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561. The Effect of Exchange Rate Fluctuations on Multinationals' Returns

Author:
Jane Ihrig and David Prior
Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
<p>This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates. All told, we find about 1 in 4 firms' returns is significantly affected by movement in the exchange rate between 1995 and 1999. </p><blockquote><p> </p> </blockquote><p> </p><p> </p>
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

562. SARS: Down But Still a Threat

Publication Date:
08-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This Intelligence Community Assessment (ICA) was requested by Secretary of Health and Human Services Tommy Thompson and Ambassador Jack Chow, Deputy Assistant Secretary of State for International Health Affairs. It highlights the evolution of Severe Acute Respiratory Syndrome (SARS) and the potential implications of the disease for the United States under several scenarios; this paper does not attempt to provide a scientific assessment of the epidemiology of SARS. Even though SARS has infected and killed far fewer people than other common infectious diseases such as influenza, malaria, tuberculosis, and HIV/AIDS, it has had a disproportionately large economic and political impact because it spread in areas with broad international commercial links and received intense media attention as a mysterious new illness that seemed able to go anywhere and hit anyone.
Topic:
International Relations, Human Welfare, Poverty, and Third World
Political Geography:
United States

563. Strategic Reactions to American Preeminence: Great Power Politics in the Age of Unipolarity

Author:
John G. Ikenberry
Publication Date:
07-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
American global power – military, economic, technological, cultural, and political – is one of the great realities of our age. Never before has one country been so powerful and unrivaled. The United States began the 1990s as the world's only superpower and its advantages continued to grow through the decade. After the Cold War, the United States reduced its military spending at a slower rate than other countries and its economy grew at a faster pace. The globalization of the world economy has reinforced American economic and political dominance. No ideological challengers are in site. More recently, in response to terrorist attacks, the United States has embarked on a massive military buildup. In the recent National Security Strategy, the Bush administration has articulated an ambitious and provocative global military role for the United States in confronting new-age threats. Overall, American power advantages are multidimensional, unprecedented, and unlikely to disappear any time soon. The world has taken notice of these developments. Indeed, the post-Cold War rise of American power -- what might be called the rise of American "unipolarity" -- has unsettled world politics. Governments everywhere are worried about the uncertainties and insecurities that appear to flow from such extreme and unprecedented disparities of power. The shifting global security environment – triggered by the terrorist attacks of September 11th –also has conspired to upset old relationships and expectations. The American invasions of Afghanistan and Iraq have put American power on display and raised far-reaching questions about the use of force, alliances, weapons of mass destruction, sovereignty and interventionism. The world is in the midst of a great geopolitical adjustment process. Governments are trying to figure out how an American-centered unipolar order will operate. How will the United States use its power? Will a unipolar world be built around rules and institutions or the unilateral exercise of American power? This global worry about how a unipolar world will operate – in which the most basic questions about the character of world politics are at stake, namely, who benefits and who commands – is the not-so-hidden subtext of all the recent controversies in America's relations with the rest of the world. The question posed in this report is: how are the major countries around the world responding to American global preeminence? Overall, strategies and policies are mostly still in flux around the world. Responses up to now have been mostly ad hoc. Governments are learning, adapting, negotiating, and reacting – thus it is not possible to identify fixed "strategies of response." This report seeks to help us understand these evolving responses in two ways: first, it will provide conceptual tools to identify and track strategic responses by major states to American preeminence, and second, it will offer some preliminary characterizations of the patterns of response, particularly by Western Europe, Russia, and China. This report might be seen as a sort of "field guide" to global reactions rather than a definitive theoretical and empirical statement on the subject. I begin by offering a summary of the findings. After this, I look at the rise of American unipolar power and the variety of ways that American power is "experienced" around the world. In the next section, I survey the deeper sources and multifaceted character of American unipolar power. Next I explore the limits of the basic strategies of response to concentrated power – balancing, bandwagoning and binding. In the next section, I explore some of the emerging strategies that are appearing among the major countries. Finally, in the conclusion I return to the issue of unipolar power and rule-based order.
Topic:
International Relations, Politics, and Sovereignty
Political Geography:
United States and America

564. Report of the Defense Science Board Task Force on Discriminate Use of Force

Publication Date:
07-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In the terms of reference, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the task force “to conduct a comprehensive study of the ends and means of precision compellence, or the nuanced use of force, in concert with coalition partners, to achieve political, economic and moral change in countries affecting US interests.” Real-world events have since underscored the need for such a study; indeed, the U.S. military applied key elements of a measured, nuanced approach in both the Afghanistan and Iraq campaigns. We are pleased to note this evolution in operations and a parallel evolution in the thinking of the combatant commands and Services. Because of this evolution, it is no longer as necessary as it once was to sell the fundamental objectives of what we term here the discriminate use of force (DUF).
Topic:
International Relations, Defense Policy, and Science and Technology
Political Geography:
United States

565. An Empirical Analysis of Inflation in OECD Countries

Author:
Jaime Marquez and Jane Ihrig
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the relationship between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU), and productivity developments on inflation. In line with previous work on the United States, we find that productivity advancements were the main structural factor reducing inflation in the United States. For foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation. This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment rate was declining.
Topic:
International Relations, Development, Economics, and International Trade and Finance
Political Geography:
United States

566. Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth

Author:
J. Benson Durham
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In contrast to the empirical literature's focus on foreign direct investment (FDI), this study examines the effects of foreign portfolio investment (FPI) and “other” foreign investment (OFI) on economic growth using data on 88 countries from 1977 through 2000. Most measures suggest that FPI has no effect, and some results indicate that OFI has a negative impact on growth that is somewhat mitigated by initial financial and/or legal development. However, these results are questionable due to possible simultaneity bias. The empirical analyses also examine whether non-FDI foreign investment affects growth indirectly. FPI does not correlate positively with macroeconomic volatility, but the results indicate that the negative indirect effect of OFI through macroeconomic volatility comprises a substantial portion of the gross negative effect of OFI on growth.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

567. Diversification, Original Sin, and International Bond Portfolios

Author:
Francis E. Warnock and John D. Burger
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
While there is a severe home bias in U.S. investors' foreign bond portfolios, we find that portfolio weights are greater for countries with more open capital accounts and whose bond returns are less correlated with U.S. returns. Positions in local-currency-denominated bonds are particularly sensitive to past and prospective returns volatility. An analysis of changes in portfolio weights over time indicates that U.S. investors have recently moved out of smaller markets and those with low and declining credit ratings. Our data also allow for an analysis of the size and currency composition of international bond markets. We find that countries with stronger institutions and better inflation performance have larger local currency bond markets. An implication for developing countries is that creditor friendly policies, such as vigilance on the inflation front and the development of strong institutions, can enable local bond market development and may in turn attract global investors.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

568. Long-Run Supply Effects and the Elasticities Approach to Trade

Author:
Joseph E. Gagnon
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Krugman (1989) argued that differences across countries in estimated income elasticities of import demand are due to omission of an exporter supply effect. He showed that such an effect can be derived in a theoretical model with economies of scale in production and a taste for variety in consumption. In his model, countries grow by producing new varieties of goods, and they are able to export these goods without suffering any deterioration in their terms of trade. This paper analyzes U.S. import demand from different source countries and finds strong evidence of a supply effect of roughly half the magnitude (0.75) of the income elasticity (1.5). Price elasticities for the most part are estimated close to -1, which is typical for the literature. Exclusion of the supply effect leads to overestimation of the income elasticity. Results based on U.S. exports to different destinations are less robust, but largely corroborate these findings.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

569. The ROK—U.S. Alliance: Where Is It Headed?

Author:
Kim Dong Shin
Publication Date:
04-2003
Content Type:
Working Paper
Abstract:
The National Security Strategy of the United States of America (September 2002) provides an important framework from which to examine the current crisis on the Korean Peninsula and other challenges in Northeast Asia. With its focus on terrorism and weapons of mass destruction (WMD), this strategy is concerned with North Korea as much as, if not more than, any other state. In particular, North Korea poses a unique set of challenges in regard to WMD. North Korea stands in sharp contrast to the Republic of Korea (ROK) on issues such as human rights, democracy, and market economies. The National Security Strategy suggests that the United States should revitalize its alliance with South Korea, while encouraging North Korea to transform its political and economic system. Yet South Korea and the United States are currently having some difficulties in developing a consensus on how to approach Pyongyang, and appear to have no clear plan to operationalize the strategy to deal with North Korea.
Topic:
International Relations and Security
Political Geography:
United States, America, Asia, and North Korea

570. Toward a More Secure America: Grounding U.S. Policies in Global Realities

Author:
David Cortright, Alistair Millar, George A. Lopez, and Linda M. Gerber
Publication Date:
10-2003
Content Type:
Policy Brief
Institution:
Fourth Freedom Forum
Abstract:
This policy brief grew out of discussions with a team of former national security and foreign policy officials held at the Washington office of the Fourth Freedom Forum in the summer of 2003. The brief was written by the staff of the Fourth Freedom Forum and the Joan B. Kroc Institute for International Peace Studies at the University of Notre Dame, who are solely responsible for the report's specific content. The authors incorporated numerous comments and suggestions from the policy advisers. The policy advisers listed below endorse the general thrust of this report and generally agree with the findings presented. Each participant may not, however, be in full agreement with every specific point and detail. The policy advisers listed extend their endorsement as individuals, not as representatives of any organization.
Topic:
International Relations, Foreign Policy, Peace Studies, and Terrorism
Political Geography:
United States, America, and Washington