Category Archives: IFDP Paper

IFDP 2017-1215: Monetary Policy Uncertainty

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Lucas Husted, John Rogers, and Bo Sun | We construct new measures of uncertainty about Federal Reserve policy actions and their consequences — monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, posi…

IFDP 2017-1214: International Transfer Pricing and Tax Avoidance: Evidence from Linked Trade-Tax Statistics in the UK

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Li Liu, Tim Schmidt-Eisenlohr, and Dongxian Guo | This paper employs unique data on export transactions and corporate tax returns of UK multinational firms and finds that firms manipulate their transfer prices to shift profits to lower-taxed destinatio…

IFDP 2017-1213: Managing Capital Flows in the Presence of External Risks

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Ricardo Reyes-Heroles and Gabriel Tenorio | We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops–large recessions together with abrupt reversals in capital inflows–and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to “overborrowing” and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and stable external interest rates reinforce “overborrowing” and lead to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility. We solve for the optimal policy and argue that the size of a tax on international borrowing that implements the policy depends on two factors, the incidence and the severity of potential future crises. We show quantitatively that these taxes respond to both the level and volatility of interest rates even though optimal decisions in the competitive equilibrium do not respond substantially to changes in volatility, and that the size of the optimal tax is non-monotonic with respect to external shocks.

IFDP 2017-1211: Finance and Inequality: The Distributional Impacts of Bank Credit Rationing

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M. Ali Choudhary and Anil Jain | We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the un…

IFDP 2017-1212: Firm-specific risk-neutral distributions: The role of CDS spreads

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Sirio Aramonte, Mohammad R. Jahan-Parvar, Samuel Rosen, and John W. Schindler | We propose a method to extract individual firms’ risk-neutral return distributions by combining options and credit default swaps (CDS). Options provide information about th…

IFDP 2017-1210: Efficient Public Good Provision in Networks: Revisiting the Lindahl Solution

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Anil Jain | The provision of public goods in developing countries is a central challenge. This paper studies a model where each agent’s effort provides heterogeneous benefits to the others, inducing a network of opportunities for favor-trading. We focus on a classical efficient benchmark – the Lindahl solution – that can be derived from a bargaining game. Does the optimistic assumption that agents use an efficient mechanism (rather than succumbing to the tragedy of the commons) imply incentives for efficient investment in the technology that is used to produce the public goods? To show that the answer is no in general, we give comparative statics of the Lindahl solution which have natural network interpretations. We then suggest some welfare-improving interventions.

IFDP 2017-1209: Interest Rate Volatility and Sudden Stops: An Empirical Investigation

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Ricardo Reyes-Heroles and Gabriel Tenorio | Using a multi-country regime-switching vector autoregressive (VAR) model we document the existence of two regimes in the volatility of interest rates at which emerging economies borrow from international fina…

IFDP 2017-1208: China’s Current Account: External Rebalancing or Capital Flight?

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Anna Wong | This paper examines an anomaly in China’s current account: its large and rapidly growing travel expenditure. Drawing evidence from counterparty data, Chinese international arrival statistics, and gravity equation models extended to travel t…

IFDP 2017-1207: Goods-Market Frictions and International Trade

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Pawel M. Krolikowski and Andrew H. McCallum | We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time cons…

IFDP 2017-1207: Goods-Market Frictions and International Trade

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Pawel M. Krolikowski and Andrew H. McCallum | We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time cons…