Recent Papers
Money Market Rates And Implied CCAPM Rates: Some International Evidence
Quarterly Review of Economics and Finance, Vol. 45, No. 4, Sept 2005, pp. 699 - 729
Abstract: New Neoclassical Synthesis models equate the money market rate, used as the instrument of monetary policy, to the implied CCAPM rate that satisfies the consumption Euler equation of a representative consumer. These models imply that the two rates should be perfectly correlated and move in the same direction. This paper identifies monetary policy shocks within six of the G7 countries and examines the relative movement of real money market and implied real CCAPM rates. The correlation between the two rates are low and often negative for all the countries. The key result is that an increase in the nominal interest rate leads to a fall in the implied CCAPM rate. Modifying preferences and incorporating habit still yields the same result. The findings suggest that the movement of these two rates implied by the transmission mechanism of monetary policy in NNS models cannot be reconciled through the consumption Euler equation. Moreover, the results argue in favour of models, like limited participation models, which model the transmission mechanism differently.
JEL Classification: E00, E43, E52, E58
Keywords: Consumtpion Euler equation; Monetary Policy Shocks; Transmission Mechanism of Monetary Policy
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The Effects of Small Sample Bias in Threshold Autoregressive (TAR) Models
Economics Letters, forthcoming
Abstract: This paper investigates Threshold Autoregressive (TAR) models that contain a limited number of observations in some regimes. Simulations show that within the context of the real exchange rate literature, parameter estimates exhibit significant small sample bias even with long time series data. These distortions create substantial power losses in attempting to identify values of coefficients from data.
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A Comparison of Nonlinear Exchange Rate Models: An Empirical Investigation,
with Stuart Glosser
submitted to Applied Financial Economics
Abstract: A recent innovation in modeling exchange rates has been the use of nonlinear techniques such as threshold autoregressive models and its smooth transition variants. This paper investigates the smooth transition autoregressive (STAR) modeling strategy in an application to real exchange rates. The key findings are as follows. First, using the methodology advocated by Teräsvirta (1994), we find evidence of nonlinear dynamics for several of the spot dollar real exchange rates using monthly data on five of the G7 countries. However, once estimated, we find that the STAR specification is appropriate for only one of the three exchange rate series indicated to be an ESTAR process. Moreover, using simulations, we show that the underlying methodology used to detect nonlinearities in the data exhibit substantial size biases, which we attribute to influential observations. We also investigate an alternative nonlinear specification and find that we can model the dollar-sterling and the dollar-lira real exchange rates better as an open-loop TAR process instead of a SETAR process.
JEL Classification: F30
Keywords: Nonlinear models of exchange rates, threshold models, ESTAR, TAR, PPP.
Demutualization: A Hazard Analysis of the Conversion of Former Credit Unions to Publicly Traded Financial Institutions,
with Russell Kashian
Works In Progress
The Impact of Temporal Sampling and Temporal Aggregation as Explanations for the Nominal Exchange Rate Puzzle
Abstract: This paper investigates whether temporal biases arising from sampling and aggregation can be used to explain the unusual persistence in the nominal exchange rate - what is referred to as the noninal exchange rate puzzle. I use daily exchange rate data to construct lower frequency datasets, and then estimate the half-life using the aggregated data. The key findings in the paper are that estimates of the half-life using daily data are lower than those found when estimated using lower frequency data. I go on to show that biases exist from temporal sampling and aggregation and calculate these explicity using Monte Carlo simulations. However, even when the magnitude of the biases are taken into account, I find that the nominal exchange rate puzzle remains.
Heterogeneity and Limited Participation: Implication For Interest Rate Movements
(Working Title), (April 2003), Georgetown University
The focus of this paper is to examine the transmission mechanism of monetary policy and its implications for movements in real interest rates within a limited participation framework. I attempt to resolve the puzzle highlighted by Canzoneri, Cumby and Diba (2002), who find that money market rates and implied CCAPM rates are negatively correlated. In doing so, I would like to reconcile two well-known facts in the literature. The first is the inability of aggregate consumption data in being able to fit the consumption Euler equation. The second is the relative success of micro-level consumption data in being able to do so. My intuition here revolves around asset market frictions. The existence of a wealth distribution within the economy leads households to exhibit different savings behaviour depending on where they lie on the distribution. Households near the top end of the wealth distribution are more likely to save, compared to those near the bottom end who consume out of current income. As a result, only they should respond to changes in interest rates leading the consumption Euler equation to hold for them. Aggregating across all households should lead to the poor relationship seen between aggregate consumption growth and real interest rates.
Foreign Direct Investment Versus Portfolio Investment: A Global Games Approach
(Working Title), (September 2003), with Pietro Cova and Rodrigo Harrison, Georgetown University
Abstract: We present a model of investment under uncertainty about fundamentals, using a global games approach. Goldstein & Razin (2003) show that there is an information based trade-off between foreign direct investment (FDI) and portfolio investment (PI) which rationalizes some well known stylised facts in the literature - the relative volatility and reversibility of foreign direct investment versus portfolio investment. We extend their result and show that uncertainty about fundamentals does not imply a multiplicity of investment outcomes even when there is an information-based trade-off between direct investments and portfolio investments. In our paper, uncertainty about fundamentals actually helps narrow down the set of possible equilibria. Hence we find that the equilibrium outcome does not exhibit co-ordination failure.
JEL Classification: C71, D82, F21
Keywords: Foreign Direct Investment, Portfolio Investment, Global Games, Financial Transparency
PhD Thesis:
Dissertation Title:
The Transmission Mechanism Of Monetary Policy
Masters Thesis:
Dissertation Chapter: (May 2002) Georgetown University
International Observations Of Monetary Policy Shocks Over The Last Three Decades
Abstract: I identify twenty episodes of monetary policy shocks within six of the G7 countries, following the spirit of the Narrative Approach used by Romer and Romer (1989). Some statistics are used to characterise the state of the economies from the backdrop of the 1970's up till recently. Major historical events, like the OPEC oil shocks and the ERM crisis, along with narrative evidence, are then used as a guide to identify 'monetary policy periods', which reflect the stance of monetary policy at central banks during those events. The significance of these monetary policy periods are then assessed using an instrumental variables approach. The results find the policy periods to be significant in the majority of the countries.
JEL Classification: E00, E52, E58
Keywords: Monetary Policy Shocks; Identification; Narrative Approach
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Disseration Chapter: (January 2003) Georgetown University
The Transmission Mechansim of Monetary Policy In New Neoclassical Synthesis Models
Abstract: This paper examines the transmission mechanism of monetary policy within NNS models in terms of implications for movements in money market and implied CCAPM rates observed within six of the G7 countries. This chapter adopts the Christiano, Eichenbaum & Evans (1999) approach to identifying monetary policy shocks using vector autoregressions in NNS models with power utility and with habit. VAR's are used to trace out the dynamic responses of consumption, inflation and output arising from an exogenous monetary policy shock. These exhibit the typical hump-shaped responses observed in the literature. The results suggest that the movements of these two rates, as implied by the transmission mechanism of monetary policy in NNS models, are inconsistent and cannot be reconciled through the consumption Euler equation. Furthermore, they suggest that the puzzle may be resolved by de-linking real interest rates and consumption growth.
JEL Classification: E00, E43, E52
Keywords: Monetary Policy Shocks; Identification; VARs
Dissertation Chapter: (June 2004) Georgetown University
Reconciling The Effects Of Monetary Policy Actions On Consumption Within A
Heterogeneous Agent Framework
Abstract: The transmission mechanism of monetary policy in NNS models predict that real interest rates and expected consumption growth should be perfectly correlated. The empirical literature on monetary policy documents a `hump-shaped' response of aggregate consumption to a monetary policy action, and finds the correlation between real interest rates and expected consumption growth to be low, and often negative. This paper incorporates heterogeneous agents into a NNS model with nominal inertia. The key findings are that heterogeneity and wage inertia are needed to reconcile these facts. Moreover, a monetary policy shock yields a hump-shaped consumption profile for myopic consumers.
JEL Classification: E27, E47, E52
Keywords: Consumption, Aggregation, Interest Rates, Heterogeneity, Monetary Policy
Download Working Paper Version here (Full version including technical appendix)
MSc Dissertation: (August 1999) University of Bristol
Smooth Transition As An Explanation For PPP Deviations: An Empirical Investigation Of A Nonlinear Adjustment Mechanism.
Abstract: "This paper considers the presence of transaction costs in equilibrium models of real exchange rate determination using the methodology proposed by Michael, Nobay and Peel (1997). Since conventional cointegration tests, which ignore the effects of transaction costs, may be biased towards long run purchasing power parity, inclusion of a nonlinear adjustment mechanism may be more appropriate. Results using monthly data from fifteen developed countries reject the linear framework in favour of an exponential smooth transition autoregressive process for five countries. This would suggest the presence of mean reverting behaviour of PPP deviations for these countries and help explain the mixed results of previous studies."
If you would like a pdf version of these papers, just email me and I will be happy to send it to you.
