Asymmetric shocks among U.S. states

This paper applies a factor model to the study of risk sharing among U.S. states. The factor model makes it possible to disentangle movements in output and consumption due to national, regional, or state-specific business cycles from those due to measurement error. The results of the paper suggest that some findings of the previous literature which indicate a substantial amount of interstate risk sharing may be due to the presence of measurement error in output. When measurement error is properly taken into account, the evidence points towards a lack of interstate smoothing.Consumption (Economics) ; Business cycles

Aggregate unemployment in Krusell and Smith’s economy: a note

Using data on workers’ flows into and out of employment, unemployment, and not-in-the-labor-force, I construct transition probabilities between “employment” and “unemployment” that can be used in the calibration of economies such as Krusell and Smith’s (1998). I show that calibration in Krusell and Smith has some counterfactual features. Yet the gains from adopting alternative calibrations in terms of matching the data are not very large, unless one assumes that the duration of unemployment spells is well above what is usually assumed in the literature.

A DSGE-VAR for the Euro Area

This paper uses a modified version of the DSGE model estimated in Smets and Wouters (2003) to generate a prior distribution for a vector autoregression, following the approach in Del Negro and Schorfheide (2003). This DSGE-VAR is fitted to Euro area data on GDP, consumption, investment, nominal wages, hours worked,inflation, M2, and a short-term interest rate. We document the fit of the DSGE-VARBayesian Analysis, DSGE Models, Forecasting, Vector Autoregressions

Firm-level evidence on international stock market movement

We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in twenty countries, we estimate a factor model that decomposes stock returns into global, country- and industry-specific shocks. We find a large and highly significant link: a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to country-specific shocks by 1.5 percent. This link has grown stronger over time since the mid-1980s.Financial markets ; International finance ; Risk

Monetary policy and the house price boom across U.S. states

The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon. The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small.

Firm-level evidence on international stock market comovement

We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in 20 countries, we estimate a factor model that decomposes stock returns into global, country-specific and industry-specific shocks. We find a large and highly significant link : on average, a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to countryspecific shocks by 1.5 percent. This link has grown stronger since the mid-1980s. --Diversification,risk,international financial markets,industrial structure

Monetary policy analysis with potentially misspecified models

The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE 2005) and Smets and Wouters (JEEA 2003). We first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest rate feedback rules. We find that many of the prescriptions derived from the DSGE model are robust to model misspecification.

International diversification strategies

We estimate a model with country- and industry-specific shocks that extends the dummy variable model used in the portfolio diversification literature by relaxing the restriction that all stocks with exposure to a given shock have the same exposure to that shock. We find that: i) This restriction is strongly rejected by the data. ii) Many industry betas are negative, while almost all country betas are positive. This difference in within-group heterogeneity may explain why country shocks have historically outweighed industry shocks in explaining international return variation. iii) We use the betas to construct portfolios whose volatility is substantially below that of the world market, both in and out of sample.Financial markets ; Risk

Monetary Policy Analysis with Potentially Misspecified Models

Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are either based on a generalized shock structure for the DSGE model or the explicit modelling of deviations from cross-equation restrictions. Using post-1982 U.S. data we first quantify the degree of misspecification in a state-of-the-art DSGE model and then document the performance of different interest-rate feedback rules. We find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially.

The rise in comovement across national stock markets: market integration or IT bubble?

A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore whether this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.Financial markets ; Risk ; Markets