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1. Current Account Imbalances Coming Back

Author:
Joseph Gagnon
Publication Date:
01-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy

2. Currency Crashes in Industrial Countries: Much Ado About Nothing?

Author:
Joseph Gagnon
Publication Date:
02-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.
Topic:
Economics, Exchange Rate Policy, Inflation, and Currency
Political Geography:
Global Focus

3. Exchange Rate Pass-Through to Export Prices: Assessing Some Cross-Country Evidence

Author:
Robert Vigfusson, Nathan Sheets, and Joseph Gagnon
Publication Date:
09-2007
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A growing body of empirical work has found evidence of a decline in exchange rate pass-through to import prices in a number of industrial countries. Our paper complements this work by examining pass-through from the other side of the transaction; that is, we assess the exchange rate sensitivity of export prices (denominated in the exporter's currency). We first sketch out a streamlined analytical model that highlights some key factors that determine pass-through. Using this model as reference, we find that the prices charged on exports to the United States are more responsive to the exchange rate than is the case for export prices to other destinations, which is consistent with results in the literature suggesting that import price pass-through in the U.S. market is relatively low. We also find that moves in the exchange rate sensitivity of export prices over time have been significantly affected by country and region-specific factors, including the Asian financial crisis (for emerging Asia), deepening integration with the United States (for Canada), and the effects of the 1992 ERM crisis (for the United Kingdom).
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
United States, United Kingdom, Canada, and Asia

4. Exchange Rate Pass-through to U.S. Import Prices: Some New Evidence

Author:
Jaime Marquez, Mario Marazzi, Nathan Sheets, Joseph Gagnon, Robert J. Vigfusson, Jon Faust, Robert F. Martin, Trevor Reeve, and John Rogers
Publication Date:
04-2005
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass-through has occurred through this commodity-price channel in recent years. While the source of the decline in passthrough is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the passthrough coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time.
Topic:
Economics, Industrial Policy, and International Trade and Finance
Political Geography:
United States and China

5. Preventing Deflation: Lessons From Japan's Experience in the 1990s

Author:
Jane Haltmaier, Alan J. Ahearne, Joseph Gagnon, and Steve Kamin
Publication Date:
06-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines Japan's experience in the first half of the 1990s to shed some light on several issues that arise as inflation declines toward zero. Is it possible to recognize when an economy is moving into a phase of sustained deflation? How quickly should monetary policy respond to sharp declines in inflation? Are there factors that inhibit the monetary transmission mechanism as interest rates approach zero? What is the role for fiscal policy in warding off a deflationary episode? We conclude that Japan's sustained deflationary slump was very much unanticipated by Japanese policymakers and observers alike, and that this was a key factor in the authorities' failure to provide sufficient stimulus to maintain growth and positive inflation. Once inflation turned negative and short-term interest rates approached the zero-lower-bound, it became much more difficult for monetary policy to reactivate the economy. We found little compelling evidence that in the lead up to deflation in the first half of the 1990s, the ability of either monetary or fiscal policy to help support the economy fell off significantly. Based on all these considerations, we draw the general lesson from Japan's experience that when inflation and interest rates have fallen close to zero, and the risk of deflation is high, stimulus–both monetary and fiscal–should go beyond the levels conventionally implied by baseline forecasts of future inflation and economic activity.
Topic:
Economics, Industrial Policy, and International Trade and Finance
Political Geography:
Israel