2007

0709

Gasoline Content Regulation as a Trade Barrier: Do Boutique Fuels Discourage Fuel Imports?
Adriana Z. Fernández, Robert W. Gilmer and Jonathan L. Story
Abstract: This paper examines the impact of Clean Air Act Amendments of 1990 (CAAA) environmental regulations on U.S. motor gasoline import patterns. Following the damage to U.S. petroleum refining infrastructure from hurricanes Katrina and Rita, the federal government provided temporary relief for several weeks from so-called boutique fuel specifications designed to improve air quality in certain regions of the country. These temporary waivers increased marketers' ability to sell gasoline originally destined for specific regional markets into a greater number of markets. We hypothesize that these same waivers also encouraged gasoline imports more than increased prices would have alone. We test our hypothesis using two analyses. The first consists of a simple transfer function analysis designed to separate price effects (and thus effects of refinery closures) from the effects of regulatory relief. The second analysis consists of a natural experiment comparing the primary recipient of regulatory relief—the Gulf Coast gasoline market— to the rest of the United States. Both analyses suggest that the CAAA-related specifications prevent a substantial amount of gasoline imports from entering the United States under normal circumstances.

0708

The Minimum Wage and Latino Workers
Pia M. Orrenius and Madeline Zavodny
Published as: Orrenius, Pia M. and Madeline Zavodny (2011), "The Minimum Wage and Latino Workers," in Latinos and the Economy: Integration and Impact in Schools, Labor Markets and Beyond, ed. David L. Leal and Stephen Trejo (New York: Springer), 169-191.
Abstract: Because Latinos comprise a large and growing share of the low-skilled labor force in the U.S., Latinos may be disproportionately affected by minimum wage laws. We compare the effects of minimum wage laws on employment and earnings among Hispanic immigrants and natives compared with non-Hispanic whites and blacks. We focus on adults who have not finished high school and on teenagers, groups likely to earn low wages. Conventional economic theory predicts that higher minimum wages lead to higher hourly earnings among people who are employed but lower employment rates. Data from the Current Population Survey during the period 1994–2005 indicate that there is a significant disemployment effect of higher minimum wages on Latino teenagers, although it is smaller for foreign- than native-born Latinos. Adult Latino immigrants are less affected by minimum wage laws than other low-education natives. We investigate whether skill levels and undocumented status help explain these findings.

0707

National, Regional and Metro-Specific Factors of the U.S. Housing Market
Dong Fu
Abstract: We build a dynamic latent factor model to decompose housing prices in major U.S. metropolitan areas into national, regional, and metro-specific idiosyncratic factors, in order to distinguish the different dynamics behind housing price movements. We find that there is a distinctive national factor that has contributed about one-fourth of the individual metropolitan's housing price volatility. The regional factor accounts for another one-fourth and the idiosyncratic factor explains about half of housing price fluctuations. However, at the regional level, the factors' contributions vary across a fairly wide range. Although it only has modest explanatory power of housing price volatility, the national factor seems to account for much of the price increase in the current housing boom. Interestingly, the regional factor exerts negative influence on housing prices in a fairly large number of metros lately, only to be outweighed by the national factor's positive contribution. We also explore the possible forces influencing the national factor of housing price movements, including monetary policy, population growth, real economic activity, general inflation and other asset prices.

0706

Pricing-to-Market with State-Dependent Pricing
Anthony Landry
Abstract: This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation.

0705

Inflation Expectations, Real Interest Rate and Risk Premiums—Evidence from Bond Market and Consumer Survey Data
Dong Fu
Abstract: This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation.

0704

Real Business Cycle Dynamics Under First-Order Risk Aversion
Jim Dolmas
Abstract: This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle mode. Although FORA preferences represent a sharp departure from the expected utitility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible effect on thr model's second moment implications. In fact, for what I argue is an empirically reasonable "ballpark" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.

0703

What Drives Natural Gas Prices?
Stephen P. A. Brown and Mine K. Yücel
Published as: Brown, Stephen P.A. and Mine K. Yücel (2008), "What Drives Natural Gas Prices?," The Energy Journal 29 (2): 45-60.
Abstract: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes.

0702

The Impact of Evolving Labor Practices and Demographics on U.S. Inflation and Unemployment
John V. Duca and Carl M. Campbell III
Abstract: Since the early 1990s, NAIRU estimates have declined and unemployment duration has risen relative to the unemployment rate. These developments may have arisen from the aging of the workforce or practices reducing job turnover. We assess the internal consistency of these hypotheses using simulation methods and test their external consistency using modified NAIRU models. We find that demographics cannot fully account for changes in the NAIRU, consistent with Staiger, Stock, and Watson (2001) and in contrast to Shimer (1998, 2001). Instead, our results attribute shifts in the NAIRU and duration to a combination of shifts in demographics and job turnover.

0701

Home Bias, Exchange Rate Disconnect, and Optimal Exchange Rate Policy
Jian Wang
Published as: Wang, Jian (2010), "Home Bias, Exchange Rate Disconnect, and Optimal Exchange Rate Policy," Journal of International Money and Finance 29 (1): 55-78.
Abstract: This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that the home bias in consumption is important to duplicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest-rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is strongly supported by the data. Then a second-order accurate solution method is employed to solve the model and compare the conditional welfare under different policy regimes. The results suggest that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model also suggests no welfare gain from the international monetary cooperation, which extends Obstfeld and Rogoff's (2002) findings to a DSGE model.

Globalization Institute Working Papers

Globalization Institute No. 5

Production Sharing and Real Business Cycles in a Small Open Economy 

José Joaquín López

Abstract: Production sharing and vertical specialization account for a significant share of trade between developed and developing countries. The Mexican maquiladora industry provides an ideal example of production sharing in a small open economy. The typical "maquila" imports most of its inputs from and exports all its output to the United States. This article tries to determine to what extent production sharing, as in the Mexican maquiladora, can serve as a transmission mechanism of business cycles in small open economies. We utilize a simple two-sector small open economy model of real business cycles that incorporates production sharing in the traded sector. The transmission channel of business cycles is introduced in the model via demand shocks to the traded sector, originated in the United States' manufacturing sector. The model is successful in replicating real business cycles statistics for the maquiladora sector, as well as some of the characteristics of the nontraded sector.

Globalization Institute No. 3

International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities

Charles Engel and Jian Wang
Published as: Engel, Charles and Jian Wang (2010), "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," Journal of International Economics 83 (1): 37-52.

Abstract: Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short-run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.

Globalization Institute No. 2

A Monetary Model of the Exchange Rate with Informational Frictions
Technical Appendix  (For code and dataset files, contact the author )

Enrique Martínez-García
Published as: Martínez-García, Enrique (2010), "A Model of the Exchange Rate with Informational Fractions," The B.E. Journal of Macroeconomics 10 (1), Contributions: Article 2.

Abstract: Data for the U.S. and the Euro area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption response to currently unobservable shocks, mostly foreign. Accordingly, the real exchange rate becomes more volatile to induce enough expenditure-switching across countries for all markets to clear. Second, differences in the degree of price stickiness across markets and firms weaken the correlation between the nominal exchange rate and the relative CPI price. This correlation is important to match the moments of the real exchange rate. The model suggests that asymmetric information and differences in price stickiness account better for the stylized facts without relying on an average contract duration for the U.S. larger than the current empirical estimates.