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Working Paper
Measuring U.S. international relative prices: a WARP view of the world
In this paper we construct a new measure of U.S. prices relative to those of its trading partners and use it to reexamine the behavior of U.S. net exports. Our measure differs from existing measures of the dollar's real effective exchange rate (REER) in that it explicitly incorporates both the difference in price levels between the United States and developing economies and the growing importance of these developing economies in world trade. Unlike existing REERs, our measure shows that relative U.S. prices have increased significantly over the past 15 years. In terms of simple correlations, ...
Working Paper
Foreign exposure to asset-backed securities of U.S. origin
The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. ...
Working Paper
Using options prices to infer PDF'S for asset prices: an application to oil prices during the Gulf crisis
We develop a general method to infer martingale equivalent probability density functions (PDFs) for asset prices using American options prices. The early exercise feature of American options precludes expressing the option price in terms of the PDF of the price of the underlying asset. We derive tight bounds for the option price in terms of the PDF and demonstrate how these bounds, together with observed option prices, can be used to estimate the parameters of the PDF. We infer the distribution for the price of crude oil during the Persian Gulf crisis and find the distribution differs ...
Working Paper
Measurement matters for modeling U.S. import prices
We focus on capturing the increasingly important role that emerging economies play in determining U.S. import prices. Emerging market producers differ from others in two respects: (1) their cost structure is well below that of developed-market producers, and (2) their wide profit margins induce pricing policies that seek to exhaust production capacity. We argue that these features have dampened the short-run responses of import prices to changes in the value of the dollar but that they have not altered the associated long-run response. To capture these considerations, we develop a new method ...
Working Paper
Current account sustainability and relative reliability
The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is ...
Working Paper
The role of fiscal policy in an incomplete markets framework
A general-equilibrium model is developed to highlight the link between neo-Keynesian models of unemployment and recent results on the constrained suboptimality of competitive economies with incomplete asset markets. Although the model deviates from the Arrow-Debreu paradigm only by the absence of some contingent claims, the competitive equilibrium exhibits underemployment and balanced-budget fiscal policies have Keynesian effects which are Pareto improving.
Working Paper
The sovereignty option: the Quebec referendum and market views on the Canadian dollar
We use exchange traded options on Canadian dollar futures to estimate the market's risk-neutral distribution for the Canadian dollar in the days before and after the Quebec sovereignty referendum. We employ a relatively new technique that places little a priori structure on the estimated distribution. This lack of structure allows the estimated distribution to reflect the multi-modal nature of expectations associated with the referendum's results. The technique is especially suited to circumstances in which a particular event will reduce a large degree of uncertainty prior to the expiration ...
Working Paper
Foreign holdings of U.S. Treasuries and U.S. Treasury yields
Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign ...
Working Paper
International relative price levels: a look under the hood
This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank?s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises ...
Working Paper
Asymmetric Information and the Death of ABS CDOs
A key feature of the 2007 financial crisis is that for many securities trading had ceased; where trading did occur, market prices were well below intrinsic values, especially for ABS CDOs. One explanation is that information had been asymmetric, with sellers having better information than buyers. We first show the information advantages sellers had over buyers in both the issuance of CDOs and, through vertical integration, performance of the CDO collateral that could well have disrupted trading after the onset of the crisis. Using a ?workhorse" model for pricing securities under asymmetric ...