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3361. In Search of The 21st Century Developmental State

Author:
Peter B. Evans
Publication Date:
12-2008
Content Type:
Working Paper
Institution:
Centre for Global Political Economy, University of Sussex
Abstract:
What role for the developmental state in the 21st century? What state structures and political institutions will best equip nations trying to enter the ranks of "developed" countries? I offer two interconnected propositions. The first stresses continuity: the "developmental state" will continue to play a crucial a role in economic growth and social transformation in the 21st century, just as it did in the latter half of the 20th century. The second is more radical: successful 21st century developmental states will have to depart fundamentally from existing models of the developmental state in order to achieve success. Growth strategies focused primarily on traditional capital accumulation will no longer suffice. State-society ties can no longer be focused narrowly on relations with capitalist elites.
Topic:
Development, Economics, Capitalism, International Development, and Global Political Economy
Political Geography:
Global Focus

3362. Building the Capacity to Address the Nation's Drug Problems

Publication Date:
11-2008
Content Type:
Working Paper
Institution:
The National Academy of Public Administration
Abstract:
The Office of National Drug Control Policy (ONDCP) was established by the Anti-Drug Abuse Act of 1988 and has been reauthorized numerous times over the years by Congress. It is a component of the Executive Office of the President (EOP) and currently has 106 employees.
Topic:
Economics, National Security, Narcotics Trafficking, and Reform

3363. Foreign Exposure to Asset-Backed Securities of U.S. Origin

Author:
Daniel O. Beltran, Laurie Pounder, and Charles Thomas
Publication Date:
08-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners’ holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.
Topic:
Economics, Financial Crisis, Financial Markets, and Mortgages
Political Geography:
United States and North America

3364. 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

3365. Constructive Data Mining: Modeling Argentine Broad Money Demand

Author:
Neil R. Ericsson and Steven B. Kamin
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
his paper assesses the empirical merits of PcGets and Autometrics–two recent algorithms for computer-automated model selection–using them to improve upon Kamin and Ericsson’s (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correc- tion model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a “ratchet” variable that cap- tures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis.
Topic:
Economics, Markets, Finance, and Inflation
Political Geography:
Argentina and South America

3366. Emerging Market Business Cycles with Remittance Fluctuations

Author:
Ceyhun Bora Durdu and Serdar Sayan
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops.
Topic:
Debt, Economics, and Credit
Political Geography:
Europe, Turkey, Asia, North America, and Mexico

3367. 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

3368. 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

3369. 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

3370. 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