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


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.

Policy Evaluation in the Presence of Outsourcing: Global Competitiveness versus Political Feasibility

We analyze the effects of outsourcing in the presence of a minimum wage by presenting a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector.

Ethnic Networks and U.S. Exports

This paper provides new estimates of the effects of ethnic networks on U.S. exports.

Recent Developments in Monetary Macroeconomics and U.S. Dollar Policy

This paper summarizes recent developments in the theory and practice of monetary policy in a closed economy and explains what these developments mean for United States dollar policy.

Immigration and Outsourcing: A General Equilibrium Analysis

This paper analyzes immigration and outsourcing in a general-equilibrium model of international factor mobility. In our model, legal immigration of skilled labor is controlled through a quota, while outsourcing is determined both by the firms in response to market conditions and through policy-imposed barriers.

International Asset Allocation under Regime Switching, Skew and Kurtosis Preferences

This paper proposes a new tractable approach to solving asset allocation problems in situations with a large number of risky assets which pose problems for standard approaches. Investor preferences are assumed to be defined over moments of the wealth distribution such as its mean, variance, skew and kurtosis.

Identifying the Effects of U.S. Intervention on the Levels of Exchange Rates

Most intervention studies have been silent on the assumed structure of the economic system—implicitly imposing implausible assumptions—despite the fact that inference depends crucially on such issues. This paper identifies the cross-effects of intervention and the level of exchange rates using the likely timing of intervention, macroeconomic announcements as instruments and the nonlinear structure of the intervention reaction function.

An Analysis of Recent Studies of the Effect of Foreign Exchange Intervention

Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: 1) the use of high frequency data; 2) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work.

Idiosyncratic Volatility, Economic Fundamentals, and Foreign Exchange Rates

This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample tests, even after we use a bootstrap procedure to explicitly account for data mining.

Home Bias and High Turnover in an Overlapping Generations Model with Learning

This paper develops a two-country OLG model under the assumption that investors are on a Bayesian learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals.

The Case for Foreign Exchange Intervention: The Government as an Active Reserve Manager

This paper argues that major governments should actively manage their foreign exchange portfolios to maximize the risk-adjusted return to the taxpayer by exploiting long-term, fundamental based predictability in floating exchange rates.

Foreign Exchange Volatility is Priced in Equities

This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors from buying options on foreign exchange futures.

Size Matters: Asymmetric Exchange Rate Pass-Through At The Industry Level

Changes in costs faced by firms have direct implications for their price-cost margins. Knowing how prices respond to such cost changes is crucial for understanding how individual markets function and, in turn, for understanding the macroeconomy.

A Spectral Analysis of the Cross-Country Consumption Correlation Puzzle

Dynamic general equilibrium models predict high cross-country consumption correlations, whereas the data show that output correlations tend to be higher. Spectral decomposition reveals that this ranking varies across frequency bands, with consumption correlations often exceeding output correlations at higher frequencies.

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