Valuation effects and the dynamics of net external assets

‘Valuation effects’ can imply that the traditional current account is an inaccurate measure of the change in the net foreign asset (NFA) position. This paper uses new developments in the analysis of portfolio choice in general equilibrium to investigate valuation effects in a two-country model. Broadly speaking, the valuation effects in the model correspond to those observed in the data. But there is a key distinction between ‘unanticipated’ and ‘anticipated’ valuation effects. Unanticipated effects can be large, dominating the movement in NFA, but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterizations.     

Habit formation and the present-value model of the current account: Yet another suspect

In a recent paper, Gruber (Gruber, J.W., 2004. A present value test of habits and the current account. Journal of Monetary Economics 51, 1495-1507) claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations.     

The present-value model of the current account has been rejected: Round up the usual suspects

Tests of the present-value model (PVM) of the current account are frequently rejected by data. Standard explanations rely on the “usual suspects” of non-separable preferences, fiscal policy and world real interest rate shocks, external imperfect international capital mobility, and an internalized risk premium. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model (RBC). Bayesian Monte Carlo experiments reveal that a “canonical” RBC model is close to the data, but far from the PVM predictions. Although each suspect matters in some way, none improve the fit to the data. However, the PVM restrictions are reproduced when the internalized risk premium is introduced into the canonical model. By adding the exogenous world real interest rate shock to this version of the model, it matches the data better and is moved closer to the PVM predictions. This suggests that there is an important common world component to current account fluctuations, which points to additional underlying macroeconomic factors that drive the current account.     

On the international transmission of technology shocks

Using vector autoregressions on U.S. time series and an aggregate of industrialized countries, we find that technology shocks appreciate the terms of trade and lower the trade balance; they induce an ‘S’-shaped cross-correlation function for both variables (the S-curve). In calibrating a prototypical international business cycle model under complete and incomplete financial markets, we find two distinct sets of parameter values. While both model specifications deliver the S-curve, the underlying transmission mechanism of technology shocks is fundamentally different. Most importantly, only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks—as suggested by the evidence.     

It happened again: A Minskian analysis of the subprime loan crisis

The advanced countries are now going through the worst crisis since the Depression, but today's dominant current theories and econometric models proved unable to predict the crisis. The paper investigates whether the financial instability hypothesis of Hyman P. Minsky offers a better explanation. Minsky argued that in a period of economic growth and tranquility economic agents are more prone to take risk, and banks are more willing to finance borrowers. Meanwhile, in the course of the boom over-indebtedness and financial innovations make the financial system more fragile, and more exposed to adverse effects. We show that both these effects made themselves felt in the subprime loan crisis. Specifically, the main determinants of the crisis have been the increasing appetite for risk and financial innovations. So, we conclude that, although this crisis differs in some of its features from previous crashes and from Minsky's account, the mechanisms underscored by Minsky were and are nevertheless at work.     

The changing sensitivity of realized portfolio betas to U.S. output growth: An analysis based on real-time data

Our results shed light on the sensitivity of the betas of portfolios formed on market capitalization (“size”) and book-to-market value (“value”) to output growth in the United States. We estimate a state-space model to analyze the sensitivity of portfolio betas to output growth. We measure output growth using real-time and revised data. Output growth has a significant effect on portfolio betas when size and value are high. Such portfolio betas exhibit countercyclical dynamics. They are more sensitive, in absolute terms, to output growth when the latter is measured using real-time data. Their sensitivity to output growth has grown over time. Portfolio betas with respect to output growth have become smaller over time, in contrast, when size is large but value is low.     

International transmission of transitory and persistent monetary shocks under imperfect information

We analyze the transmission of monetary shocks in a new open-economy macroeconomics model with one-period nominal contracts and imperfect information. Shocks may have transitory and persistent components that can be disentangled only through the accumulation of information over time. As a consequence, the responses to shocks are significantly altered compared with the case of full information. There are persistent effects on international relative prices, and delayed exchange-rate overshooting is possible following a persistent shock. In some cases, there are (ex post) excess returns as a positive interest rate spread is accompanied by an appreciating currency (or vice versa). Lastly, it is demonstrated that staggering reinforces persistence.     

Asymmetric shocks among U.S. states

The paper applies a factor model to the study of risk sharing among U.S. states. The factor model makes it possible to disentangle movements in output and consumption due to national, regional, or state-specific business cycles from those due to measurement error. The results of the paper suggest that some findings of the previous literature which indicate a substantial amount of inter-state risk sharing may be due to the presence of measurement error in output. When measurement error is properly taken into account, the evidence points towards a lack of inter-state smoothing.     

Stock Market's Response to Real Output Shocks: Connection Restored but Delayed

We propose a vector autoregression with asymmetric leads model to combine the forward‐looking, contemporaneous, and delayed responses of the stock market to output news. Using this approach, we document that the stock market's connection to real output, shown by Binswanger to have been broken since the early 1980s, has been restored after 1998, however, via a delayed response. Subperiods mainly differ in terms of delayed response, portraying an interesting evolution of market participants' response to macroeconomic information based on the realized persistence of output shocks.     

Emerging market fluctuations: What makes the difference?

Aggregate fluctuations in emerging countries are different from those in developed countries. Using data from Mexico and Canada, this paper decomposes these differences in terms of reduced form shocks that affect aggregate efficiency and distort the decisions of households about how much to invest, consume, and work in a standard model of a small open economy. The decomposition exercise suggests that most of these differences are explained by fluctuations in aggregate efficiency, distortions in labor choices over the business cycle, and distortions in intertemporal consumption choices. Successful models for emerging markets fluctuations should include primitive shocks and frictions that generate these features. Models with financial frictions in the form of working capital constraints, possibly augmented with endogenous collateral constraints, are consistent with these findings.     

Globalization and financial development: A model of the Dot-Com and the Housing Bubbles

In the last decade the United States experienced the burst of the Dot-Com and the Housing Bubbles. I develop a model to study the relationship between globalization and the emergence of rational bubbles. I also analyze how the effect of globalization on house prices depends on the type of bubble. I show that bubbles cannot arise in a financially developed country in autarky. In contrast, as globalization progresses, bubbles are more likely to appear in the financially developed country. I also show that house prices increase with globalization only when the bubble is attached to houses. This prediction is consistent with empirical evidence for U.S. metropolitan areas.     

International trade in durable goods: Understanding volatility, cyclicality, and elasticities

Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. The model is able to match many dimensions of the data, which suggests that trade in durable goods may be an important element in open-economy macro models.     

大萧条发生之前美国总需求结构变动研究

通过对美国大萧条前10年总需求结构的统计分析和与英法两国同期数据的比较认为,实际收入与批发价格指数相关系数达到-0.2左右,实际收入与M1收入流通速度相关系数达到-0.2左右,可以构成美国大萧条的内需预警;实际收入指数与外需率的相关系数为-0.6左右,实际收入指数与外贸依存度的相关系数为-0.5左右,可以构成外需预警。二者必须在一个时段内同时出现,目前没有证据认为内需低迷或外需低迷可以单独视为大萧条的预警。     

Analyzing and Advancing the State of the Art of Advertising Self-Regulation

Personal in-depth interviews with executives of trade and professional business associations are the basis of a report on the state of the art of industrywide advertising self-regulation. Based on the experience developed by over 20 disparate industry groups, five essential criteria for effective advertising self-regulation programs are proposed. The article demonstrates that within industry is the knowledge and experience to increase the effectiveness of advertising self-regulation.     

大萧条前后日本的进出口结构与总供求态势

实证分析表明,大萧条时期日本的装备制造业水平较低导致了资本形成严重依赖进口,总供求态势是供给约束型的,并未达到欧美经济强国的需求约束型经济境界。在样本区间内,日本的总供给价格弹性不过0.15,表现为极弱状态。因此,以需求约束型经济态势为基本前提假设的理论框架对这一时期日本宏观经济总量问题的研究均不适用。     

How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States

Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identification, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade—whose responses are left unrestricted—depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks.     

International trade and macroeconomic dynamics with labor market frictions

This paper studies how labor market frictions affect the consequences of trade integration in a two-country dynamic stochastic general equilibrium model with heterogeneous firms and endogenous producer entry. Two main results emerge. First, trade integration is beneficial for welfare by inducing higher productivity, but unemployment can temporarily rise during the transitional adjustment. Labor market rigidities reduce gains from trade, even though they can mitigate short-run employment losses. Second, consistent with the data, the model predicts that stronger trade linkages lead to increased business cycle synchronization. The strength of this effect, however, depends on the labor market characteristics of the integrating partners.     

Are asset price guarantees useful for preventing Sudden Stops?: A quantitative investigation of the globalization hazard-moral hazard tradeoff

An implication of the globalization hazard hypothesis is that ‘Sudden Stops’ caused by global financial frictions could be prevented by offering foreign investors price guarantees on emerging markets assets. These guarantees create a tradeoff, however, because they weaken globalization hazard while creating international moral hazard. We study this tradeoff using a quantitative, equilibrium asset-pricing model. Without guarantees, margin calls and trading costs cause Sudden Stops driven by a Fisherian deflation. Price guarantees prevent this deflation by propping up foreign demand for assets. The effectiveness of price guarantees, their distortions on asset markets, and their welfare implications depend critically on whether the guarantees are contingent on debt levels and on the price elasticity of foreign demand for domestic assets.