International Finance and Macroeconomics

Article excerpt

The NBER's Program on International Finance and Macroeconomics met in Cambridge on March 18. NBER Research Associates Menzie D. Chinn, University of Wisconsin, Madison, and Andres Velasco, Harvard University, organized this program:

Linda S. Goldberg, Federal Reserve Bank of New York, and Michael W. Klein, NBER and Tufts University, "Establishing Credibility: Evolving Perceptions of the European Central Bank" Discussant: John H. Rogers, Federal Reserve Board

Anna Pavlova, MIT, and Roberto Rigobon, NBER and MIT, "Flight to Quality, Contagion, and Portfolio Constraints" Discussant: Gita Gopinath, NBER and University of Chicago

Ross Levine, NBER and University of Minnesota, and Sergio L. Schmukler, World Bank, "Internationalization and the Evolution of Corporate Valuation" (NBER Working Paper No. 11023) Discussant: Anusha Chari, University of Michigan

Cedric Tille, Federal Reserve Bank of New York, "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations" Discussant: Pierre-Olivier Gourinchas, NBER and University of California, Berkeley

Doireann Fitzgerald, University of California, Santa Cruz, "A Gravity View of Exchange Rate Disconnect" Discussant: Nelson Mark, NBER and University of Notre Dame

Giancarlo Corsetti, European University; Philippe Martin, University of Paris-1 Pantheon Sorbonne; and Paolo Pesenti, Federal Reserve Bank of New York, "Productivity Spillovers, Terms of Trade, and the Home Market Effect" Discussant: Mark Melitz, NBER and Harvard University

The credibility of a central bank's anti-inflation stance, a key determinant of its success, may reflect institutional structure or, more dynamically, the history of policy decisions. The first years of the European Central Bank (ECB) provide a natural experiment for considering whether, and how, central bank credibility evolves. In this paper, Goldberg and Klein first present a model demonstrating how the high-frequency response of asset prices to news reflects market perceptions of the anti-inflation stance of a central bank. Empirical tests of this model, regressing both the change in the slope of the German yield curve and the change in the euro/dollar exchange rate on the surprise component of U.S. price news, suggest significant breaks in the market's perception of the policy stance of the ECB during its first five years of operation. The dates of these breaks are linked to the policies undertaken by the ECB. Similar tests on the response of the slope of the U.S. yield curve to price news during this period fail to find comparable breaks in market perceptions of the conduct of monetary policy by the Federal Reserve.

Pavlova and Rigobon examine the co-movement among stock market prices and the terms of trade within a three-country, Center-Periphery dynamic equilibrium model in which agents in the Center country face portfolio constraints. In this model, international transmission occurs through the terms of trade, through the common discount factor for cash flows, and finally through an additional channel reflecting the tightness of the portfolio constraints. Portfolio constraints generate endogenous wealth transfers to or from the Periphery countries. These implicit transfers are responsible for creating contagion among the terms of trade of the Periphery countries, as well as among their stock market prices. Under a portfolio constraint limiting investment of the Center country in the stock markets of the Periphery, stock prices also exhibit a flight to quality. A negative shock to one of the Periphery countries depresses stock prices throughout the Periphery, while boosting the stock market in the Center.

By documenting the evolution of Tobin's "q" before, during, and after firms internationalize, Levine and Schmukler provide evidence on the bonding, segmentation, and market timing theories of internationalization. …