A list of articles published by members of the Dallas Fed Research staff.

2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000

2010 Academic Publications

Home Bias, Exchange Rate Disconnect, and Optimal Exchange Rate Policy
Journal of International Money and Finance, February 2010   
Jian Wang 
Abstract: This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates, in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts that the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is supported by the data. A second-order accurate solution method is employed to find the optimal operational monetary policy rule. Our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model does not detect welfare gain from international monetary cooperation, which extends Obstfeld and Rogoff's [Obstfeld, M., Rogoff, K., 2002. Global implications of self-oriented national monetary rules, Quarterly Journal of Economics May, 503–535] findings to a DSGE model. 

Is Tighter Fiscal Policy Expansionary Under Fiscal Dominance?: Hypercrowding Out in Latin America
Contemporary Economic Policy, April 2010
William C. Gruben and John H. Welch 
Abstract: Hypercrowding out occurs when fiscally dominated governments' domestic credit demands are so intrusive to a nation's financial system that a move toward fiscal surplus lowers interest rates and increases growth. We sample nine Latin American countries to test for these relationships. The impulse-response results of vector error correction models, six nations test positive for these two connections, suggesting market concern despite recent efforts toward fiscal balance. 

Variety, Globalization, and Social Efficiency
Southern Economic Journal, April 2010
W. Michael Cox and Roy Ruffin
Abstract: The standard formal presentation of the Dixit-Stiglitz-Krugman (DSK) model of monopolistic competition with a constant-elasticity-of-substitution (CES) utility function supposes a sufficient number of firms so that the elasticity of demand facing each variety is approximated by a constant elasticity of substitution. Such a formulation forces economies of scale to be frozen so that firm size never changes. We use a Bertrand-Nash interpretation of the equilibrium that allows the elasticity of demand facing each variety to depend on the number of varieties, thus allowing the gains from globalization to reflect both the increase in variety and the exploitation of economies of scale. We also develop a precise expression for per capita real income with any number of sectors and examine the age-old question of the socially optimal number of varieties.

The Quantitative Role of Capital Goods Imports in US Growth
American Economic Review, May 2010
Abstract: Michele Cavallo and Anthony Landry
A significant body of literature has found that technological improvements embodied in new capital goods account for a large share of US output growth. This phenomenon, known as investment-specific technological change, has stimulated the growth rate of output by raising the efficiency of equipment and software (E&S) in the production of final output. In an influential contribution, Jeremy Greenwood, Zvi Hercowitz, and Per Krusell (1997) found that investment-specific technological change accounted for nearly 60 percent of growth in US output per hour during the postwar period. The salient findings of this paper are that capital goods imports have contributed 20 to 30 percent to growth in US output per hour between 1967 and 2008, and that this contribution has even risen to a measured 30 to 40 percent in the last 20 years. These findings imply that capital goods imports have represented an increasing source of growth in US output per hour. In related work, Michele Cavallo and Anthony Landry (2009) show that the relative price of capital goods imports has fallen more rapidly than the relative price of domestic E&S investment over the sample period. This observation, together with the finding that a significant portion of the increase in the stock of E&S has stemmed from higher capital goods imports, hints that the decline in the relative price of capital goods imports has been a key driving force behind the observed increase in the stock of E&S.

Mexican Immigrant Employment Outcomes Over the Business Cycle
American Economic Review, May 2010 
Pia M. Orrenius and Madeline Zavodny
Abstract: The United States is beginning to emerge from the deepest downturn the country has experienced since the Great Depression. As of October 2009, the number of unemployed persons had risen by 8.2 million since the “Great Recession” began in December 2007.1 All demographic groups have experienced job losses, but some groups have been more adversely affected than others.  Repeating the pattern of most previous downturns, the recession’s impact has been worst for low education and minority workers.

A Model of the Exchange Rate with Informational Frictions
B.E. Journal of Macroeconomics, 2010
Enrique Martinez-Garcia
Abstract: Data for the U.S. and the Euro-zone (12) during the post-Bretton Woods period show that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Open-economy models with price stickiness and local-currency pricing often require an average duration above 4 quarters to approximate those stylized facts. I argue that limited and asymmetric information introduces a lag in the consumption decisions, and as a result the real exchange rate becomes more volatile to ensure that goods markets clear at all times. Hence, informational frictions can explain the volatility of the real exchange rate without imposing price stickiness above the available estimates (e.g., Gali et al., 2001). I also find that differences in price stickiness across markets weaken the correlation between the nominal exchange rate and the CPI ratio between countries. This can increase the persistence of the real exchange rate, but often by worsening the model along other dimensions (e.g., by lowering the correlation between nominal and real exchange rates).