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Jel Classification:E30 

Working Paper
Financial integration and international business cycle co-movement: the role of balance sheets

This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between ...
Globalization Institute Working Papers , Paper 89

Journal Article
The Real Term Premium in a Stationary Economy with Segmented Asset Markets

This article proposes a general equilibrium model to explain the positive and sizable term premia implied by the data. The authors introduce a slow mean-reverting process of consumption growth and a segmented asset-market mechanism with heterogeneous trading technologies into an otherwise standard heterogeneous agent general equilibrium model. First, the slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit near-zero first-order autocorrelation, as observed in the data. This slight ...
Review , Volume 101 , Issue 2 , Pages 115-134

Working Paper
Pegging the exchange rate to gain monetary policy credibility

Central banks that lack credibility often tie their exchange rate to that of a more credible partner in order to ?import? credibility. We show in a small open economy model that a central bank that displays ?limited credibility? can deliver significant improvements to a social welfare function that contains no role for exchange rate stabilization by maximizing an objective function that places weight on exchange rate stabilization, and thus the central bank with limited credibility will peg their currency to that of a more credible partner. As the central bank?s credibility improves it will ...
Globalization Institute Working Papers , Paper 224

Report
Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model

This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in ...
Staff Report , Paper 646

Working Paper
Sudden Stops and Optimal Foreign Exchange Intervention

This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through ...
Globalization Institute Working Papers , Paper 405

Report
Cost-Price Relationships in a Concentrated Economy

The US economy is at least 50 percent more concentrated today than it was in 2005. In this paper, we estimate the effect of this increase on the pass-through of cost shocks into prices. Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. The resulting above-trend price growth lasts for about four quarters. Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current ...
Current Policy Perspectives

Working Paper
Private news and monetary policy forward guidance or (the expected virtue of ignorance)

How should monetary policy be designed when the central bank has private information about future economic conditions? When private news about shocks to future fundamentals is added to an otherwise standard new Keynesian model, social welfare deteriorates by the central bank?s reaction to or revelation of such news. There exists an expected virtue of ignorance, and secrecy constitutes optimal policy. This result holds when news are about cost-push shocks, or about shocks to the monetary policy objective, or about shocks to the natural rate of interest, and even when the zero lower bound of ...
Globalization Institute Working Papers , Paper 238

Working Paper
Do Monetary Policy Announcements Shift Household Expectations?

We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings ...
Working Papers , Paper 1906

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