NBER News and Research Archive

4 January 2013

The Federal Reserve, Emerging Markets, and Capital Controls

Sebastian Edwards analyzes weekly data from seven emerging nations -- Brazil, Chile, Colombia, Mexico, Indonesia, Korea, and the Philippines -- all of which had flexible exchange rates and followed some kind of inflation targeting during the period he examines. He confirms that there is interest-rate “pass through” from the U.S. Federal Reserve System to these emerging markets during the 2000s. However, the transmission of interest rate shocks differs -- in terms of impact, steady state effect, and dynamics -- in Latin America and Asia. He also finds little evidence that capital controls can isolate emerging countries from global interest rate disturbances.

3 January 2013

Volatility and Growth

Geert Bekaert and Alexander Popov find a positive short-term relationship between the volatility and skewness of growth in a sample of 110 countries. This relationship is driven by differences in the rate of industrialization, macroeconomic stabilization, and in the discovery and exploitation of natural resources in mostly developing countries. However, in panel data looking at the longer term, they find a negative relationship between volatility and skewness, driven by business cycle variation in rich countries. They suggest that this correlation is due to sudden and short-lived growth spurts in mostly developing countries and sharp crises in mostly developed countries.

2 January 2013

Evidence from Industry IPO Waves

Zhi Da, Ravi Jagannathan, and Jianfeng Shen find that there are time periods when market conditions are more favorable to growth firms and that during those times, firms with strong growth but weak margins may be overvalued. Focusing on a set of firms in the same industry that went public at about the same time in a cluster -- which is called an IPO wave -- they find that firms with relatively high valuations (price-to-book ratios) and historical sales growth rates but low gross margins during their first three years after the IPO wave under-performed their industry peers by more than 1 percent per month during the subsequent four-year period.

31 December 2012

Information and College Access

Phil Oreopoulos and Ryan Dunn analyze the results of a small field experiment in which students from disadvantaged high schools in Toronto were invited to participate in two short internet surveys. They could receive $20 for their participation. At the end of the first survey, half of the students, selected at random, were shown a 3-minute video describing the costs and benefits of post-secondary education and how to make it affordable. Three weeks later, all the students were asked to complete a second survey, with questions about their impressions of the costs and benefits of post-secondary education, as well as their own educational attainment expectations. The students who had seen the video were more convinced of the benefits of continuing their education, less concerned about the costs, and they reported themselves more likely to go on to post-secondary school.

28 December 2012

Quiet Bubbles

The credit bubble of 2003-7 is often equated with earlier episodes, like the Internet boom. But while credits were over priced in this period, like Internet stocks a decade earlier, Harrison Hong and David Sraer show that the two periods were quite different. Equity bubbles are "loud" -- meaning that price and volume move together -- because investors speculate on the capital gains they will achieve from reselling to more optimistic investors. As for debt, the resale option is limited, so debt bubbles require that investors be optimistic -- that optimism leads to less speculative trading, because investors view debt as safe and having only a limited upside. Therefore, debt bubbles are "quiet": high price comes with low volume.

27 December 2012

Mismeasurement of Pensions Before and After Retirement

Alan Gustman, Thomas Steinmeier, and Nahid Tabatabai demonstrate that Current Population Survey (CPS) data on pension incomes received in retirement understate the full contribution of pensions to the support of retirees. One reason is that the CPS ignores irregular payments from pensions. Another is that some pension wealth that was accumulated prior to retirement, and would be measured in pre-retirement surveys, “disappears” at retirement. Sixteen percent of pension wealth is transformed into some other form at the time of disposition and thus not counted in the CPS, and for those with defined benefit pensions, 12 percent of the benefit is transformed in such a way that it is not counted as pension income after retirement.

26 December 2012

Arbitrage Opportunities in the Foreign Exchange Markets

Takatoshi Ito, Kenta Yamada, Misako Takayasu, and Hideki Takayasu ask whether and how often “free lunch opportunities” – defined as situations when the bid price exceeds the ask price -- arise in the foreign exchange market, and how quickly they disappear. They analyze data from the major inter-bank trading platform for spot exchange rates, the EBS electronic broking services, and find that with computerized trading (as opposed to human keystrokes) it has become easy for banks to search for and take advantage of every profit opportunity within seconds. However, “free lunch opportunities” do not last long: the probability of disappearance within one second was less than 50 percent in 1999 but increased to about 90 percent by 2009. The researchers show that these changes were the result of heavier use of algorithmic (program) trading and direct connection of banks’ computers to the trading platform, as well as to wide-spread usage of Primary Customer system, in which less-credit-worthy banks, by paying a fee, can borrow the name of high-credit-worthy banks that have better trading opportunities with tighter bid-ask spread.

24 December 2012

Vulnerable Banks

Robin Greenwood, Augustin Landier, and David Thesmar study data on the sovereign bond exposures of a large set of European banks during the 2010-11 sovereign debt crisis. They use these exposures to estimate the potential spillovers that could occur during bank deleveraging precipitated by sovereign downgrades or defaults, and they document a correlation between their estimates of bank vulnerability and the equity drawdowns experienced by European banks in 2010 and 2011. They further find that size caps, or forced mergers among the most exposed banks, do not reduce systemic risk very much. On the other hand, modest equity injections, if distributed appropriately between the most systemic banks, can cut the vulnerability of the banking sector to deleveraging by more than half.

21 December 2012

The Long-Run Impacts of Childhood Access to the Safety Net

Hilary Hoynes, Diane Whitmore Schanzenbach, and Douglas Almond analyze data from the Panel Study of Income Dynamics on family background and county of residence in early childhood, and on later adult health and economic outcomes. They find that access to the U.S. Food Stamp Program, which was rolled out across U.S. counties at various times between 1961 and 1975, was correlated with outcome measures decades later. They conclude that access to food stamps in childhood leads to a significant reduction in the incidence of obesity, high blood pressure, and diabetes. Women whose families received food stamps are also more economically self sufficient as adults than women of similar background whose families did not receive them.

20 December 2012

The Spatial Diffusion of Technology

Diego Comin, Mikhail Dmitriev, and Esteban Rossi-Hansberg study the diffusion over time and space of 20 major technologies in a sample of 161 countries over the last 140 years. They are specifically interested in the presence of cross-country correlations in the adoption of technology. They find that technology diffuses more slowly to locations that are farther away from leaders in the adoption of technology, especially when the countries in question are rich, and when the distance between them is measured along the south-north dimension. The researchers conclude that geography plays a significant role in determining technology diffusion across countries.

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