#2004-034C "Using Extraneous Information to Analyze Monetary Policy in Transition Economies"
by William T. Gavin, and David M. Kemme
December 2004
Revised October 2007

Empirical macroeconomics is plagued by small sample size and large idiosyncratic variation. This problem is especially severe in the case of the transition economies. More...

FORTHCOMING: Journal of International Money and Finance

#2004-033A "The Reform of October 1979: How It Happened and Why"
by David E. Lindsey, Athanasios Orphanides, and Robert H. Rasche
December 2004

This study offers a historical review of the monetary policy reform of October 6, 1979. It lays out the historical record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the transcripts of Federal Open Market Committee (FOMC) meetings during 1979. More...

#2004-032B "The Importance of Nonlinearity in Reproducing Business Cycle Features"
by James Morley, and Jeremy M. Piger
November 2004
Revised May 2005

This paper considers the ability of simulated data from linear and nonlinear time-series models to reproduce features in U.S. real GDP data related to business cycle phases. We focus our analysis on a number of linear ARIMA models and nonlinear Markov-switching models. More...

PUBLISHED: in C. Milas, P. Rothman, and D. van Dijk (eds.), Nonlinear Time Series Analysis of Business Cycles, Elsevier Science, Amsterdam, 2006

#2004-031B "The Case for Foreign Exchange Intervention: The Government as an Active Reserve Manager"
by Christopher J. Neely
November 2004
Revised July 2005

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. More...

#2004-030A "Non-Markovian Regime Switching with Endogenous States and Time-Varying State Strengths"
by Siddhartha Chib, and Michael J. Dueker
November 2004

This article presents a non-Markovian regime switching model in which the regime states depend on the sign of an autoregressive latent variable. The magnitude of the latent variable indexes the 'strength' of the state or how deeply the system is embedded in the current regime. In this model, regimes have dynamics, not only persistence, so that one regime can gradually give way to another. In this framework, it is natural to allow the autoregressive latent variable to be endogenous so that regimes are determined jointly with the observed data. More...

#2004-029F "Foreign Exchange Volatility is Priced in Equities"
by Hui Guo, Christopher J. Neely, and Jason Higbee
November 2004
Revised June 2007

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

FORTHCOMING: Financial Management

#2004-028B "International Transmission of Inflation among G-7 Countries: A Data-Determined VAR Analysis"
by Jian Yang, Hui Guo, and Zijun Wang
November 2004
Revised October 2005

We investigate the international transmission of inflation among G-7 countries using data-determined vector autoregression analysis, as advocated by Swanson and Granger (1997). Over the period 1973 to 2003, we find that unexpected changes in U.S. inflation have large effects on inflation in other countries, although they are not always the dominant international factor. More...

PUBLISHED: Journal of Banking and Finance, October 2006, 30(10), pp. 2681-700

#2004-027C "Aggregate Idiosyncratic Volatility in G7 Countries"
by Hui Guo, and Robert Savickas
November 2004
Revised January 2007

We argue that changes in average idiosyncratic volatility provide a proxy for changes in the investment opportunity set, and this proxy is closely related to the book-to-market factor. More...

FORTHCOMING: Review of Financial Studies

#2004-026B "The Monetary Instrument Matters"
by William T. Gavin, Benjamin D. Keen, and Michael R. Pakko
November 2004
Revised March 2005

This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, we examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. More...

PUBLISHED: Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), pp. 633-58

#2004-025B "Near-Rational Exuberance"
by James B. Bullard, George W. Evans, and Seppo Honkapohja
October 2004
Revised September 2005

We study how the use of judgement or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. More...