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Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

International

Do European Capital Flows Comove?

We study the cross-section correlations of net, total, and disaggregated capital flows for the major source and recipient European Union countries. We seek evidence of changes in these correlations since the introduction of the euro to understand whether the European Union can be considered a unique entity with regard to its international capital flows.

The Cyclical Properties of Disaggregated Capital Flows

We analyze the second-moment properties of the components of international capital flows and their relationship to business cycle variables (output, investment, and real interest rate) in 22 industrial and emerging countries.

Threshold Adjustment in Deviations from the Law of One Price

Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries.

International Comovements in Inflation Rates and Country Characteristics

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates.

Enlargement and Common External Tariff in a Political-Economic Model of Customs Union

We present a model with three blocks of nations: two of the blocks are members of a Customs Union (CU) and maintain a common external tariff (CET) on the third (non member).

The Dynamic Interaction of Trading Flows, Macroeconomic Announcements and the CAD/USD Exchange Rate: Evidence from Disaggregated Data

We explore the relationship between disaggregated trading flows, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements with a novel data set of unprecedented breadth and length. <a href="http://research.stlouisfed.org/econ/cneely/Data_Appendix_The_Dynamic_Interaction.pdf">Data Appendix</a>.

Equity Portfolio Diversification under Time-Varying Predictability and Comovements: Evidence from Ireland, the US, and the UK

We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets.

Offshoring, Economic Insecurity, and the Demand for Social Insurance

The fear of offshoring, particularly in services since 2000, has raised workers economic insecurity and heightened concerns over future economic globalization. Many have argued that globalization has exacerbated labor market turbulence increasing the demand for social insurance programs.

Political Asymmetry and Common External Tariff in a Customs Union

This paper examines the effect of political and economic asymmetries in the formation of common external tariffs (CETs) in a customs union (CU). We do so by introducing possible cross-border lobbying and by endogenizing tariff formation in a political economic model for the determination of CETs.

Jumps, Cojumps and Macro Announcements

We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps.

Managing International Portfolios with Small Capitalization Stocks

In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks.

Do Donors Care about Declining Trade Revenues from Liberalization? An Analysis of Aid Allocation

Many developing country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability, and may affect government spending on development activities.

Trade and Child Labor: A General Equilibrium Analysis

This paper augments the existing literature on trade and child labor by exploring the effects of terms of trade changes in the context of a three good general equilibrium model, where one of the goods is a non-traded good.

Foreign Aid and Export Performance: A Panel Data Analysis of Developing Countries

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation.

Corruption and Trade Protection: Evidence from Panel Data

This paper provides new estimates of the effects of corruption and poor institutions on trade protection. It exploits data on several measures of trade protection including import duty, international trade taxes, and the trade-GDP ratio.

Nash Equilibrium Tariffs and Illegal Immigration: An Analysis of Preferential Trade Liberalization

We use a version of the small-union Meade model to consider the effects of interdependent import tariffs in the presence illegal immigration.

Resolving the Unbiasedness and Forward Premium Puzzles

There are two unresolved puzzles in the empirical foreign exchange literature.

Handicapping Currency Design: Counterfeit Deterrence and Visual Accessibility in the United States and Abroad

Despite the increasing use of electronic payments, currency retains an important role in the payment system of every country. In this article, the authors compare and contrast tradeoffs among currency design features, including those primarily intended to deter counterfeiting and ones to improve usability by the visually impaired.

The Perils of Globalization: Offshoring and Economic Insecurity of the American Worker

According to polls from the 2006 congressional elections, globalization and economic insecurity were the primary concerns of many voters.

Is There Too Little Immigration? An Analysis of Temporary Skilled Migration

This paper presents a model of legal migration of temporary skilled workers from one source country to two host countries, both of which can control their levels of such immigration.

A Note on Oil Dependence and Economic Instability

We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making fluctuations driven by self- fulfilling expectations easier to occur.

The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market

We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules.

Central Bank Authorities’ Beliefs about Foreign Exchange Intervention

This paper presents the results of a survey of monetary authorities with respect to foreign exchange intervention.

Worldwide Macroeconomic Stability and Monetary Policy Rules

We study the interaction of multiple large economies in dynamic stochastic general equilibrium. Each economy has a monetary policymaker that attempts to control the economy through the use of a linear nominal interest rate feedback rule.

Central Bank Intervention with Limited Arbitrage

Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational risk-arbitrage would quickly drive asset prices back to long-run equilibrium.

Central Bank Intervention and Exchange Rate Volatility, Its Continuous and Jump Components

We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets.

What Tames the Celtic Tiger? Portfolio Implications from a Multivariate Markov Switching Model

We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among the Irish stock market, one of the top world performers of the 1990s, and the US and UK stock markets.

The Determinants of Aid in the Post-Cold War Era

This paper estimates the responsiveness of aid to recipient countries’ economic and physical needs, civil/political rights, and government effectiveness.

Investigating the Intertemporal Risk-Return Relation in International Stock Markets with the Component GARCH Model

We revisit the risk-return relation using the component GARCH model and international daily MSCI stock market data. In contrast with the previous evidence obtained from weekly and monthly data, daily data show that the relation is positive in almost all markets and often statistically significant. Likelihood ratio tests reject the standard GARCH model in favor of the component GARCH model, which strengthens the evidence for a positive risk-return tradeoff.

Small Caps in International Equity Portfolios: The Effects of Variance Risk

We show that predictable covariances between means and variances of stock returns may have a first order effect on portfolio composition. In an international asset menu that includes both European and North American small capitalization equity indices, we find that a three-state, heteroskedastic regime switching VAR model is required to provide a good fit to weekly return data and to accurately predict the dynamics in the joint density of returns.


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