FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.     

YOLO: Mortality Beliefs and Household Finance Puzzles

We study the effect of subjective mortality beliefs on life‐cycle behavior. With new survey evidence, we document that survival is underestimated (overestimated) by the young (old). We calibrate a canonical life‐cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young undersave by 26%, and retirees draw down their assets 27% slower, while the model's fit to consumption data improves by 88%. Cross‐sectional regressions support the model's predictions: Distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.     

The Impact of Open Data on Public Procurement

We examine how open procurement data affect the competitiveness of award procedures and the execution of government contracts. The European Union recently made its historical procurement notices available for bulk download in a cohesive and user-friendly database. Comparing government contracts above and below EU procurement size thresholds, we find that, after the open data initiative, procurement officials are more likely to award treated contracts through open bidding. In cross-sectional analyses, we document variation in the open bidding effect consistent with two underlying mechanisms: (1) increased scrutiny by NGOs and investigative journalists and (2) learning by national procurement regulators. However, treated contracts are also more likely to experience costly modifications because the shift to open bidding introduces rigidity that limits officials’ discretion in selecting suppliers based on private information. Overall, our evidence indicates that open procurement data promote competitive bidding but lead to contracts with weaker execution performance. These inferences also hold in an alternative open data setting.     

Exchange Rate Pass‐Through,Domestic Competition,and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi

Import competition from China is pervasive in the sense that for many good categories, the competitive environment that U.S. firms face in these markets is strongly driven by the prices of Chinese imports, and so is their pricing decision. This paper quantifies the effect of the government‐controlled appreciation of the Chinese renminbi vis‐à‐vis the USD from 2005 to 2008 on the prices charged by U.S. domestic producers. In a panel spanning the period from 1994 to 2010 and including up to 519 manufacturing sectors, import price changes of Chinese goods pass into U.S. producer prices at an average rate of 0.7, while import price changes that can be traced back to exchange rate movements of other trade partners only have mild effects on U.S. prices. Further analysis points to the importance of trade integration, variable markups, and demand complementarities on the one side, and to the importance of imported intermediate goods on the other side as drivers of these patterns. Simulations incorporating these microeconomic findings reveal that a substantial revaluation of the renminbi would result in a pronounced increase in aggregate U.S. producer price inflation.     

A classification of mergers and acquisitions by motives: Analysis of market responses*

Abstract. This study classifies mergers and acquisitions (M&A) into three target groups: (i) those that choose M&A as an alternative to bankruptcy, (ii) highly liquid target firms, and (iii) the remainder of M&A. Each of these categories yields different market responses: stockholders of bankrupt-predicted target firms have the lowest abnormal returns while stockholders of highly liquid targets have the highest. These results are consistent with the free-cash-flows hypothesis for M&A and are robust to possible confounding effects, such as size, method of payment, and whether the takeover is a merger or a tender offer. Résumé. Les auteurs classifient les fusions et les acquisitions selon trois groupes, savoir: i) les entreprises qui choisissent la fusion ou l'acquisition comme solution de rechange à la faillite, ii) le entreprises cibles qui ont un degré élevé de liquidité et iii) les autres cas de fusions et d'acquisitions. Chacun de ces groupes suscite des réactions différentes du marché: les actionnaires d'entreprises cibles dont la faillite est prévisible enregistrent les rendements anormaux les plus faibles tandis que les actionnaires des entreprises cibles ayant un degré élevé de liquidité enregistrent les rendements les plus élevés. Ces résultats sont conformes à l'hypothèse des flux monétaires libres relative aux fusions et aux acquisitions et résistent aux effets contradictoires possibles, tels que la taille, le mode de paiement et la nature de la prise de participation (fusion ou offre publique d'achat).     

Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market

This paper extends the Mussa and Rosen (1978) model of quality pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low-quality goods are more sensitive to exchange rate shocks than prices of high-quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts toward higher quality and more expensive goods. We test these predictions using highly disaggregated price and quantity U.S. import data and find only weak empirical evidence in support of our theory.