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

2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000

2010 Academic Publications

Can Alternative Taylor-Rule Specifications Describe Federal Reserve Policy Decisions?
Journal of Policy Modeling, November–December 2010
Adriana Fernandez and Evan F. Koenig
Abstract: We look at how well several alternative Taylor-rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor-rule features that are most important for achieving relatively strong real-time performance. Key features of our preferred rule, which is robust to changing economic conditions, are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures. We conclude by presenting an empirical application to show the policy relevance of our preferred rule in the context of the 2008–2009 recession.

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. 

The Quantitative Role of Capital Goods Imports in US Growth
American Economic Review Papers and Proceedings, 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 Papers and Proceedings, 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).

Do Remittances Boost Economic Development? Evidence from Mexican States
Law and Business Review of the Americas, Fall 2010
Pia M. Orrenius, Madeline Zavodny, Jesús Cañas, and Roberto Coronado
Abstract: Remittances have been promoted as a development tool because they can raise incomes and reduce poverty rates in developing countries. Remittances may also promote development by providing funds that recipients can spend on education or health care or invest in entrepreneurial activities. From a macroeconomic perspective, remittances can boost aggregate demand and thereby GDP as well as spur economic growth. However, remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labor supply among recipients. We used state-level data from Mexico during 2003-2007 to examine the aggregate effect of remittances on employment, wages, unemployment rates, the wage distribution, and school enrollment rates. Our results suggest that while employment, wages, and school enrollment have risen over time in Mexican states, increasing remittances do not account for these trends. However, remittances may lessen some measures of income inequality. Two-stage least squares specifications among central Mexican states suggest that remittances shift the wage distribution to the right, reducing the fraction of workers earning the minimum wage or less.

Improving the ACCRA U.S. Regional Cost of Living Index
Journal of Economic and Social Measurement, September 2010
Keith R. Phillips and Christina Daly
Abstract: The broadest and most commonly used measure of the cost of living across U.S. cities is the American Chamber of Commerce Research Association (ACCRA) index. This index is used by business and government organizations and the media to rank living standards and real wages across U.S. cities. In this study we reduce the aggregation bias in the index by calculating national average prices for the 59 item prices using population weights instead of the equal weight formula used by ACCRA. This correction results in a decline in the index values for all cities and changes in the rankings and bi-variate comparisons between city pairs. In some high-cost cities the index values decrease by over 25 percent, and in 74 percent of the cities the rank changes by greater than one spot.

State-Dependent Pricing, Local-Currency Pricing, and Exchange Rate Pass-Through
Journal of Economic Dynamics and Control, October 2010
Anthony Landry
Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in in Dotsey et al. (1999) which firms discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.

Housing Markets and the Financial Crisis of 2007–2009: Lessons for the Future
Journal of Financial Stability, December 2010
John V. Duca, Anthony Murphy, and John Muellbauer
Abstract: An unsustainable weakening of credit standards induced a US mortgage lending and housing bubble, whose consumption impact was amplified by innovations altering the collateral role of housing. In countries with more stable credit standards, any overshooting of construction and house prices owed more to traditional housing supply and demand factors. Housing collateral effects on consumption also varied, depending on the liquidity of housing wealth. Lessons for the future include recognizing the importance of financial innovation, regulation, housing policies, and global financial imbalances for fueling credit, construction, house price and consumption cycles that vary across countries.