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3111. Competitive Search Equilibrium in a DSGE Model

Author:
David M. Arseneau and Sanjay K. Chugh
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We show how to implement a competitive search equilibrium in a fully-specified DSGE environment. Competitive search, an equilibrium concept well-understood in labor market theory, offers an alternative to the commonly-used Nash bargaining in search-based macro models. Our simulation-based results show that business cycle fluctuations under competitive search equilibrium are virtually identical to those under Nash bargaining for a broad range of calibrations of Nash bargaining power. We also prove that business cycle fluctuations under competitive search equilibrium are exactly identical to those under Nash bargaining restricted to the popularly-used Hosios condition for search efficiency. This latter result extends the efficiency properties of competitive search equilibrium to a DSGE environment. Our results thus provide a foundation for researchers interested in studying business cycle fluctuations using search-based environments to claim that the sometimes-awkward assumption of bargaining per se does not obscure interpretation of results.
Topic:
Economics and Markets

3112. Why Do U.S. Cross-Listings Matter?

Author:
Francis E. Warnock, John Ammer, Sara B. Holland, and David C. Smith
Publication Date:
05-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper investigates the underlying determinants of home bias using a comprehensive sample of U.S. investor holdings of foreign stocks. We document that U.S. cross-listings are economically important, as U.S. ownership in a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and show that increases in U.S. investment are largest in firms from weak accounting backgrounds and in firms that are otherwise informationally opaque, indicating that U.S. investors value the improvements in disclosure associated with cross-listing. We confirm that relative equity valuations rise for cross-listed stocks, and provide evidence suggesting that valuation increases are due in part to increases in U.S. shareholder demand and in part to the fact that the equities become more attractive to non-U.S. shareholders.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
United States

3113. Jackknifing Stock Return Predictions

Author:
Erik Hjalmarsson and Benjamin Chiquoine
Publication Date:
06-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We show that the general bias reducing technique of jackknifing can be successfully applied to stock return predictability regressions. Compared to standard OLS estimation, the jackknifing procedure delivers virtually unbiased estimates with mean squared errors that generally dominate those of the OLS estimates. The jackknifing method is very general, as well as simple to implement, and can be applied to models with multiple predictors and overlapping observations. Unlike most previous work on inference in predictive regressions, no specific assumptions regarding the data generating process for the predictors are required. A set of Monte Carlo experiments show that the method works well in finite samples and the empirical section finds that out-of-sample forecasts based on the jackknifed estimates tend to outperform those based on the plain OLS estimates. The improved forecast ability also translates into economically relevant welfare gains for an investor who uses the predictive regression, with jackknifed estimates, to time the market.
Topic:
Economics, International Trade and Finance, and Markets

3114. Predicting Global Stock Returns

Author:
Erik Hjalmarsson
Publication Date:
06-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
I test for stock return predictability in the largest and most comprehensive data set analyzed so far, using four common forecasting variables: the dividend- and earnings-price ratios, the short interest rate, and the term spread. The data contain over 20,000 monthly observations from 40 international markets, including 24 developed and 16 emerging economies. In addition, I develop new methods for predictive regressions with panel data. Inference based on the standard fixed effects estimator is shown to suffer from severe size distortions in the typical stock return regression, and an alternative robust estimator is proposed. The empirical results indicate that the short interest rate and the term spread are fairly robust predictors of stock returns in developed markets. In contrast, no strong or consistent evidence of predictability is found when considering the earnings- and dividend-price ratios as predictors.
Topic:
Economics, International Trade and Finance, and Markets

3115. Trade Elasticity of Substitution and Equilibrium Dynamics

Author:
Martin Bodenstein
Publication Date:
06-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Furthermore, recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity of substitution may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade elasticity of substitution is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. While multiple steady states clearly signal equilibrium multiplicity in the dynamic setup, this is not a necessary condition. Solutions based on log-linearization around a deterministic steady state are of limited to no help in computing the true dynamics. However, the log-linear solution can hint at the presence of multiple dynamic equilibria.
Topic:
Economics, International Trade and Finance, and Markets

3116. How Long Can the Unsustainable U.S. Current Account Deficit Be Sustained?

Author:
Steven B. Kamin, Carol C. Bertaut, and Charles P. Thomas
Publication Date:
07-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper addresses three questions about the prospects for the U.S. current account deficit. Is it sustainable in the long term? If not, how long will it take for measures of external debt and debt service to reach levels that could prompt some pullback by global investors? And if and when such levels are breached, how readily would asset prices respond and the current account start to narrow?
Topic:
Economics, Foreign Exchange, Government, International Political Economy, and Political Economy
Political Geography:
United States

3117. An Anatomy of Credit Booms: Evidence From Macro Aggregates and Micro Data

Author:
Enrique G. Mendoza and Marco E. Terrones
Publication Date:
07-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper proposes a methodology for measuring credit booms and uses it to identify credit booms in emerging and industrial economies over the past four decades. In addition, we use event study methods to identify the key empirical regularities of credit booms in macroeconomic aggregates and micro-level data. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations, widening external deficits and managed exchange rates. Micro data show a strong association between credit booms and firm-level measures of leverage, firm values, and external financing, and bank-level indicators of banking fragility. Credit booms in industrial and emerging economies show three major differences: (1) credit booms and the macro and micro fluctuations associated with them are larger in emerging economies, particularly in the nontradables sector; (2) not all credit booms end in financial crises, but most emerging markets crises were associated with credit booms; and (3) credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Markets

3118. Simple Monetary Rules Under Fiscal Dominance

Author:
Ricardo Nunes, Michael Kumhof, and Irina Yakadina
Publication Date:
07-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper asks whether an aggressive monetary policy response to inflation is feasible in countries that suffer from fiscal dominance, as long as monetary policy also responds to fiscal variables. We find that if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria. But following such rules results in extremely volatile inflation. This leads to very frequent violations of the zero lower bound on nominal interest rates that make such rules infeasible. Even within the set of feasible rules the optimal response to inflation is highly negative, and more aggressive inflation fighting is inferior from a welfare point of view. The welfare gain from responding to fiscal variables is minimal compared to the gain from eliminating fiscal dominance.
Topic:
Economics, Government, and Political Economy

3119. Policy Liberalization and FDI Growth, 1982 to 2006

Author:
Matthew Adler and Gary Clyde Hufbauer
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Over the last three decades the global economy has expanded in a remarkable fashion. While nominal world GDP has increased four times, world bilateral trade flows have grown more than six-fold, and the stock of foreign direct investment (FDI) has grown by roughly 20 times since 1980. The sources of global trade and investment growth are well known—general economic expansion, policy liberalization, and better communications and technology—but the impact of each source is unclear. In this paper we attempt to uncover the contribution of policy liberalization to the rising ratios of US inward and outward FDI stocks to GDP over the last three decades.
Topic:
Economics, Globalization, International Political Economy, International Trade and Finance, Markets, and Political Economy
Political Geography:
United States

3120. Technological Regimes, Schumpeterian Patterns of Innovation and Firm Level Productivity Growth

Author:
Fulvio Castellacci and Jinghai Zheng
Publication Date:
03-2008
Content Type:
Working Paper
Institution:
Norwegian Institute of International Affairs
Abstract:
The paper investigates the relationships between technological regimes and firm-level productivity performance, and it explores how such a relationship differs in different Schumpeterian patterns of innovation. The analysis makes use of a rich dataset containing data on innovation and other economic characteristics of a large representative sample of Norwegian firms in manufacturing and service industries for the period 1998-2004. First, we decompose TFP growth into technical progress and efficiency changes by means of data envelopment analysis. We then estimate an empirical model that relates these two productivity components to the characteristics of technological regimes and a set of other firm-specific factors. The results indicate that: (1) TFP growth has mainly been achieved through technical progress, while technical efficiency has on average decreased; (2) the characteristics of technological regimes are important determinants of firm-level productivity growth, but their impacts on technical progress are different from the effects on efficiency change; (3) the estimated model works differently in the two Schumpeterian regimes. Technical progress has been more dynamic in Schumpeter Mark II industries, while efficiency change has been more important in Schumpeter Mark I markets.
Topic:
Economics and Science and Technology
Political Geography:
Europe and Norway