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Working Paper
U.S. monetary policy and econometric modeling: tales from the FOMC transcripts 1984-1991
This paper uses the transcripts from the FOMC meetings to characterize the interactions between policymakers and macro models in the formulation of U.S. monetary policy. We develop a taxonomy of these interactions and present two case studies. The first case focuses on the debate on the choice of monetary target and the second case focuses on the 1990/1991 recession. The analysis reveals that U.S. monetary policy relies on models for information. Models give estimates of both the outlook and the response of the economy to policy changes. Models also evolve to recognize the changing context in ...
Working Paper
An empirical analysis of policy coordination in the United States, Japan and Europe
Coordination of macroeconomic policy has been a major topic at recent summit meetings, and has been the subject of a number of theoretical studies. However, relatively little empirical research exists on policy coordination. This paper is an attempt to help fill this gap. The paper considers the quantitative importance of the coordination of fiscal and monetary policy under flexible exchange rates. We also evaluate the mechanisms by which the effects of macroeconomic policy are transmitted abroad. The nature of the equilibrium reached in the absence of coordination is also analyzed, and the ...
Working Paper
Is the ECU an optimal currency basket?
Recently the role of the ECU has increased and there has been concern whether it is sustainable. The first part of this paper examines the composition of the ECU and investigates the impact of changes in this composition on the value of the ECU. The results show that when there is little exchange rate variability among the currencies that comprise the ECU or when the changes in composition are small the value of the ECU remains stable. The second part of this paper constructs an alternative, optimal basket of currencies for Germany and compares this basket to the ECU. The path of the optimal ...
Working Paper
Re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990
The general view of the economics profession is that we can not explain exchange rate movements. However, some researchers still contend that the relationship between real interest rates and the real exchange rate is a useful framework for thinking about exchange rate movements. This paper asks whether there is such a systematic relationship and whether it is revealed by the data. In our attempt to find such a relationship we investigate whether the empirical results are conditional on: (1) the time period selected, (2) the choice of interest rate, (3) the measure of expected inflation, and ...
Working Paper
Capital controls during financial crises: the case of Malaysia and Thailand
This study examines the impact capital controls had in Malaysia (1998-1999) and Thailand (1997). We aim to assess the extent to which the capital controls were effective in delivering the outcomes that motivated their imposition. We conclude that in Thailand the controls did not deliver much of what was intended--although, one does not observe the counterfactual. By contrast, in the case of Malaysia the controls did align closely with the priors of what controls are intended to achieve: greater interest rate and exchange rate stability and more policy autonomy.
Working Paper
The U.K. sector of the Federal Reserve's multicountry model : the effects of monetary and fiscal policies
The purpose of this paper is to describe and to analyze in some detail the U.K. sector of the Federal Reserve's Multicountry Model (MCM). The analysis focuses on the effects of shifts in U.K. monetary and fiscal policies at three levels: 1) within the unlinked U.K. sector, 2) within the linked MCM framework, and 3) within the linked MCM under the assumption that U.K. policy shifts are coordinated with those in other countries. In comparing the unlinked MCM U.K. sector with other U.K. models such as the LBS and National Institute it is found that all the models have similar government ...
Working Paper
Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis
Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) to explore this question. As applied to land-holding property companies, it predicts greatly amplified responses to financial shocks--like the ending of the land price bubble or the fall of the exchange rate. The initial fall in asset values is followed by the ...
Working Paper
Optimal currency basket in a world of generalized floating : an application to the nordic countries
The purpose of this paper is to derive optimal weights for a currency basket taking into consideration the objective of the policymaker. We carefully distinguish between the two terms: effective exchange rate index and currency basket, which are often used interchangeably in the literature. In general, our analysis is an extension of the work of Branson-Katseli and Lipschitz-Sundararajan and then applied to the Nordic countries. We use the policy objective of minimizing fluctuation in export production and illustrate our results using Norway, Sweden and Finland. The weights we derive create ...
Working Paper
The reaction of exchange rates and interest rates to news releases
This paper examines the response of exchange rates and interest rates--U.S. and foreign--to economic news. The news is associated with the surprise component of the monthly release of six U.S. macroeconomic variables. The results suggest that dollar exchange rates systematically react to news about real economic activity--a surprise of 100,000 on nonfarm payroll employment leads to a 0.2 percent appreciation of the exchange rate. In general, exchange rates do not react systematically to news on inflation. By contrast, U.S. interest rates respond to both types of news, although the response ...
Working Paper
A new interpretation of the coordination problem and its empirical significance
In this paper, we discuss a new interpretation of what might be meant by the "coordination" of policies; in this interpretation, the policymakers are selecting a noncooperative solution rather than a cooperative solution. The new interpretation is suggested by the fact that games typically have a large number of Nash solutions, and players are not indifferent as to which occurs. The multiplicity of solutions may be due to information sharing and surveillance, the choice of policy instruments, or the adoption of reputational strategies in repeated versions of the game. The "coordination" ...