings to existing literature on the failure of the expectations hypothesis and to the role of term premia.
Topic:
Economics and Interest Rates
Political Geography:
Global Focus

2448. Home Computers and Educational Outcomes: Evidence from the NLSY97 and CPS

Author:
Daniel O. Beltran, Kuntal K Das, and Robert W. Fairlie
Publication Date:
11-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Although computers are universal in the classroom, nearly twenty million children in the United States do not have computers in their homes. Surprisingly, only a few previous studies explore the role of home computers in the educational process. Home computers might be very useful for completing school assignments, but they might also represent a distraction for teenagers. We use several identification strategies and panel data from the two main U.S. datasets that include recent information on computer ownership among children -- the 2000-2003 CPS Computer and Internet Use Supplements (CIUS) matched to the CPS Basic Monthly Files and the National Longitudinal Survey of Youth 1997 -- to explore the causal relationship between computer ownership and high school graduation and other educational outcomes. Teenagers who have access to home computers are 6 to 8 percentage points more likely to graduate from high school than teenagers who do not have home computers after controlling for individual, parental, and family characteristics. We generally find evidence of positive relationships between home computers and educational outcomes using several identification strategies, including controlling for typically unobservable home environment and extracurricular activities in the NLSY97, fixed effects models, instrumental variables, and including future computer ownership and falsification tests. Home computers may increase high school graduation by reducing non-productive activities, such as truancy and crime, among children in addition to making it easier to complete school assignments.
Topic:
Crime, Education, and Science and Technology
Political Geography:
Global Focus

2449. A Note on Mundell-Fleming and Developing Countries

Author:
John Weeks
Publication Date:
03-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper inspects the statement found in macroeconomic text books that under a flexible exchange rate regime with perfectly elastic capital flows monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the domestic price level effect of devaluation be ignored. The price level effect is noted in some textbooks, but not analysed. When it is subjected to a rigorous analysis, the interaction between exchange rate changes and domestic price level changes render the standard statement false. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Monetary policy will be more effective than fiscal policy if and only if the sum of the trade elasticities exceeds the import share. Inspection of data from developing countries indicates a low effectiveness of monetary policy under flexible exchange rates. In the more general case of less than perfectly elastic capital flows the conditions for monetary policy to be more effective than fiscal policy are even more restrictive. Use of empirical evidence on trade shares and interest rate differentials suggest that for most countries fiscal policy would prove more effective than monetary policy under a flexible exchange rate regime. In any case, the general theoretical assertion that monetary policy is more effective is incorrect.
Topic:
Monetary Policy, Developing World, Capital Flows, Macroeconomics, and Fiscal Policy
Political Geography:
Global Focus

2450. Niebyl, Money and Development

Author:
Daniela Tavasci, Jan Toporowski, and Radha Upadhyaya
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper examines Karl Niebyl’s critique of monetary theory against the typology of equilibrium, reflective and critical theories of money. It argues that despite fundamental criticisms of monetary theory, his analysis of money in capitalist development is essentially a reflective one. The paper goes on to show how the development of the capitalist firm in the twentieth century may give a more critical, disequilibrium, role to money and finance. The introduction presents a categorisation of theories of money. The second section shows the reflective nature of Niebyl’s theory of money comparing it to more recent disequilibrium or critical theories. As Niebyl’s work focuses to the changing function of money with the emergence of industrial capitalism, the next section deals with possible lessons for understanding money in a context of capitalist development. The fourth section reflects on Niebyl’s considerations on methodology.
Topic:
Development, Monetary Policy, Capitalism, and Industrialization
Political Geography:
Global Focus