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61. The Dollar’s Influence in East Asia: Benevolent or Overbearing? A Comparative Answer in the U.S. Economic Aid and the Dollar Standard

Author:
Gloria Koo
Publication Date:
04-2012
Content Type:
Journal Article
Journal:
Joint U.S.-Korea Academic Studies
Institution:
Korea Economic Institute of America (KEI)
Abstract:
There is no doubt that the United States has been a dominant economic power in the world. U.S. troops are deployed in the various corners of the world, and their military presence is often a strong force in propping up the status quo or a peaceful co-existence, possibly and hopefully more peaceful than otherwise. The U.S. has held an important role in the international system as a military power. But also in an economic sense, the U.S. has been a dominant leader. As a major consumer market and an investor, U.S. influence on the global economy is significant to say the least. This is especially true in East Asia. Through military alliance and economic aid, the U.S. crafted close relationships with East Asian countries and influenced their domestic policymaking. For example, as a provider of military and economic stability, the U.S. wielded much influence on domestic macroeconomic policies of Korea and Taiwan during the early industrialization years of 1950s-60s. The economic aid came with conditions, and Korea and Taiwan complied. Although explicit economic aid stopped in the late 1960s, other forms of assistance, for example loans, grants and technology transfers continued, and more importantly security alliances remained strong. The U.S. still holds much influence over Korea and Taiwan, as a military ally and a major trade partner. In the present day, Korea and Taiwan closely peg their currencies to the U.S. dollar and hold large currency reserves in dollars. As a result, macroeconomic stability of Korea and Taiwan depends largely on the stability of the dollar. In this way, the dollar’s influence on Korea and Taiwan is quite significant. Similar to but also different from the way that Korea and Taiwan depended on U.S. economic aid, they again depend on the dollar to anchor economic stability.
Topic:
International Relations, Economics, Investment, Currency, and Economic Stability
Political Geography:
Taiwan, Asia, South Korea, and United States of America

62. U.S. International Equity Investment and Past Prospective Returns

Author:
John Armmer, Sara B. Holland, David C Smith, and Francis E. Warnock
Publication Date:
03-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show that our firm-level analysis has implications for country-level studies, suggesting that research investigating equity investment patterns at the country-level should include cross-listing as an endogenous control variable. We describe easy-to-implement methods for including the importance of cross-listing at the country level.
Topic:
International Cooperation, Exchange Rate Policy, Investment, and Equity
Political Geography:
North America and United States of America

63. When Good Investments Go Bad: The Contraction in Community Bank Lending After the 2008 GSE Takeover

Author:
Tara Rice and Jonathan Rose
Publication Date:
03-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
n September 2008, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship and dividend payments on common and preferred shares were suspended. As a result, share prices fell to nearly zero and many banks across the country lost the value of their investments in the preferred shares. We estimate more than 600 depository institutions in the United States were exposed to at least $8 billion in investment losses from these securities. In addition, fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover. Since these GSE investments were considered to be safe investments by banks, regulators, and rating agencies, we consider these losses to be exogenous shocks to bank capital, and use this event to examine the relationship between community bank condition and lending during this crisis. We find that in the quarter following the takeover of Fannie Mae and Freddie Mac, the measured Tier 1 capital ratio at exposed banks fell about three percent on average, and loan growth at exposed banks with median capitalization was about 2 percentage points lower compared to other banks in the following quarter. Consequently, considering the set of community banks that incurred about $2 billion in GSE-related losses, and assuming that each bank reduced loan growth by 2 percentage points, the estimated aggregate lending drop among these banks would be roughly $4 billion.
Topic:
Investment, Lending, Banking, and Banking Crisis
Political Geography:
North America and United States of America

64. The Return on U.S. Direct Investment at Home and Abroad

Author:
Stephanie E. Curcuru and Charles Thomas
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S.. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which U.S. firms invest, and U.S. investments are perceived as relatively safe. This has implications for the long-run sustainability of the U.S. current account deficit which will depend, in part, on the long-run behavior of this income.
Topic:
Economics, International Cooperation, Foreign Direct Investment, Tax Systems, and Investment
Political Geography:
North America and United States of America

65. U.S. International Equity Investment and Past Prospective Returns

Author:
Stephanie E. Curcuru, Charles Thomas, Francis E. Warnock, and Jon Wongswan
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Counter to extant stylized facts, using newly available data on country allocations in U.S. investors' foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, U.S. investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per year.
Topic:
Economics, Finance, Investment, Stock Markets, and Equity
Political Geography:
North America and United States of America

66. Housing and Debt Over the Life Cycle and Over the Business Cycle

Author:
Matteo Iacoviello
Publication Date:
10-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age pro.les of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and .nd that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical financial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.
Topic:
Debt, Financial Crisis, Business, Investment, and Housing
Political Geography:
North America and United States of America

67. Global Imbalances: A Source of Strength or Weakness?

Author:
Kristin J. Forbes
Publication Date:
07-2007
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Gross capital flows into the United States totaled $1.8 trillion in 2006. When combined with the $1.0 trillion the United States sent abroad, these net capital inflows funded the U.S. current account deficit of about $800 billion.1 The source of a large proportion of these capital inflows was developing economies—especially China and major oil exporters. Why are foreigners willing to invest such massive amounts of money in the U.S. economy? And perhaps even more surprising—why are countries with low levels of investment willing to send this relatively scarce resource to a capital-abundant economy instead of investing in their own countries? Understanding the motivation behind the millions of individual decisions that drive these capital inflows is critically important to understanding if this massive net transfer of capital into the United States reflects a strength or weakness of the global economy.
Topic:
Economy, Investment, and Capital
Political Geography:
Global Focus and United States of America

68. The Columbian Exchange and the Reversal of Fortune

Author:
Thomas Grennes
Publication Date:
01-2007
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is difficult to think about modern American food without including hamburgers and hotdogs. It is also difficult to think about popular American history without cowboys mounted on horseback tending herds of cattle. However, before the arrival of Columbus in 1492 there were no cattle or pigs in America to provide beef and pork for hamburgers and hotdogs. There was no wheat to make hamburger and hotdog buns. There were no horses for cowboys or Indians to ride. The European settlers brought with them cattle, pigs, horses, wheat, and many other plants and animals that became the foundation for modern food and agriculture in the Western Hemisphere. It is also difficult to think about modern Mexican food without including rice, tacos filled with meat, refried beans in animal fat, cheese in enchiladas, and sugar, cinnamon, and milk in chocolate. However, Mexico in 1492 had none of these ingredients. The massive transplantation of plants and animals across the Atlantic Ocean in both directions has been called the Columbian Exchange (Crosby 1972). It has been described as the “greatest human intervention in nature since the invention of agriculture (Fernandez-Armesto 2002: 165), and it has had an enormous effect on the Americas and the entire world. The Columbian Exchange altered the kind of food Americans and Mexicans eat, the kind of agricultural products produced in both countries, and the entire pattern of world economic growth. This article will concentrate on the effects of the Columbian Exchange, but the exchange of plants and animals was part of a broader process of trade, migration, investment, colonization, and exchange of ideas that followed the voyages of discovery by Columbus and others. The same Old World plants and animals were introduced to the two regions that would become the United States and Mexico, but the effects in the two countries were substantially different.1 The United States was the poorer neighbor in 1492, but it became relatively richer. The purpose of this article is to show how differences in institutional development affected responses to the same opportunities. I shall concentrate on developments in the United States and Mexico, but the Canadian experience was similar to the U.S. response, and the response in the rest of Latin America was similar to the Mexican response (Cole et al. 2005).
Topic:
Migration, History, Food, Investment, Trade, and Columbian Exchange
Political Geography:
North America, Mexico, and United States of America