Reach for Yield and Fickle Capital Flows

By Ricardo J. Caballero and Alp Simsek

AEA Papers and Proceedings, May 2018

In Caballero and Simsek (2017), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situa...

Global Financial Cycles and the Exchange Rate Regime: A Perspective from Emerging Markets

By Maurice Obstfeld, Jonathan D. Ostry, and Mahvash S. Qureshi

AEA Papers and Proceedings, May 2018

This paper examines the claim that exchange rate regimes are of little relevance in the transmission of global financial conditions to domestic financial and macroeconomic conditions. Our findings suggest that exchange rate regimes do matter, at least for...

Optimal Payment Areas or Optimal Currency Areas?

By Patrick Bolton and Haizhou Huang

AEA Papers and Proceedings, May 2018

We use the Optimal Capital Structure of Nations framework in Bolton and Huang (2018) to develop a new theory of Optimum Currency Areas. Whether two economically integrated nations should form an optimal currency area depends on a trade-off between financi...

Financial Cycles and Credit Growth across Countries

By Nuno Coimbra and Hélène Rey

AEA Papers and Proceedings, May 2018

In Coimbra and Rey (2017) we develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behavior of financial intermedia...

The Effects of Tax Changes at the Zero Lower Bound: Evidence from Japan

By Akihisa Kato, Wataru Miyamoto, Thuy Lan Nguyen, and Dmitriy Sergeyev

AEA Papers and Proceedings, May 2018

We use the narrative approach to identify tax changes unrelated to current economic conditions and estimate the effects of these changes on macroeconomic variables during and outside of the zero lower bound period in Japan. We find little difference in th...

Unconventional Fiscal Policy

By Francesco D'Acunto, Daniel Hoang, and Michael Weber

AEA Papers and Proceedings, May 2018

Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We provide preliminary evidence for the effective...

What Do We Know about the Effects of Austerity?

By Alberto Alesina, Carlo A. Favero, and Francesco Giavazzi

AEA Papers and Proceedings, May 2018

The literature on fiscal multipliers is far from having reached an agreed upon conclusion. One result, however, seems very robust: in OECD economies, fiscal consolidations based upon expenditure cuts are much less costly than those performed on the tax si...

Exchange Rates and the Working Capital Channel of Trade Fluctuations

By Valentina Bruno, Se-Jik Kim, and Hyun Shin

AEA Papers and Proceedings, May 2018

Exchange rates affect the economy not only through the competitiveness of exports but also through a financial channel. The financial channel goes in the opposite direction to the competitiveness channel in that a stronger currency goes hand-in-hand with ...

Foreign Safe Asset Demand for US Treasurys and the Dollar

By Zhengyang Jiang, Arvind Krishnamurthy, and Hanno Lustig

AEA Papers and Proceedings, May 2018

We present theory showing that the spot dollar exchange rate reflects the value of all future convenience yields that foreign investors assign to US Treasuries. The convenience yield also creates wedge, the Treasury-based dollar basis, between the yield o...

Trade Invoicing, Bank Funding, and Central Bank Reserve Holdings

By Gita Gopinath and Jeremy C. Stein

AEA Papers and Proceedings, May 2018

We develop a model that shows how the currency denomination of a country's imports influences the funding structure of its banking system, and in turn, the currency composition of its central bank's reserve holdings. The link between the dollar's role in ...

The Welfare Consequences of Income-Induced Expenditure Switching

By Rudolfs Bems and Julian Di Giovanni

AEA Papers and Proceedings, May 2018

Bems and di Giovanni (2016) establish that income-induced expenditure switching (IIES) from foreign goods to cheaper domestic substitutes played a significant role in external rebalancing during the 2008–2009 financial crisis in Latvia. In this paper, w...

Wealth Redistribution after Exchange Rate Devaluations

By Andres Drenik, Gustavo Pereira, and Diego J. Perez

AEA Papers and Proceedings, May 2018

We document that the likelihood of having assets in foreign currency is increasing in households' income within many emerging economies. This pattern leads to heterogeneous exposures of wealth to exchange rate movements. We analyze the redistribution of l...

What Is the Impact of Food Stamps on Prices and Products Variety? The Importance of the Supply Response

By Xavier Jaravel

AEA Papers and Proceedings, May 2018

Comparing US states that implemented policies generating state-specific variation in the take-up rate for food stamps, I find that food stamp eligible households experienced lower inflation and a faster increase in product variety in states with a larger ...

The Geographic Spread of a Large Devaluation

By Javier Cravino and Andrei A. Levchenko

AEA Papers and Proceedings, May 2018

Cravino and Levchenko (2017) establish that the 1994 Mexican peso devaluation raised the prices of consumption baskets of low-income households substantially more than the prices of the consumption baskets of high-income households. In this paper, we expl...

Through a Crystal Ball Darkly: The Future of Monetary Policy Communication

By Alan S. Blinder

AEA Papers and Proceedings, May 2018

I make six predictions about the future of central bank communication about monetary policy. Some are made with great confidence, like: transparency will increase over time. Others are far riskier, like: attempts to communicate with the general public, th...

Central Bank Forward Guidance and the Signal Value of Market Prices

By Stephen Morris and Hyun Song Shin

AEA Papers and Proceedings, May 2018

Central banks use forward guidance to steer market expectations of future monetary policy moves. At the same time, they rely on market prices to gauge the likely path of the economy and the appropriate stance of monetary policy. This two-way flow between ...

Central Bank Communications and the General Public

By Andrew Haldane and Michael McMahon

AEA Papers and Proceedings, May 2018

Despite the recent revolution in central bank communication, it is unclear the general public have benefitted from these enhanced central bank communications. We first analyze the growth of communication and some reasons that the public may have missed th...

The "Standard Error" of Event Studies: Lessons from the 2016 Election

By Justin Wolfers and Eric Zitzewitz

AEA Papers and Proceedings, May 2018

The 2016 Election offers an unusually stark warning about the limitations of event studies. In four separate pre-election event windows, financial market responses to shifts in electoral probabilities were consistent with expectations that a surprise Trum...

Unequal Rewards to Firms: Stock Market Responses to the Trump Election and the 2017 Corporate Tax Reform

By Alexander F. Wagner, Richard J. Zeckhauser, and Alexandre Ziegler

AEA Papers and Proceedings, May 2018

Massive dollars shuttled back and forth among firms on the twisted path to and passage of the 2017 tax reform. Prices of individual stocks responded to the difference between initial and revised expectations. From the bill's initiation in the House to fin...

Economic Expectations, Voting, and Economic Decisions around Elections

By Gur Huberman, Tobias Konitzer, Masha Krupenkin, David Rothschild, and Shawndra Hill

AEA Papers and Proceedings, May 2018

Survey respondents who associate themselves with the "winning team" in an election, substantially increase their expectations for their stock market, but only modestly increase their expected household economic well-being. The impact of the election outco...