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Globalization and Monetary Policy Institute 2011 Annual Report, Federal Reserve Bank of Dallas Contents Letter from the President 1 Hyperinflation in Zimbabwe 2 The Conquest of Mexican Inflation 13 Public Perception of Globalization’s Impact Shapes Trade Realities 21 Summary of Activities 2011 26 Annual Public Lecture 29 Microeconomic Aspects of the Globalization of Inflation: A Joint Conference with the Swiss National Bank 30 Immigration Policy in an Era of Globalization: A Joint Conference with Southern Methodist University 35 Dynamic Stochastic General-Equilibrium Modeling: 10th Annual Advances in Econometrics Conference 39 Working Papers Issued in 2011 43 New Colleagues at the Institute 45 Institute Staff, Advisory Board and Senior Fellows 47 Global Economic Data Resource Introduced in 2011 48 On the cover: Copy of the 1602 Chinese map Kunyu Wanguo Quantu, or Map of the Ten Thousand Countries of the Earth, created by Italian Matteo Ricci for the Wanli emperor. Published by the Federal Reserve Bank of Dallas, February 2012. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265-5906. This publication is available on the Internet at www.dallasfed.org. Letter from the President With the public finances of so many countries The report also contains an article by Chris- in a parlous state, central bank independence has tian Winge on the factors that drive popular sup- never been more important, ensuring that central port for free trade and open borders. Few things bankers are able to deliver on their mandates. The make it harder to sustain political support for open Federal Reserve Bank of Dallas’ Globalization and markets than economic distress and uncertainty, Monetary Policy Institute annual report for 2011 making it all the more important that we return to contains two articles that illustrate how crucial vigorous growth and low unemployment. central bank independence is to monetary and price stability. The first, by Janet Koech, documents how 2011 was another good year for our globalization research program. The institute issued the 100th working paper in a dedicated series Zimbabwe became the first country to experience dating back to 2007 and also hosted its inaugural hyperinflation in the 21st century. It is a sad tale public lecture, delivered by Jürgen Stark, then of how political pressure to monetize unsustain- chief economist of the European Central Bank. able government spending can be the undoing of We were fortunate to be able to launch this lecture a country and reverse decades of economic devel- series with such a distinguished public servant. A opment. The second article, by Mark Wynne and key message of his lecture was the importance of Ed Skelton, looks at Mexico’s experience over the conducting monetary policy with an eye toward past two decades and makes for happier reading. medium-term price stability—and the critical role It shows that by embracing sound central banking central bank independence plays in ensuring such practice—specifically, by enshrining the indepen- an outcome. dence of the Banco de México in the Mexican constitution and adopting inflation targeting—Mexico was able to end the vicious cycle of financial instability that had plagued it from the 1970s. To be sure, Mexico still faces significant development challenges, but monetary instability is no longer the obstacle to growth that it once was. Richard W. Fisher President and CEO Federal Reserve Bank of Dallas Central bank independence has never been more important, ensuring that central bankers are able to deliver on their mandates. 2 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Hyperinflation in Zimbabwe countries. Zimbabwe, once considered the breadbasket of Africa, was reduced to the continent’s beggar within a few years; its citizens were pushed into poverty and often forced to emigrate. The country’s experience shows how a relatively self-sustaining nation at independence fell victim to out-of-control inflation and the severe erosion of wealth. The causes of Zimbabwe’s hyperinflation, its effects and how it was stopped are particularly instructive. In his seminal work, Phillip Cagan defined hyperinflation as beginning when monthly inflation rates initially exceed 50 percent. It ends in the month before the rate declines below 50 percent, where it The historic Zimbabwean $100 trillion bill is now a novelty item. must remain for at least a year (Cagan 1956). ZimOne hundred trillion dollars—that’s 100,000,000,000,000—is the largest denomination babwe entered the hyperinflationary era in March 2007; the period ended when the nation abandoned of currency ever issued.1 The Zimbabwean govern- its currency in 2009 (Chart 1). The evolution of the Zimbabwean dollar in the post-independence period ment issued the Z$100 trillion bill in early 2009, among the last in a series of ever higher denomina- is shown in the timeline on page 10. Bouts of hyperinflation are mostly accompations distributed as inflation eroded purchasing power. When Zimbabwe attained independence nied by rapidly increasing money supply needed in 1980, Z$2, Z$5, Z$10 and Z$20 denominations to finance large fiscal deficits arising from war, circulated, replaced three decades later by bills in revolution, the end of empires and the establish- the thousands and ultimately in the millions and ment of new states. Hyperinflation, as Cagan trillions as the government sought to prop up a defined it, initially appeared during the French weakening economy amid spiraling inflation. Revolution, when the monthly rate peaked at 143 Shortly after the Z$100 trillion note began percent in December 1795. More than a century circulating, the Zimbabwean dollar was officially elapsed before hyperinflation appeared again. abandoned in favor of foreign currencies. From During the 20th century, hyperinflation occurred 2007 to 2008, the local legal tender lost more 28 times, often associated with the monetary than 99.9 percent of its value (Hanke 2008). This chaos involving two world wars and the collapse marked a reversal of fortune from independence, of communism (Bernholz 2003). Zimbabwe’s hy- when the value of one Zimbabwe dollar equaled perinflation of 2007–09 represents the world’s 30th US$1.54. occurrence as well as the continent’s second bout Zimbabwe’s extreme and uncontrollable (after a 1991–94 episode in the Congo).2 inflation made it the first—and so far only—country in the 21st century to experience a hyperinflationary episode. Hyperinflation devastates people and Zimbabwe’s History Zimbabwe is located in the southern region of Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 3 the African continent and is bounded to the north Zimbabwe African Peoples Union (ZAPU) under by Zambia, to the east by Mozambique, to the Joshua Nkomo. south by South Africa and to the west by Botswana In the early 1960s, as colonial rule ended and the Caprivi Strip of Namibia. At 390,757 square throughout the continent and as African-majority kilometers (150,871 square miles), Zimbabwe is governments assumed control in neighboring about the size of California, with a population the Northern Rhodesia (now Zambia) and Nyasa- United Nations estimated at 12.7 million in 2011. land (now Malawi), the white-minority Southern Its capital is Harare. The nation’s name is derived Rhodesia government led by Ian Smith issued from historical structures called “Great Zimbabwe” a Unilateral Declaration of Independence from (houses of stone), the largest stone sculptures in the United Kingdom on Nov. 11, 1965. The move Africa after the pyramids of Egypt. scuttled Britain’s plan for a multiracial democracy, The country was settled by the British in 1890, prompting sanctions from the former colonial when Cecil Rhodes, a businessman who made his power, which deemed the independence declara- fortune mining diamonds in South Africa, pushed tion illegal. Still, the white-minority government northward in search of more bounty. Rhodes claimed nation status as the Republic of Rhodesia, successfully persuaded the British to grant a royal or simply Rhodesia, in 1970. charter to his British South Africa Co., which he A civil war ensued, with African guerrilla used to promote the colonization of the region. groups under ZAPU and ZANU leadership taking The country was renamed Southern Rhodesia in 1895 in his honor. It became a self-governing British colony in October 1923, following a 1922 referendum. In 1953, in the face of African opposition, Britain consolidated the colonies of Rhodesia (Northern and Southern Rhodesia) with Chart 1 Zimbabwe Consumer Price Inflation Soars Amid Hyperinflationary Period Percent, month/month 500 Nyasaland into the Federation of Rhodesia and 450 Nyasaland. Growing African nationalism and dis- 400 sent, particularly in Nyasaland, persuaded Britain 350 to dissolve the union in 1963 and form three 300 colonies—Northern Rhodesia, Southern Rhodesia 250 and Nyasaland. 200 During much of the colonial period, from 100 and political involvement, as the local population 50 mostly quickly ended, the leaders imprisoned. Two political parties that formed in the 1960s proved resilient—the Zimbabwe African National Union (ZANU) under Robert Mugabe and the Consumer Prices Stabilize in 2009 Percent, month/month 2 1 0 –1 –2 –3 –4 2009 2010 2011 150 1890 to 1979, blacks and whites fought over land resisted marginalization. Several uprisings were July 2008, inflation at 2,600.2 percent March 2007, inflation exceeds 50 percent 0 –50 ’80 ’83 ’86 ’89 ’92 ’95 ’98 ’01 ’04 ’07 ’10 SOURCES: International Monetary Fund’s International Financial Statistics database; Reserve Bank of Zimbabwe’s Monthly Economic Reviews. 4 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report up arms from bases in Zambia and Mozambique. Z$0.647, and real GDP in 1980 grew 14.6 percent In 1979, an agreement on a new constitution, over 1979 levels (Chart 2). On a per capita basis, transitional arrangements and a ceasefire were real GDP (purchasing-power-parity adjusted) in reached at a conference convened in Lancaster 2005 prices equaled US$232; the unemployment House in London. Following elections the next rate was 10.8 percent in 1982. February, Mugabe became the first prime minister By July 2008, when Zimbabwe’s Central Sta- and formed a coalition government that included tistical Office released its last inflation figures for former ZAPU leader Nkomo. Zimbabwe became a that year, the month-over-month (nonannualized) recognized independent nation on April 18, 1980. rate had reached 2,600.2 percent—more than 231 The Mugabe government has ruled ever since.3 million percent on a year-over-year basis. The International Monetary Fund (IMF) put the annual Before and During Hyperinflation To trace the economy’s deterioration and un- inflation rate in September 2008 at 489 billion percent, with some independent analysts estimating it derstand the causes of the extreme price changes, much higher.4 The largest currency denomination it helps to compare 1980 (when newly indepen- in 2009 was the Z$100 trillion note. However, the dent Zimbabwe left behind its identity as Rhode- most widely used currencies in almost all transac- sia) with 2008–09, the height of hyperinflation. tions were the U.S. dollar, South African rand and At independence, annual inflation was 5.4 the Botswana pula. At the official exchange rate percent; month-to-month inflation averaged 0.5 on Dec. 31, 2008, US$1 traded for Z$4 million, percent. The largest currency denomination was although parallel black-market rates were much Z$20, and the Zimbabwean dollar was the most greater. In 2008, real GDP contracted 17 percent widely used currency—involved in more than 95 (Chart 2), with per capita GDP at US$136—41 percent of transactions. Officially, US$1 bought percent below what it was at independence. The unemployment rate stood at 94 percent, according to a report by the U.N. Office for the Coordination of Humanitarian Affairs, and the country became the bread beggar of Africa (Makochekanwa 2009).5 Zimbabwe’s Inflation Nightmare Zimbabwe’s economic crisis and subsequent hyperinflation were preceded by several years of economic decline and mounting public debt. Weakening began in 1999, coinciding with periods of drought that adversely affected the agriculturally dependent nation. External debt as a share of GDP increased to 119 percent in 2008 from 11 percent in 1980. Land reallocation in 2000 and 2001, which redistributed large agricultural tracts, depressed commercial farming output. Output fell 50 percent between 2000 and 2009, led by a decline in the country’s major foreign-exchange cash crop, tobacco, which slid 64 percent in 2008 from 2000 Signs such as this one appeared in Zimbabwe during its hyperinflation episode. Photo credit: Eugene Baron levels (Chart 3). Commercial production of maize, Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 5 the national staple, dropped 76 percent during the same time (FAOSTAT Database 2011). Uncontrolled government spending accompanied the weak economy. In 1997, authorities approved unbudgeted expenditures, amounting to almost 3 percent of GDP, for bonuses to approxi- Chart 2 Zimbabwe Real GDP Contracts During Most of the Past Decade Percent, year/year 20 15 mately 60,000 independence war veterans. Efforts to cover the payment with tax increases failed after trade-union-led protests, prompting the government to begin monetization (printing additional 10 5 0 money to “pay” for the expenditure). In 1998, the government spent another significant share of gross national product (GNP) for its involvement in Congo’s civil war. Additionally, authorities faced –5 –10 –15 debt obligations to the IMF. In 2006, Zimbabwe still had substantial overdue obligations to the –20 ’80 ’85 ’90 ’95 ’00 ’05 ’10 IMF’s Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust, totaling about US$119 million.6 These funds were intended to NOTE: Data plotted are the growth rates of GDP in constant 2000 U.S. prices. SOURCE: World Bank’s World Development Indicators database. foster development and reduce poverty. The dire economic conditions prompted a wave of emigration to neighboring countries, contributing to a population and labor force decline beginning in 2003 (Chart 4). Zimbabwe emigration totaled 761,226, about 6 percent of Chart 3 Zimbabwe’s Tobacco Production Declines Billions of tons 300 the population in 2005. This number increased to 1.25 million in 2010, representing 9.9 percent of 250 the population (World Bank 2008 and 2011). With a shrinking tax base and revenue that could not 200 support expenditures and obligations, the government printed yet more money. Currency lost value at exponential rates amid an imbalance between economic output and the increasing money supply (Chart 5). 150 100 50 Hyperinflation and economic troubles were so profound that by 2008, they wiped out the wealth of citizens and set the country back more than a half century. In 1954, the average GDP per capita for Southern Rhodesia was US$151 per year (based on constant 2005 U.S.-dollar purchasingpower-parity rates). In 2008, that average declined to US$136, eliminating gains over the preceding 53 years (Chart 6). 0 ’80 ’84 ’88 ’92 ’96 ’00 SOURCE: Food and Agriculture Organization of the United Nations. ’04 ’08 6 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Starving Billionaires—Effects of Hyperinflation Zimbabwe’s official annual rate of inflation exceeded 231 million percent in 2008, quickly eroding the currency’s purchasing power. The Economic Times newspaper noted on June 13, 2008, that “a loaf of bread now costs what 12 new cars did a decade ago,” and “a small pack of locally produced coffee beans costs just short of 1 billion Zimbabwe dollars. A decade ago, that sum would have bought 60 new cars.”7 At the height of the hyperinflation, prices doubled every few days, and Zimbabweans struggled to keep their cash resources from evaporating. Businesses still quoted prices in local currency but revised them several times a day. A minibus driver taking commuters into Harare still charged passengers in local currency but at a higher price on As Zimbabwe printed money in higher and higher denominations, nearly everyone was a billionaire—of a worthless currency. Photo credit: Howard Burditt/Reuters the evening trip home. And he changed his local notes into hard currency three times a day.8 The government attempted to quell rampant inflation by controlling the prices of basic commodities and services in 2007 and 2008. Authorities forced merchants—sometimes with police force—to lower prices that exceeded set Chart 4 Weak Economy Squeezes Zimbabwe Population, Labor Force Growth Millions ceilings. This quickly produced food shortages because businesses couldn’t earn a profit selling Millions 5.5 13 Labor force 12 5.0 at government-mandated prices and producers of goods and services cut output to avoid incurring losses. People waited in long lines at fuel stations and stores. While supermarket shelves were 4.5 11 Population 10 4.0 9 3.5 8 3.0 7 2.5 6 2.0 empty, a thriving black market developed where goods traded at much higher prices. Underground markets for foreign exchange also sprang up in ’80 ’84 ’88 ’92 ’96 ’00 SOURCE: World Bank’s World Development Indicators database. ’04 ’08 back offices and parking lots where local notes were converted to hard currencies at much more than the official central bank rate. Some commodities, such as gasoline, were exclusively traded in U.S. dollars or the South African rand, and landlords often accepted groceries and food items as barter for rent. When currency is almost worthless, the use of foreign exchange or barter frequently occurs—a situation previously Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 7 experienced in Germany, Hungary and Argentina in the 20th century. Chart 5 Zimbabwe Dollar Depreciates Sharply During Hyperinflation Era Inflation Is a Monetary Phenomenon Z$/US$, log scale 1E+18 Hyperinflation, which rapidly destroys a 1E+16 currency’s value, is fundamentally a monetary phe- 1E+14 nomenon. Deprived of conventional means of rais- 1E+12 ing revenue, such as taxation, governments borrow 1E+10 without limit from the central bank (Chart 7). 100000000 Then, as inflation accelerates, fiscal policy makers 1000000 begin administering monetary control. 10000 Besides Zimbabwe, there have been 29 other 100 bouts of hyperinflation (Table 1). Recent macro- 1 economic studies focusing on high and sustained .01 levels of inflation offer evidence of a causal rela- .0001 ’80 tionship between variations in money supply and variations in aggregate price levels. In his study of hyperinflation, Cagan (1956) ’88 ’84 ’92 ’96 ’00 ’04 ’08 SOURCE: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011. assessed the statistical relationship between money and price changes by looking at seven instances of hyperinflation from six European countries from 1920 to 1946. Assuming that infladetermination of hyperinflation, Cagan concluded Chart 6 Economic Decline Wipes Out 53 Years of Income Growth in Zimbabwe that the demand for real money balances declined 300 tion expectations played a primary role in the GDP per capita at PPP (2005 US$) as inflation rates increased, contributing to the phenomenon. 250 Milton Friedman’s monetarist view that “inflation is always and everywhere a monetary 200 phenomenon” is based on the quantity theory of money that asserts aggregate prices P and total money supply M are related, according to the following equation, where Y is real output and V is velocity of money—the rate at which money turns 150 1954 GDP per capita level (US$151) 100 50 over in the economy. MxV=PxY Transforming each variable into a growth rate, with lowercase letters denoting percentage changes, the quantity theory of money can be expressed as: p = v + m – y, where p is the rate of inflation and v, m and y are growth rates of velocity, money stock and output, 0 ’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 NOTES: Data used are real GDP per capita (Laspeyres series) in 2005 constant prices. Data reporting started in 1954. SOURCE: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011. 8 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report respectively. The implication of this relationship is that inflation will increase when money supply Chart 7 Zimbabwe Central Bank Government Debt Holdings Jump After 2003 growth exceeds the expansion of real economic activity, assuming that the velocity of money Millions of Z$, log scale (the number of times it changes hands) remains 10000000 unchanged. 1000000 In Zimbabwe, money supply and prices moved in tandem, as expected from the quantity theory of 100000 money. In addition, the velocity of money increased 10000 as people opted to spend immediately rather than hold on to depreciating cash. This rise in velocity as 1000 well as the increase in the stock of money through 100 printing of new currency produced the exponential increase in prices, shown in Chart 8. 10 1 ’80 ’84 ’88 ’92 ’96 ’00 ’04 ’08 NOTE: Central bank’s holdings of government debt were zero or near zero between 1980 and 1989. SOURCE: International Monetary Fund’s International Financial Statistics database. Stopping Spiraling Inflation Expectations play a major role in perpetuating higher prices during bouts of hyperinflation, and the effect of those expectations on money and inflation is amplified relative to other influences, such as the business cycle. To blunt exponential price increases, government finance must change in a credible way so the public believes there is real commitment to eliminating abuses that caused rapid inflation and currency devaluation. Past chronic inflation episodes have been stabilized through the adoption of an independent central bank, an alteration in the fiscal regime and by instituting a credible exchange rate stabilization mechanism. In most cases, price stability was achieved virtually overnight following exchange rate stabilization. For example, Hungary and Germany experienced average monthly inflation rates in the 12 months prior to stabilization of 19,800 and 455.1 percent, respectively. After stabilization, the monthly rates over a year’s time dropped to 1.3 and 0.3 percent, respectively (Vegh 1991). Table 2 shows the monthly averages for the Supermarket shelves emptied because of price controls. Photo credit: Eugene Baron rates of devaluation and inflation before and after the exchange rates were stabilized during eight hyperinflation episodes. Fundamental fiscal policy changes are also needed to ensure the change in fiscal policy regime Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 9 the subsequent budget for 2010 was also set in U.S. Table 1 Hyperinflation in History Country Year(s) France Germany Austria Poland Soviet Union Hungary Greece Hungary Taiwan China Bolivia Nicaragua Peru Argentina Poland Brazil Yugoslavia Azerbaijan Congo (Zaire) Kyrgyzstan Serbia Ukraine Georgia Armenia Turkmenistan Belarus Kazakhstan Tajikistan Bulgaria Zimbabwe Highest inflation per month (percent) 1789–96 143.26 1920–23 29,525.71 1921–22 124.27 1921–24 187.54 1922–24 278.72 1923–24 82.18 1942–45 11,288 1945–46 1.295x1016 1945–49 398.73 1947–49 4,208.73 1984–86 120.39 1986–89 126.62 1988–90 114.12 1989–90 196.6 1989–90 77.33 1989–93 84.32 1990 58.82 1991–94 118.09 1991–94 225 1992 157 1992–94 309,000,000 1992–94 249 1993–94 196.72 1993–94 438.04 1993–96 62.5 1994 53.4 1994 57 1995 78.1 1997 242.7 2007–09 2,600.2* dollars. An estimated four-fifths of all transactions in 2010 took place in U.S. dollars, including most wage payments (Kramarenko et al. 2010). Even after adopting U.S. monetary policy by dollarizing, post-hyperinflation Zimbabwe still faces challenges: rebuilding public finances, instituting and maintaining credible policies to control government spending, reducing poverty and promoting economic growth. Data for 2010 showed encouraging signs of recovery. Real GDP expanded 9 percent from 2009 levels, marking the second year of growth. Inflation subsided to single digits since dollarization and has remained at those levels. According to the Reserve Bank of Zimbabwe, the October 2011 consumer price inflation was 4.2 percent on a year-over-year basis, compared with 4.3 percent in September.10 Real GDP per capita in 2009 increased 4.8 percent from 2008 levels, the second positive reading after nine years (since 1998) of mostly negative growth rates. (continued on page 11) *Zimbabwe’s last official month-to-month recording of inflation by the country’s Central Statistics Office, July 2008, although estimates are much higher. The official annual rate recorded for July 2008 is 231 million percent, and the International Monetary Fund estimated the annual inflation rate for September 2008 at 489 billion percent. SOURCE: Monetary Regimes and Inflation: History, Economic and Political Relationships, by Peter Bernholz, Northhampton, Mass.: Edward Elgar Publishing, 2003, Table 2.1. Chart 8 Inflation, Money Supply Rise in Tandem in Zimbabwe Money supply growth, year/year, log scale 1.0E+21 alters public expectation of future government actions, essential in ensuring continued disinflation. In late 2008, the Zimbabwe dollar was replaced in transactions by widespread dollarization amid hyperinflation. The official demise of the currency occurred in February 2009, when authorities established a multicurrency system. Transactions in Inflation, year/year, log scale 1000000 1.0E+18 100000 1.0E+15 CPI inflation 1.0E+12 1000 1.0E+09 100 1.0E+06 Money supply hard foreign currencies were authorized, and payment of taxes in foreign exchange was subsequently allowed.9 While the South African rand, Botswana pula and the U.S. dollar were granted official status, 10000 10 1.0E+03 1 1.0E+00 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 the U.S. dollar became the principal currency. NOTE: Money supply measure plotted is M3, which is the sum of notes and coins in circulation plus demand, savings and time deposits in the banking system. Budget revenue estimates and planned expendi- SOURCE: Reserve Bank of Zimbabwe’s Monthly Economic Reviews. tures for 2009 were denominated in U.S. dollars, and 10 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Timeline of Currency Denominations and Inflation in Zimbabwe ▼ April 1980 The (first) Zimbabwean dollar replaces the Rhodesian dollar at par, which buys US$1.54. A series of bank notes is issued, ranging from Z$2 to Z$20. ▼ From 1994 to 2006 The Reserve Bank issues a new series of notes, from Z$2 to Z$100. As inflation rises and erodes the currency’s purchasing power, Z$500 and Z$1,000 banknotes are issued from 2001 to 2005. In the first half of 2006, new Z$50,000 and Z$100,000 denominations debut. ▼ Aug. 1, 2006 ▼ July 1, 2008 A Z$100 billion note is issued, about the price of three eggs at the time. ▼ Aug. 1, 2008 Another round of currency reforms is implemented. The government slashes 10 zeros from each second Zimbabwean dollar bill and the third Zimbabwean dollar is valued at 10 billion old dollars (second Zimbabwean dollars). Inflation continues rising. ▼ Sept. 29, 2008 New Z$10,000 and Z$20,000 notes are introduced. The first currency reform is implemented in an effort to contain spiraling inflation. The Zimbabwean dollar is redenominated by lopping off three zeros from the old currency. The new (second) Zimbabwean dollar is revalued at one new dollar = 1,000 old dollars. ▼ Oct. 13, 2008 The new Z$50,000 bill is printed. ▼ July 1, 2007 The Z$500,000 note is introduced, valued at about US$16 at the official exchange rate. ▼ Dec. 4, 2008 The Z$1 million, Z$10 million, Z$50 million and Z$100 million bills appear. Ten days later, the Z$200 million and Z$500 million banknotes debut, followed by the Z$1 billion, Z$5 billion and Z$10 billion notes issued on Dec. 19, 2008. ▼ Dec. 31, 2007 The Z$750,000 (US$25) note begins circulation. ▼ Jan 1, 2008 The Z$1 million, Z$5 million and Z$10 million denominations debut. ▼ April 2, 2008 Z$25 million and Z$50 million bills are introduced. Prices of basic goods are in millions—a T-shirt costs Z$276.5 million, pants Z$2.75 billion. Tomatoes and other local produce are priced in millions. At a restaurant, two beers and water cost Z$1.24 billion. ▼ May 2, 2008 The Z$100 million, Z$250 million and Z$500 million notes debut. Annual inflation reaches more than 100,000 percent. ▼ May 15, 2008 Z$5 billion, Z$25 billion and Z$50 billion notes are printed. ▼ Nov. 5, 2008 Z$100,000 and Z$500,000 notes are issued. ▼ Jan. 12, 2009 The government issues two new denominations: Z$20 billion and Z$50 billion bills. ▼ Jan. 16, 2009 Even higher denominations are issued: Z$10 trillion, Z$20 trillion, Z$50 trillion bills and the largest banknote ever—the Z$100 trillion bill. ▼ Feb. 3, 2009 The Reserve Bank of Zimbabwe introduces the fourth Zimbabwean dollar, with 12 zeros removed from old bills, making 1 trillion old dollars equal to one new dollar. Denominations of the new currency are the Z$1, 5, 10, 20, 50, 100 and 500 notes. However, loss of confidence quickly leads to abandonment of the Zimbabwean dollar in favor of foreign currencies, primarily the U.S. dollar and the South African rand. SOURCES: Data on U.S. dollar equivalence are computed from International Monetary Fund exchange rate data. Dates of currency issuance are from Garry Craig New Zealand (www.garrysue.net). Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 11 Hyperinflation Consequences Zimbabwe is the first country to experience a Table 2 Devaluation, Inflation and Money Growth in Hyperinflations (in percent per month) hyperinflationary episode in the 21st century. Hyperinflation is rare and often associated with wars, regime change and unstable political and economic environments where revenues are insufficient to cover government expenditures and printing more currency becomes a solution. Excess money supply not backed by economic growth leads to a loss of confidence in the currency, which ultimately can result in abandonment of the local currency in favor of foreign ones. Hyperinflation produces adverse impacts— wealth and savings are wiped out within months, and prices of basic commodities become out of reach to many, especially those on fixed incomes. Governments often implement price controls in an attempt to control inflation. This frequently leads to shortages, as producers opt for alternative markets to avoid the mandated price ceilings that don’t cover production costs. A thriving black market ensues, where basic goods and foreign currencies are traded at premium prices. Economies also resort to barter and trade in foreign currencies Country Devaluation rates Inflation rates Austria (October 1922) October 1921–September 1922 October 1922–September 1923 32.6 –0.4 46.0 0.4 35.7 8.7 Poland (February 1924) February 1923–January 1924 February 1924–November 1924 63.7 0.8 66.2 1.2 62.7 11.1 Greece (February 1946) February 1945–January 1946 February 1946–December 1946 — — 27.0 –0.8 31.6 13.4 Taiwan (June 1949) January 1948–May 1949 June 1949–December 1950 — — 30.7 6.7 23.7 11.4 Germany (January 1924) January 1923–December 1923 January 1924–December 1924 409.8 –3.9 455.1 0.3 419.7 12.0 Hungary (April 1924) April 1923–March 1924 April 1924–March 1925 28.0 0.0 33.3 0.2 28.1 8.5 Hungary (August 1946) August 1945–July 1946 August 1946–July 1947 — — 19,800 1.3 12,200 14.2 Bolivia (October 1985) October 1984–September 1985 October 1985–September 1986 44.0 4.9 57.6 5.7 48.5 8.3 NOTES: The date in parentheses following the country name indicates the month in which the exchange rate stabilized. Money refers to notes in circulation, except in Bolivia and Taiwan where it indicates M1—notes in circulation plus demand deposits. when the home currency has lost its value. In Zimbabwe, the printing presses worked SOURCE: “Stopping High Inflation: An Analytical Overview,” by Carlos A. Vegh, International Monetary Fund, IMF Working Paper no. 91/107, November 1991. overtime, delivering ever-increasing currency denominations that lost value faster than they could be printed. The Z$100 trillion bill, issued in January 2009, was the largest denomination in the history Notes of money. At the time of issuance, this note was The Z$100 trillion note was issued after two currency reforms—in 2006 and 2008—where a total of 13 zeros were slashed from currency, making the 100 trillion (1014) note technically equivalent to 1027 pre-2006 Zimbabwean dollars. By this measure, the Z$100 trillion takes the lead as the largest currency ever issued. The 100 million Hungarian B-pengo (1020 pengo) put into circulation in 1946 is historically recognized as the world’s largest currency—but comes in second when Zimbabwe’s currency revaluations are considered. 2 Hungary maintains the top spot for the highest hyperinflation rate, with its monthly rate peaking at 1.3 x 1016 percent in July 1946. 3 Mugabe served as prime minister from 1980 to 1987 and has been president since 1987. 4 Hanke and Kwok (2009) estimated the inflation rate as of December 2008 at 6.5 quindecillion novemdecillion percent (that is, 65 followed by 107 zeros). worth US$300,11 and its value diminished by the hour as the inflation rate soared in the millions. Recently, this historic Z$100 trillion bill has become a hot commodity among collectors and novelty buyers, selling for about US$5 on eBay. This historical keepsake is a stark reminder of what happens to a currency when inflation and fiscal balances go unchecked. —Janet Koech Money growth 1 12 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report References Bernholz, Peter (2003), Monetary Regimes and Inflation: History, Economic and Political Relationships (Northampton, Mass.: Edward Elgar Publishing). Cagan, Phillip (1956), “The Monetary Dynamics of Hyperinflation,” in Studies in the Quantity Theory of Money, ed. Milton Friedman (Chicago: University of Chicago Press), 25–117. FAOSTAT Database (2011), Food and Agricultural Commodities Production, Food and Agriculture Organization of the United Nations, http://faostat.fao.org, accessed Jan. 25, 2012. Hanke, Steve (2008), “Zimbabwe: From Hyperinflation to Growth,” Development Policy Analysis no. 6 (Washington, D.C.: Cato Institute, June 25). Hanke, Steve, and Alex Kwok (2009), “On the Measurement of Zimbabwe’s Hyperinflation,” Cato Journal 29 (2): 353–64. A Zimbabwean $100 billion note was needed to purchase three eggs in July 2008. Photo credit: Philimon Bulawayo/Reuters Zimbabwe’s 94 percent unemployment rate is mentioned by IRIN—a humanitarian news and analysis service of the United Nations—in its article “Zimbabwe: Poverty for a Few Dollars More,” Jan. 30, 2009, www.irinnews.org/ report.aspx?reportid=82674. 6 International Monetary Fund press release no. 06/33, Feb. 15, 2006, www.imf.org/external/np/sec/pr/2006/pr0633. htm. 7 “Zimbabwe Inflation Now over 1 Million Percent,” Economic Times, June 13, 2008, http://articles.economictimes. indiatimes.com/2008-06-13/news/27696937_1_zimbabweinflation-zimbabwe-dollars-harare. 8 “A Worthless Currency: The Local Dollar Is Fast Shriveling Away,” The Economist, July 17, 2008, www.economist. com/node/11751346. 9 “Taxes to Be Paid in Foreign Currency,” by Bernard Mpofu, Zimbabwe Independent, Jan. 30, 2009, www.theindependent.co.zw/business/21900-tax-to-be-paid-in-foreigncurrency.pdf. 10 Monthly Economic Review, Reserve Bank of Zimbabwe, October 2011, www.rbz.co.zw/pdfs/Monthly/Monthly%20 Economic%20Review%20October%202011.pdf. 11 “Zimbabwe to Print First $100 Trillion Note,” CNN, Jan. 16, 2009, http://articles.cnn.com/2009-01-16/world/ zimbawe.currency_1_zimbabwe-dollar-south-african-randdollar-note?_s=PM:WORLD. 5 Kramarenko, Vitaliy, Lars Engstrom, Genevieve Verdier, Gilda Fernandez, S. Erik Oppers, Richard Hughes, Jimmy McHugh and Warren Coats (2010), “Zimbabwe: Challenges and Policy Options After Hyperinflation” (Washington, D.C.: International Monetary Fund). Makochekanwa, Albert (2009), “Clothed in Rags by Hyperinflation: The Case of Zimbabwe,” Munich Personal RePEc Archive (MPRA) Paper no. 28863 (Pretoria, South Africa, University of Pretoria, January). Vegh, Carlos (1991), “Stopping High Inflation: An Analytical Overview,” IMF Working Paper no. 91/107 (Washington, D.C., International Monetary Fund, November). World Bank (2008), Migration and Remittances Factbook 2008 (Washington, D.C.: World Bank). ——— (2011), Migration and Remittances Factbook 2011, 2nd ed. (Washington, D.C.: World Bank). Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 13 The Conquest of Mexican Inflation From the 1970s through the mid-1990s, like 1982, it was preceded by at least three years Mexico lurched from one crisis to another, its mon- of near-continuous financial turmoil, caused by etary and fiscal framework a source of instability a series of shocks to the price of oil, which in the that impeded long-term growth. By adopting best early 1980s accounted for roughly 70 percent of practices in central banking in the latter 1990s— the nation’s exports. granting the Banco de México independence and Mexico subsequently improved its policy mandating price stability as the central bank’s pri- record sufficiently to regain access to financial mary goal—Mexico began installing a framework markets, leading to anticipation that the 1994 that has proven remarkably successful. election year would be uneventful. But as the Additional fiscal and financial system reforms election approached, the government’s resolve to of the 1990s and 2000s have eliminated macroeco- combat inflation and contain spending weakened nomic policy as a source of instability, although yet again, and short-term debt piled up. The peso more remains to be done to bolster economic was devalued sharply in December 1994, and development. Still, Mexico’s experience provides the recently privatized banking sector entered an instructive view of how a nation, by providing a prolonged crisis, setting back financial system independence and a clear mandate to its central development for more than a decade. Painful as it bank, can create relative macroeconomic stability was, the so-called Tequila Crisis of 1994–95 finally and enhance economic opportunity. prompted officials to commit once (and hopefully, A Record of Crisis and Instability The monthly change in the nominal exchange rate of the Mexican peso against the U.S. dollar since 1970 is plotted in Chart 1. Big swings cor- Chart 1 Elections Brought Peso Instability respond to periods of financial turbulence. Large Percent downward spikes, in particular, indicate massive (U.S. dollar/peso exchange rate, monthly change) 30 peso devaluations; shaded bars denote years of 20 Mexican presidential elections. 10 The first big devaluation occurred during the 1976 election year amid excessive inflation that ended Mexico’s 22-year defense of its fixed exchange rate. Profligate spending and money 0 –10 –20 creation resumed as the 1982 election year ap- –30 proached. Again, Mexico couldn’t maintain its –40 fixed exchange rate, and making matters worse, it –50 couldn’t meet its debt obligations. The subsequent default triggered the Latin American debt crisis. Although the 1988 election does not stand out as a crisis period quite –60 ’70 ’75 ’80 ’85 ’90 NOTE: Shaded bars denote election years. SOURCES: Banco de México; authors’ calculations. ’95 ’00 ’05 ’10 14 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report for all) to macroeconomic discipline. The peso has since freely floated, remaining Chart 2 Mexico’s Inflation Peaked in 1988 within reasonable bounds except during the Asian (12-month inflation rate) crisis (1997–98) and the more recent global finan- Percent 200 cial crisis. In 2000, for the first time in more than 70 180 years, the country underwent a political transition 160 involving a changing of the party in power, while 140 at the same time the economy was hit by a U.S. 120 manufacturing recession. Yet, there was no crisis. 100 And in 2006, despite much political uncertainty and social unrest, once again, there was no crisis. 80 Mexico’s periodic financial turbulence has 60 40 been accompanied by bouts of inflation, shown 20 in Chart 2, from the 1970s through the 1990s, with shaded bars again signifying election years. 0 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 Inflation peaked at 180 percent in February 1988, not quite hyperinflation, but still high Note: Shaded bars denote election years. SOURCE: Instituto Nacional de Estadística y Geografía. enough to do real economic damage. The spike associated with the Tequila Crisis (rates of around 50 percent in late 1995 and early 1996) has been followed by a steady decline. In recent years, inflation has been comparable to—or a little bit better Chart 3 Crises Lower Mexico’s Output than—what was experienced in the early 1970s. Inflation now approaches the rates found in devel- (Real GDP per capita growth, adjusted for purchasing power parity) Percent oped countries. 15 The crises were accompanied by sharply 10 declining output. While 1976 represented but a 1976 crisis brief pause along the country’s postwar economic 5 miracle, the 1982 crisis brought the miracle period to a complete halt (Chart 3). It triggered the deep- 0 est recession since the Great Depression and was followed by a decade of economic stagnation. –5 The impact of the Tequila Crisis was somewhat –10 1982 crisis shorter-lived; nevertheless, in 1995 real gross Global financial crisis Tequila Crisis domestic product (GDP) per capita fell by almost –15 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 NOTE: Shaded bars denote election years. SOURCES: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011; authors’ calculations. 10 percent, a postwar record. Roots of Reform The first major innovation in Mexico’s macroeconomic policy framework roughly coincided with the Tequila Crisis. Economists had begun reaching a consensus about what constituted best practices in central banking. First, there was grow- Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 15 ing agreement that independence from short-term political pressure was vital for central bankers to deliver price stability. Second, there was an emerging belief that inflation targeting was the best way for independent central banks to conduct policy and to be held accountable for its outcomes. The Reserve Bank of New Zealand pioneered inflation Chart 4 Independent Central Banks Deliver Better Inflation Outcomes (Average annual inflation rate, 1955–88) Percent 9 Spain 8 targeting as a monetary policy framework in the 7 early 1990s, and in the two decades since then, it 6 has been adopted by numerous central banks in 5 both developed and emerging-market economies. The scatter plot of data shown in Chart 4, from a widely cited paper by Alberto Alesina and Denmark Norway/Sweden/France Japan Belgium 1 policy makers. The chart shows the relationship 0 Canada U.S. Netherlands Switzerland 3 ernments to allow greater freedom for monetary comes on the vertical axis for a group of developed U.K. 4 2 on the horizontal axis and long-run inflation out- Italy Australia Lawrence H. Summers,1 helped sway many gov- between a measure of central bank independence New Zealand Germany 0 1 2 3 Index of central bank independence 4 5 SOURCE: “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,” by Alberto Alesina and Lawrence H. Summers, Journal of Money, Credit and Banking, vol. 25, no. 2, 1993, pp. 151–62. countries over three decades. Countries with more-independent central banks (on a scale of 1 to 5, with 5 signifying the most independent) tended to have lower inflation over the long run, the data indicated. Furthermore, Alesina and Summers showed that these better inflation outcomes came at no apparent cost in terms of real economic activity. The original Alesina and Summers finding has since been replicated by many researchers. Mexico learned the importance of central bank independence in a particularly painful way. Until 1982, the central bank operated as a stateowned corporation—separately, but without com- federal deficits and compelled the central bank to lend the government money to finance populist programs. Predictably, the results were a stagnation of private credit and triple-digit inflation. Mexico amended its constitution on Aug. 20, 1993; Article 28 made the central bank independent, effective Jan. 1, 1994. Price stability became the bank’s primary objective. Article 28’s wording is a particularly strong statement of independence, especially given the Banco de México’s history. plete independence from the federal government. During the 1982 financial crisis, then-President José López Portillo changed the Banco de México’s charter at the same time he nationalized the banking system and devalued the peso. Portillo moved the central bank into the Treasury Ministry, placing it under the control of the executive branch. Consequently, during the 1980s, the central bank became a powerful tool to manipulate the economy for short-term political ends. Mexican governments freely printed money to finance Article 28 of the Constitution of the Mexican United States “El Estado tendrá un banco central que será autónomo en el ejercicio de sus funciones y en su administración. Su objetivo prioritario será procurar la estabilidad del poder adquisitivo de la moneda nacional, fortaleciendo con ello la rectoría del desarrollo nacional que corresponde al Estado. Ninguna autoridad podrá ordenar al banco conceder financiamiento.” “The State shall have a central bank, which shall be autonomous in exercising its function and management. Its main goal will be to foster the stability of the national currency’s purchasing power, therefore strengthening the State’s role in guiding the country’s development. No authority shall order the central bank to grant financing.” 16 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report The creation of money is explicitly separated from other tasks of state, and the wording eliminates the Chart 5 Monetary Policy Evolves A. Initial Inflation Targets Missed possibility of the government forcing the central bank to provide it financing. Although the Mexican (12-month inflation rate) Percent president appoints the central bank board (with 60 legislative approval), board members have staggered terms to prevent the president from replac- 50 ing all members at the same time. Thus, the Banco de México enjoys a level of 40 Actual inflation rate independence superior to that of most other cen- 30 tral banks. Still, the first few years of central bank independence were extremely difficult. 20 10 Inflation Targeting—the Early Years Target inflation rate The central bank initially faced widespread 0 1995 2000 2005 2010 uncertainty about its commitment and ability to achieve financial and price stability. Within a year of receiving independence, the Banco de México B. Mexico Inflation Reaches Target Range (12-month inflation rate) confronted the Tequila Crisis: a twin balance-of- Percent payments and financial crisis. That tumult prompt- 9 ed a peso devaluation, causing inflation to spike to 8 52 percent in 1995 from 7 percent the year before, 7 badly damaging central bank credibility. Policy- Actual inflation rate 6 makers missed the bank’s first two inflation targets, 5 in 1995 and 1996, by wide margins. An initial infla- 4 tion target of 19 percent in 1995 was increased to 42 percent as the peso became unstable. 3 Target inflation rate The policy, however, could not be described 2 as full inflation targeting. The initial strategy was 1 to adopt a monetary growth target—specifically, 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 SOURCES: Instituto Nacional de Estadística y Geografía; Banco de México. 2010 2011 a growth ceiling on net domestic credit. Since the monetary policy objective limited the expansion of net domestic credit and aimed for an increase in international reserves, it was not considered a true inflation-targeting regime. The central bank instead established borrowed reserves as its instrument of monetary policy, allowing markets to determine both the exchange rate and the interest rate. Actual inflation since 1995, along with the inflation target, is depicted in Chart 5A. The central bank essentially met its 15 percent target in 1997 (official inflation was 15.5 percent) and in 1998 began a gradual transition to full inflation target- Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 17 ing and an emphasis on policy transparency. The than to the middle, and there have been some central bank badly missed the 1998 target of 12 notable misses, although these have been mainly percent; inflation was 18.4 percent amid peso associated with swings in relatively volatile food weakness caused by contagion from the Asian and and energy prices.3 Most recently, inflation peaked at more than 6 percent toward the end of 2008 but Russian crises of 1997–98. In 1999, the Banco de México announced a series of inflation targets, with the stated goal of reducing inflation in Mexico to that of its primary has since been on a steady downward trajectory, lately running at around 3.25 to 3.5 percent. A formal comparison of some key statistics trading partners by 2003. In 2000, the central bank before and after central bank independence con- began publishing its Quarterly Inflation Reports firms what should be apparent from these charts— (Informe Sobre la Inflación), which detail the the average level and volatility of inflation have inflation environment, the conduct of monetary significantly declined since the Banco de México’s policy and the balance of risks for future inflation.2 independence (Table 1). The introduction of intermediate-term inflation targets and increased information for the public were important steps toward the adoption of full inflation targeting. Complementary Fiscal Reforms Most bouts of high inflation involve pressure from fiscal authorities to finance chronic budget deficits or monetize the national debt. Central Full Inflation Targeting Mexico installed the necessary components bank independence makes it easier for central banks to resist this pressure if it conflicts with their for full-fledged inflation targeting by 2001. The mandate for price stability. It would be even better Banco de México dropped the other two elements if fiscal authorities could be somehow induced to of its monetary policy strategy—net domestic maintain a sustainable profile for public finances credit and international reserves—leaving an infla- so that the pressure to monetize deficits—printing extra money to “pay” what the government tion target as the single, explicit monetary policy goal. The policy framework included a floating owes—would not arise in the first place. To this exchange rate, an independent monetary author- end, a second set of macroeconomic policy ity with price stability as its main policy goal, the reforms in Mexico may further enhance the ability absence of other nominal policy strategy anchors of the Banco de México to deliver price stability. and implementation of monetary policy within a transparent framework in which communication with the public became key. Since 2003, the Banco de México has maintained an inflation target of 3 percent, with a tolerance range of plus or minus 1 percentage point. The central bank’s performance vis-à-vis the inflation target since fully implementing inflation targeting is highlighted in Chart 5B. Concentrating on the period since the formal adoption of full inflation targeting, we see that the Banco de México has done an impressive job at delivering on its price stability mandate. Admittedly, inflation has been closer to the upper limit of its targeted range Table 1 Central Bank Independence Aids Price Stability in Mexico Period Average annualized Standard deviation monthly inflation (percent) Prior to independence (1970–94) Since independence (1994–current) Since inflation targeting (2001–current) 1995–2000 43.3 11.1 4.4 22.1 SOURCES: Instituto Nacional de Estadística y Geografía; authors’ calculations. 42.9 15.5 2.4 21.0 18 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Figuring out the true state of Mexico’s public finances is complicated by the important role that Chart 6 Fiscal Policy Remains Disciplined oil—and the national oil company, Pemex—plays (Deficit as a share of GDP) in the national economy and the government’s Percent 4 finances. Oil-related revenue accounts for 30–40 3 percent of total revenue, so oil-price changes can 2 significantly affect the government’s fiscal position. 1 Therefore, the most important factor in the budget 0 is how expected oil revenue is included in the budget calculation. –1 The formula used to calculate anticipated oil –2 –3 Primary balance Budget deficit Public-sector borrowing requirement –4 –5 prices over the next fiscal year is based on past and future oil prices.5 Then, that expected oil price is used in budget projections and for oil revenue stabilization funds. –6 1997 1999 2001 2003 2005 2007 2009 SOURCE: Secretaría de Hacienda y Crédito Público. Even without the boon to public finances from recent years’ oil-price run-up, Mexico made real progress getting on a sounder financial footing. Along with the official budget deficit, Mexico’s government routinely reports two additional Four major pieces of legislation have been enacted measures of budget balance (Chart 6). The priin the past five years that significantly strength- mary balance is the budget deficit less net interest ened Mexico’s fiscal policy framework—the most payments. The other measure, the public-sector important is the Budget and Fiscal Responsibility borrowing requirement, is the broadest measure Law of 2006, which includes among its provisions and includes the government’s long-term invest- a balanced-budget rule.4 ment projects and off-balance-sheet spending. The This rule applies to the traditional budget off-balance-sheet spending includes the net costs deficit; therefore, it excludes some off-budget of PIDIREGAS (Mexican public–private partner- operations such as long-term development ships), inflation adjustments to indexed bonds, projects. There is also an exception allowing the financing costs of the programs for bank restruc- federal government to run a deficit during exigent turing and debt support, and financial commit- circumstances. If a budget deficit is proposed, the ments to development banks. legislative branch must provide explicit justifica- Until the onset of the recent financial crisis, tion for the shortfall and a plan for returning to Mexico ran primary surpluses, something that a zero balance. If, over the course of a fiscal year, the U.S. has not managed for more than a decade. expected revenue doesn’t meet projections, the Indeed, the fiscal capacity created by the recent re- government must cut expenditures to balance the forms created a new phenomenon in Mexico’s fis- budget. Unfortunately, the balanced budget is done cal policy—the ability to set countercyclical policy. on a year-by-year basis and lacks both a broader, During earlier downturns, the country couldn’t medium-term outlook of three to five years and a implement any type of stimulus and, instead, longer-term estimate of 20 to 30 years. Still, the bal- had to cut spending. During the latest recession, anced-budget rule has kept public debt relatively Mexico passed a stimulus package, albeit a modest low and helped maintain fiscal policy discipline. one. Still, even in the face of a 6 percent decline Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 19 in output, the country’s budget deficit (as mea- More recently, the government passed a sured by the financial balance) remained below 3 series of laws to improve fiscal policy, including percent of GDP (while the broader measure came a balanced-budget rule. Largely because of these in at 3.5 percent of GDP in 2010). Furthermore, reforms, Mexico fared surprisingly well in the re- the country’s debt has remained relatively stable at cent global financial crisis. Indeed, Mexico is now below 30 percent of GDP through the recent crisis, viewed as a better credit risk than many peripheral in marked contrast to the U.S. and other advanced European countries. But much more remains to countries that have debt levels approaching or be done. Monetary and fiscal policy are no longer exceeding 100 percent of GDP. the impediments to growth and development that they once were. Reward Seen in Risk Premium Perhaps the most striking evidence of The broader challenges confronting Mexico are well known. Among Organization for Econom- Mexico’s macroeconomic policy discipline can be ic Cooperation and Development (OECD) coun- found in the cost of public-sector financing. The tries, Mexico typically ranks close to the bottom, interest rate spread, or difference, between the cost if not dead last, on various metrics of educational of Mexican government debt and U.S. Treasuries attainment. There are significant regulatory bar- is shown in Chart 7. Both the U.S. financial crisis in riers to entry into key network industries such as 2008–09 and the more recent problems with Euro- telecommunications and electricity, and restricpean sovereign debt boosted interest rate spreads tions limit foreign direct investment in some sec- as measured in basis points (100 basis points tors. Competition and investment are curtailed by equal 1 percentage point). Even though the Asian a lack of legal certainty. And Pemex has presided crisis was less intense than the current tumult, it over a decline in oil production in recent years, affected Mexico more because it occurred at the due in no small part to poor incentives. These fac- beginning of Mexico’s policy shift. Overall, Mexico is regarded as a safe haven among emerging markets. Furthermore, compared with all but Germany, France and the United Kingdom, Mexico’s interest rate premium is lower than that of European countries. This is a strik- Chart 7 Improved Policy Narrows Interest Premium (Interest rate spread) Basis points ing example of the rewards of maintaining policy 1,600 discipline and a jarring reminder of the perils of 1,400 fiscal profligacy. Tequila Crisis 1,200 Asian crisis Improved Financial Framework Mexico has made very real and substantive progress in improving its macroeconomic policy 1,000 800 2008–09 crisis 600 framework in recent decades. Major innovations occurred in the middle 1990s, when the government codified the independence of the Banco de México in the constitution, with the bank going on to adopt a best-practices approach to monetary policy, pursuing its mandate for price stability through a strategy of inflation targeting. 400 200 0 1993 1995 1997 1999 2001 2003 SOURCE: CTRB JP Morgan Chase Emerging Markets. 2005 2007 2009 2011 20 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report tors manifest themselves in a persistent gap in labor productivity relative to other OECD members. For Mexico to bridge that gap, it will need to be as creative in embracing structural change as it has been in embracing monetary and fiscal reforms. —Mark Wynne and Edward C. Skelton Notes 1 “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,” by Alberto Alesina and Lawrence H. Summers, Journal of Money, Credit and Banking, vol. 25, no. 2, 1993, pp. 151–62. 2 Quarterly Inflation Reports can be found at www.banxico. org.mx/publicaciones-y-discursos/publicaciones/informesperiodicos/trimestral-inflacion/index.html. 3 Core inflation in Mexico sometimes diverges dramatically from headline inflation, due to the importance of food prices to the consumer price index (CPI). Food and beverages account for almost 20 percent of the Mexican CPI, compared with about 8 percent of the U.S. CPI. Mexican economists sometimes refer to the “pico de gallo” effect on inflation, whereby movements in the prices of onions and tomatoes can disproportionately affect headline inflation. 4 The other key pieces of legislation are the Integral Fiscal Reform, approved in September 2007, which had among its many objectives the improvement of tax collection and was expected to raise the collection of non-oil tax receipts by 2.1 percent of GDP over 2008–12; the 2007 New ISSTE Law, intended to create a more-sustainable public pension system over the long term by transitioning from a pay-asyou-go system to a system of individual savings accounts; and finally, the government accounting law, passed in 2008, which brought public-sector accounting standards more in line with generally accepted accounting principles. 5 Specifically, the formula gives a weight of 25 percent to the average oil price for the past 10 years, a weight of 25 percent to the average futures price for the next three years and a weight of 50 percent for the futures prices for the next few months adjusted by a factor of 0.86. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 21 Public Perception of Globalization’s Impact Shapes Trade Realities History teaches us that perception often polls asking whether trade with other nations is matters much more than reality in shaping public good for the U.S. “economy”—as opposed to the opinion. Accordingly, perception is crucial to “country”—received a substantial majority of posi- understanding the outcomes of globalization, from tive responses.3 One might conclude that our attitudes toward increased free trade and the breakdown of political and economic barriers to technological integra- globalization are at best fickle or that the survey tion, greater capital flows and worker migration. findings are flawed. But it may be more prudent to Ideally, the public’s evaluations are sound and view the seemingly mixed results as a reflection of closely reflect reality. Polling data, however, indi- the complexity of the underlying issue. A majority of Americans actually agree on cate this is often not the case. Misplaced perceptions may profoundly affect the course of global- several aspects of globalization. Surveys con- ization policies. sistently indicate that most people believe free trade and related commerce agreements have What the Polls Say cost, rather than created, domestic jobs and that domestic wages have been suppressed, rather than When viewed in the aggregate, surveys indicate that Americans have very mixed feelings enhanced, by these arrangements and integra- about increasing global connectivity, or at least tion efforts.4 This is at odds with the professional certain aspects of it. consensus: Economists generally believe that the net effect of globalization on unemployment is An NBC poll by the Peter Hart and Bill McInturff polling organizations, taken in Novem- minimal and that the drivers of wage differentials ber 2010, asked Americans about the impact of have been based on technology rather than trade.5 It is interesting to note that Americans tend free trade on the U.S. By a 47–23 percent margin, respondents said free trade “hurt” rather than to think free trade potentially poses more harm to “helped” the country. their fellow citizens than to themselves. Some view 1 Another poll, conducted for CNN by Opinion such concern as altruism.6 Regardless of the cause, Research Corp., also in November 2010, measured the contrast in beliefs regarding “self” and “other” the contrasting views of import-driven risk versus may be one reason the average American holds export-based economic growth and yielded a a more guarded perspective on globalization’s much narrower gap between opponents and sup- effects than economists do. Furthermore, studies porters. Half of those surveyed said threats posed indicate that the perceived disutility of job loss can by imports outweigh their benefit, while 41 per- be enough to override even the prospect of new cent believed that trade is mostly an opportunity. and better jobs.7 In the context of globalization CNN, which asked the same question in each of and free trade, this implies that if enough people 2 the previous three years, found opinion shifting be- believe their jobs will be at risk, even temporartween threat and opportunity every year between ily, they will oppose policies with a potential to 2007 and 2010. To further muddle the discussion, expand labor demand. Thus, anxiety may further 22 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report contribute to a negative outlook on free-trade mea- strate whether developing countries show greater sures, even those that empirical evidence shows to support for free trade than developed ones. In the be ultimately beneficial. same poll, Germany, the U.K. and France indicated approval for their own business and trade ties at Digging Deeper similarly high rates of 95, 87 and 83 percent, re- There’s an overwhelming consensus within spectively. The overall level of positive response for the U.S. that trade agreements are good for de- developed nations was 87.2 percent.10 The surveys veloping countries—by a 6–1 margin, according were conducted primarily by phone in developed to some surveys.8 This raises the question of how countries and exclusively through face-to-face these countries perceive globalization, specifically interviews in underdeveloped nations. free trade. If the American public were correct in Despite receiving a substantial share of its assessment, we would expect largely positive re- free-trade benefits—including an ever-increasing sponses in many developing nations. Indeed, this variety of inexpensive imports—Americans is the case. A March/April 2011 poll of developed showed the lowest level of support for their own and underdeveloped nations’ citizens, conducted trade ties in the Pew poll, with a 67 percent posi- for the Pew Research Center by Princeton Survey tive response. Research Associates International, found that 84 It’s difficult to determine to what extent trade’s percent of respondents from developing nations perceived effect on jobs factored into the negative felt that their countries’ trade and business ties response and, thus, provided a possible explana- were “very good” or “somewhat good.”9 tion for Americans’ lukewarm support of trade. As Such positive responses alone do not demon- of March 2011, half of all American adults believed that finding a job was more difficult than in the prior year, and many attributed sluggish employment growth to free-trade effects such as outsourcing overseas.11 Chart 1 Unemployment Due to Outside Forces vs. Lack of Jobs as ‘Very Big’ Problem (2011) The perceived severity of unemployment within a country appears correlated with the Percent attributing unemployment to outside forces degree its citizens attribute the problem to “outside 100 forces” (Chart 1).12 Interestingly, the correlation 90 between actual unemployment rates and the 80 severity of unemployment as perceived by the public appears modest at best.13 These relation- 70 ships suggest that an assessment of globalization 60 depends more on perceived levels of joblessness 50 or related factors than on actual levels. Perception, 40 of course, is very much a function of expectation. In the U.S., expectations for employment levels are 30 higher than in many other countries and may help 20 30 40 50 60 70 80 Percent perceiving lack of jobs as “very big” problem 90 100 NOTE: India is removed from set as outlier (reason is perhaps recognition within the country that unemployment is primarily due to demographics). SOURCE: Pew Research Center. explain why citizens view “outside forces” as the cause of higher-than-normal unemployment. Similarly, in poll data two months before the U.S. recession began in December 2007, the perception of the economy appears correlated with Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 23 support for free trade. The more favorably people view their national economies, the more likely they are to back free trade (Chart 2).14 The causal conclusion is that optimism in some areas begets greater optimism in others; policies, economic activities and other factors that increase approval of the economy also appear linked to the level of support for a nation’s international trade ties. Chart 2 Support for Free Trade vs. Perception of Economy (2007) Citizens supporting free trade (percent) 95 90 85 80 Yet in Chart 3, we see another relationship, 75 one that seems counterintuitive. This scatterplot 70 shows attitudes toward openness to trade against actual unemployment rates for a cross-section of countries in 2010 and indicates that even in coun- 65 60 tries with very high unemployment rates, support 55 for trade can be quite high—so much, in fact, that 50 0 there is even a weak positive correlation.15 This result is likely attributable to the unequal employ- 10 20 30 40 50 60 70 80 Citizens viewing current economic situation as “good” (percent) 90 100 SOURCES: Ipsos; Pew Global. ment expectations of developed and underdeveloped countries in the survey. This relationship lends further credence to the notion that the degree of public approval for globalization and its associated attributes is more ployment and economic prosperity. For example, Chart 3 Perception of Trade Ties (2011) vs. Unemployment Rate (2010) developed countries may attribute current rela- Percent saying country’s business and trade ties are “very good” 70 a function of perceived rather than actual unem- tive employment instability to trade. Americans’ tendency to blame “outside forces” and reject 60 trade ties to a greater extent than other developed nations with equal or higher unemployment rates 50 may have more to do with the limited social safety net or comparatively unsheltered nature of the U.S. economy. It is also possible that certain underdeveloped countries with high unemployment rates view trade more favorably because they believe 40 30 20 that trade relations will mitigate their troubles or improve current circumstances. Complex U.S. Attitudes Toward Trade Attitudes toward trade also vary depending on the bilateral relationship of the parties involved, the surveys show. Overall public approval for free trade is more accurately described as a confluence of forces than as a single and independent variable 10 0 5 10 15 Unemployment rate (percent) SOURCES: Pew Research Center; CIA World Factbook. 20 25 24 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Prevailing Public Opinion Chart 4 Opinion on Extending Specific Trade Ties Attributing unemployment to outsourcing, regardless of the veracity of such linkage, can Percent produce increased protectionism exactly because 80 Americans viewing more trade with this country as “good” (percent) Americans viewing more trade with this country as “bad” (percent) 70 people vote based on perception. In turn, politicians pass laws and negotiate trade agreements based on voter sentiment. Thus, globalization, de- 60 spite its positive net results, may confront setbacks 50 in the face of prevailing negative opinion. 40 Futurist John Naisbitt once described globalization as a “bottom-up” phenomenon that is 30 the totality of “all actions initiated by millions of 20 individuals.”18 Taking this idea to heart, it becomes 10 much easier to see public opinion for what it is: 0 Canada Japan EU India Brazil Mexico S. Korea China SOURCE: Pew Research Center. a force that both affects and is itself affected by the choices that individuals make. The process of global integration has only just begun, but it is not happening to us. Rather, it is happening because of us. This underscores the fundamental importance of disseminating accurate information about (Chart 4). The average American citizen is almost globalization’s impact. Only then can policymakers twice as likely to say that greater commerce with take actions that maximize prosperity and most Canada is good as they are to say the same about closely reflect society’s values. China. Similarly, we are significantly more likely to support additional trade with Japan than with South Korea.16 Americans also view increasing trade with South Korea, a developed country, less favorably than extending ties with Mexico.17 This seems to erode the reasonable belief that we are primarily concerned with the actual products traded or the quality of “human capital” invested in them. Instead, cultural ties, existing relationships or even geographic proximity may play a more significant role. Many will reject the results of polls, claiming the responses show only what people think and not reality. Dismissing these findings ignores a fundamental fact about human nature: We don’t make decisions according to some universal set of facts; we make them based on “our” facts. In this respect, perception is reality, and nowhere is this truer than in the political process, which effectively governs how globalization unfolds. —Christian Winge Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 25 Notes Winge was a 2011 intern in the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas. He is a student at Trinity University. 1 “International Trade/Global Economy,” Polling Report (2011), NBC News and Wall Street Journal (November 2010), www.pollingreport.com/trade.htm. (Telephone survey of 1,000 respondents, with a margin of error of 3.1 percentage points.) 2 “International Trade/Global Economy,” Polling Report (2011), CNN/Opinion Research Corp. (November 2010), www.pollingreport.com/trade.htm. (Telephone survey of 1,014 respondents, with a margin of error of 3 percentage points.) 3 “International Trade/Global Economy,” Polling Report (2011), CBS News and New York Times (April 2009), www.pollingreport.com/trade.htm. (Survey of 998 respondents, with a margin of error of 3 percentage points.) 4 “International Trade/Global Economy,” Polling Report (2011), NBC News and Wall Street Journal (September 2010), www.pollingreport.com/trade.htm. (Survey covered 1,000 respondents, with margin of error of 3.6 percentage points). Also, “Americans Are of Two Minds on Trade,” Pew Research Center, Nov. 9, 2010, www.pewresearch. org/pubs/1795/poll-free-trade-agreements-jobs-wageseconomic-growth-china-japan-canada. 5 See “Jobs on Another Shore,” by David T. Coe, Finance and Development, International Monetary Fund, vol. 45, no. 1, 2008, pp. 48–51,www.imf.org/external/pubs/ft/ fandd/2008/03/pdf/coe.pdf, and International Trade: Free, Fair and Open? by Patrick Love and Ralph G. Lattimore, Paris: OECD Publishing, 2009, www.oecd-ilibrary.org/ trade/international-trade_9789264060265-en. 6 “Free Trade: Why Are Economists and Noneconomists So Far Apart?” by William Poole, Federal Reserve Bank of St. Louis Review, vol. 86, no. 5, 2004, pp. 1–6, www.research. stlouisfed.org/publications/review/04/09/Poole.pdf. See note 6. See “Americans Are of Two Minds on Trade,” note 4. 9 “China Seen Overtaking U.S. as Global Superpower,” Pew Global Attitudes Project, Pew Research Center, July 13, 2011, www.pewglobal.org/2011/07/13/chinaseen-overtaking-us-as-global-superpower/6/. (Survey respondents were queried in face-to-face and telephone interviews; the margin of error varies from 2.5 to 5 percentage points, depending on the nation where the survey was conducted. Margins of error also reflect that certain types of households, such as those without phones, were not included in the surveys of some countries.) 10 See note 9. 11 “Half of Americans Report Job Hunting Is More Difficult than a Year Ago,” RBC Consumer Outlook Index, Ipsos, March 31, 2011. Also see “Americans’ Top Job-Creation Idea: Stop Sending Work Overseas,” by Frank Newport, Gallup, March 31, 2011. Discrepancies with previous surveys are likely explained by the limited selection of answers available in this poll as well as invocation of country-specific “trade ties” as opposed to the open-ended expression “trade.” 12 See note 9. 13 See note 9 and CIA World Factbook 2011, www.cia.gov/ library/publications/the-world-factbook/index.html. 14 “Ipsos Global Advisory: The Economic Pulse of the World,” December 2010, and “World Publics Welcome Global Trade—But Not Immigration,” Pew Research Center-Pew Global Attitudes Project, Oct. 4, 2007, www. pewglobal.org/2007/10/04/world-publics-welcome-globaltrade-but-not-immigration/. 15 See note 13. 16 See “Americans Are of Two Minds on Trade,” note 4. 17 See “Americans Are of Two Minds on Trade,” note 4. 18 See Finest Quotes, Globalization Quotes (John Naisbitt), 2011, www.finestquotes.com/select_quote-categoryglobalization-page-0.htm. 7 8 26 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Summary of Activities 2011 The Globalization and Monetary Policy Institute continued to build strength in important metrics, the Review of Economics and Statistics and the Journal of Money, Credit and Banking. research areas and contribute to the study of international economics during 2011. The institute Conferences marked a milestone with the issuance of the 100th paper in its working paper series, the institute’s The institute sponsored three conferences during the year. The main research conference— core business product. Submissions originate from “Microeconomic Aspects of the Globalization permanent staff in Dallas as well as from a global of Inflation”—was cosponsored with the Swiss network of research associates and senior fellows. National Bank and held Aug. 19–20 in Zurich. It A major initiative in 2011 was the creation of an featured presentations by researchers from the annual public lecture on globalization and mon- Paris School of Economics, the U.S. Bureau of etary policy. Jürgen Stark, an outgoing member of Labor Statistics, the Graduate Institute Geneva, the executive board of the European Central Bank Brandeis University, Pennsylvania State University, (ECB), delivered the inaugural lecture, “Globaliza- Central European University, the Federal Reserve tion and Monetary Policy: From Virtue to Vice?” on Bank of New York and the Board of Governors of Nov. 29. the Federal Reserve System. The institute also cosponsored the 10th Academic Research Jian Wang’s paper “The Taylor Rule and annual “Advances in Econometrics Conference: Dynamic Stochastic General-Equilibrium Model- Forecast Intervals for Exchange Rates” (with Jason ing” with the economics department at South- J. Wu) was accepted for publication by the Journal ern Methodist University. Held Nov. 4–6 on the of Money, Credit and Banking. Two papers by SMU campus in Dallas , the conference featured Alexander Chudik were accepted. “Econometric presentations by researchers from the Federal Analysis of High Dimensional VARs Featuring a Reserve Banks of Dallas and Kansas City, Chiba Dominant Unit” (coauthored with M. Hashem Keizai University, the University of Padova, the Pesaran) will appear in Econometric Reviews. “And University of Kiel, the University of California at Then Current Accounts (Over)Adjusted” (with Mi- Irvine and Boston University. A third conference, chele Ca’ Zorzi and Alistair Dieppe) was published “Immigration Policy in an Era of Globalization,” in Empirical Economics. Scott Davis’ paper “Inter- was cosponsored with SMU’s Tower Center for national Real Business Cycles with Endogenous Political Studies and included migration scholars Markup Variability” was published in the Journal from the University of Sydney, Oxford University, of International Economics. At year-end, institute the University of Toronto, Stockholm University, staff had papers under review at the American the University of California, the University of Texas Economic Journal: Macroeconomics, the Journal of at Austin, SMU and the Dallas Fed, among others. Economic Dynamics and Control, the Journal of In- Synopses of the three conference proceedings folternational Economics, the Journal of International low this summary. Money and Finance, the Journal of Econometrics, As in previous years, institute staff presented Economics Letters, the Journal of Applied Econo- work in a variety of external forums. In 2011, staff Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 27 members gave seminars before the Fed’s Board sponsored by Banque de France, the Centre for of Governors and at Bowling Green State Univer- Economic Policy Research, the American Eco- sity, the Federal Reserve Bank of Cleveland, the nomic Journal: Macroeconomics, the Paris School European University Institute, Banque de France, of Economics and the European Center for Ad- Fudan University, the Hong Kong Institute for vanced Research in Economics and Statistics. Monetary Research, the University of Kansas, Uni- Anthony Landry discussed a paper on versité Laval, Shanghai University of Finance and exchange rate pass-through at the Price Dynam- Economics, Shanghai Institute of Law and Finance, ics Conference at the University of Chicago’s Sveriges Riksbank and Texas A&M University. Staff members also presented their work at Milton Friedman Institute in February. Ananth Ramanarayanan presented “Imported Inputs and major professional conferences, including the International Trade Dynamics” at the University American Economic Association annual meeting, of Warwick’s International Trade Research Day in the Canadian Macroeconomics Study Group, the February and a second paper, “Default and the Ma- Seventh Dynare Conference, the Econometric So- turity Structure in Sovereign Bonds,” at the Whar- ciety North American summer meeting, European ton School of Business conference on “Sovereign Economic Association and Econometric Society Debt Risk” in April. Wang presented “The Effects of meetings, the International Economic Association News About Future Productivity on International World Congress, the Midwest Macroeconomics Relative Prices: An Empirical Investigation” at the Meetings, the Shanghai Macroeconomics Work- ECB–Bank of Canada conference on “Exchange shop, the Society for Computational Economics Rates and Macroeconomic Adjustment” in June. meeting, Southern Economic Association meetings, the Spanish Economic Association annual meeting and Western Economic Association meet- Bank Publications Institute staff contributed seven articles to the ings. Davis organized a session at the Midwest Dallas Fed’s Economic Letter publication in 2011: Macroeconomics Meetings on “Trade and Real “With Reforms in China, Time May Correct U.S. Exchange Rates.” Enrique Martínez-García chaired Current Account Imbalance” (Wang), “Upstream sessions at the Western Economic Association and Capital Flows: Why Emerging Markets Send SavEuropean Economic Association meetings. In addition to gatherings of major professional societies, staff members participated in a variety ings to Advanced Economies” (Cociuba), “Will China Ever Become as Rich as the U.S.?” (Mark Wynne), “Distance and the Impact of ‘Gravity’ of one-off conferences. Simona Cociuba presented Help Explain Patterns of International Trade” her paper, “Financial Intermediation, Risk Taking (Ramanarayanan), “The Sluggish Recovery from and Monetary Policy,” at the second Bank for the Great Recession: Why There Is No ‘V’ Rebound International Settlements Consultative Council for This Time” (Wynne), “How the U.S. Tax System the Americas Conference in May. Davis presented Stacks Up Against Other G-7 Economies” (Landry) “Financial Integration and International Business and “Relating Commodity Prices to Underly- Cycle Co-Movement: The Role of Balance Sheets” ing Inflation: The Role of Expectations” (Davis). at an October conference in Paris that was jointly Wang contributed a paper on “Exchange Rate 28 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Pass-Through into U.K. Import Prices: Evidence Technology Zurich), Mina Kim (Bureau of Labor from Disaggregated Data” to the Dallas Fed’s Staff Statistics), Julien Martin (Paris School of Econom- Papers series. ics), Dimitra Petropoulou (University of Oxford), In addition, Martínez-García and Adrienne Attila Rátfai (Central European University), Kim Mack created a database on international house Ruhl (New York University), Filipa Sá (Univer- prices (www.dallasfed.org/institute/houseprice/ sity of Cambridge), Tomasz Wieladek (London index.cfm), accessible to researchers and updated Business School), Hakan Yilmazkuday (Florida on a regular basis. (See “A Cross-Country Quarter- International University) and Jianfeng Yu (Univer- ly Database of Real House Prices: A Methodologi- sity of Minnesota). cal Note,” by Martínez-García and Mack, institute Working Paper no. 99, 2011.) Staff members Cociuba and Ramanarayanan left the Dallas Fed to become assistant professors in the economics department at the University People Horst Köhler, president of the Federal Republic of Germany from 2004 to 2010 and head of the International Monetary Fund from 2000 to of Western Ontario. Chudik, who earned a PhD from Cambridge University in 2008 and previously worked at the ECB, arrived in late November. Landry won a prestigious Fernand Braudel 2004, became a member of the institute’s advisory Senior Fellowship for spring 2011 to the European board effective May 24. Michael Bordo, professor University Institute in Florence, Italy. The Braudel of economics at Rutgers University, joined as a Fellowship is highly competitive and provides senior fellow. a framework for established academics with an The institute added 11 new research associates: Saroj Bhattarai (Pennsylvania State University), Peter Egger (Swiss Federal Institute of international reputation to pursue their research in this world-class program. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 29 Annual Public Lecture Jürgen Stark, then-member of the executive board of the European Central Bank (ECB), deliv- independence and a medium-term orientation for monetary policy. ered the Globalization Institute’s inaugural public lecture on Nov. 29, 2011. The purpose of this new lecture series is to About Jürgen Stark Jürgen Stark was a member of the executive present prominent policymakers who address an board and governing council of the ECB before aspect of the relationship between globalization stepping down at the end of 2011. Prior to join- and monetary policy. Stark’s lecture, “Globalization ing the ECB, he was vice president of Deutsche and Monetary Policy: From Virtue to Vice?” ex- Bundesbank, responsible for European and inter- plored the many ways that globalization has both national affairs. He has held numerous positions in simplified and complicated the work of central the German Ministry of Economics and Ministry bankers. of Finance and has represented Germany at the Stark warned that some of the measures G-7 and G-8 Economic Summits and in various implemented in response to the financial crisis trade talks. He serves as a member of the Eco- pose dangers to the process of globalization and nomic and Financial Committee of the European stressed the importance of having in place what Union. In 2005, he was named honorary professor he termed “robust” monetary policy frameworks. at Eberhard Karls University in Tübingen, Germa- A critical component of such frameworks will be ny. Stark studied economics at both the University a commitment to price stability as the primary of Hohenheim and Eberhard Karls, where he deliverable of central banks, as will central bank received his doctorate in economics in 1975. Jürgen Stark Jürgen Stark of the European Central Bank gave the Dallas Fed’s inaugural public lecture in November. He was joined by Mark Wynne (left), head of the Globalization and Monetary Policy Institute, and Dallas Fed President Richard Fisher. 30 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Microeconomic Aspects of the Globalization of Inflation: A Joint Conference with the Swiss National Bank The Globalization and Monetary Policy Institute hosted “Microeconomic Aspects of the Global- when pass-through is incomplete, optimal monetary policy needs to take into account exchange rate ization of Inflation,” a joint conference with the Swiss misalignments. National Bank on Aug. 19–20 in Zurich. The confer- Identifying the extent of pass-through is chal- ence brought together researchers to examine how lenging econometrically. Several of the papers at globalization affects pricing, exploring in greater the conference used novel approaches to produce detail some of the issues raised by Auer and Fischer improved estimates and found a greater degree (2010), as well as to increase understanding of how of pass-through than in previous studies. One key price dynamics unleashed by globalization affect determinant of this pass-through is the choice of the measurement of fundamental determinants of currency in which imports are invoiced. If imports improved living standards over time. are priced in the currency of the supplier, (short run) Organizers were Raphael Auer and Andreas Fischer of the Swiss National Bank, Peter Egger of the Swiss Federal Institute of Technology and Mark pass-through will be higher than if they are priced in the currency of the importer. A common theme of the papers presented was Wynne of the Federal Reserve Bank of Dallas. Pre- the use of detailed microdata to shed new light on senters included researchers from the Paris School important macro or aggregate questions. Indeed, all of Economics; the U.S. Bureau of Labor Statistics; of the papers used microdata with varying degrees The Graduate Institute, Geneva; Brandeis University; of fineness to address different questions. Two Pennsylvania State University; Central European papers dealing with measurement issues used such University; the Federal Reserve Bank of New York; data to construct alternatives to official price indexes and the Board of Governors of the Federal Reserve to quantify the extent of the biases in these indexes System. Paper discussants were drawn from a simi- due to globalization. And two papers that addressed larly diverse set of institutions, including the Univer- questions from a general-equilibrium perspective il- sity of Warwick, the University of Zurich, the Federal lustrated how such a perspective can shed new light Reserve Banks of Dallas and Atlanta, the University on old relationships. of Frankfurt and New York University. The extent to which changes in exchange rates pass through to import prices—and from import prices to final goods prices—is a key determinant of The Extent and Determinants of Pass-Through Julien Martin of the Paris School of Econom- the international transmission of inflation. Fur- ics began the conference with “Globalization of thermore, the extent of pass-through is critically Inflation: Micro Evidence on the Imported Input important to the conduct of monetary policy in an Channel.” One of the most prominent aspects of open economy. When pass-through is complete, globalization is the increased vertical specialization optimal monetary policy entails focusing on the do- of production. Intermediate inputs once produced mestic output gap and domestic inflation. However, in-house or sourced domestically are increasingly Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 31 obtained from low-cost overseas suppliers. What happens when the prices of these imported intermediate inputs change? How are they transmitted to final goods prices? Is the pass-through one-for-one or smaller? Pass-through would be expected to be less than one-for-one to the extent that imported intermediate inputs are just a single cost among many (others include labor, capital and domestic inputs) and firms can substitute between imported and domestic inputs. Martin reported that he used a unique French dataset for some 500 French manufacturing firms that allowed him to match the cost of imported Conference discussions continue over lunch. intermediate inputs with the price of the final prod- in China’s exchange rate policy in 2005 showed up in uct made by each firm from 2005 to 2010. the prices of U.S. imports from China. Kim said she Martin’s key finding was that the pass-through and her coauthors used a detailed, monthly goods- from imported intermediate inputs to final goods level dataset on the prices of U.S. imports from and prices was only 0.12. When the cost of imported exports to China between September 1993 and intermediate inputs rises 1 percent, the price of the March 2011 to document aspects of trade between final product made using these inputs (whether sold the two countries. First, they found that growth in the volume of domestically or exported) rises 0.12 percent. But a significant amount of international trade is between imports from China has come from a greater range related parties; that is, between domestic parents or variety of products rather than simply more of and foreign subsidiaries or affiliates. Interestingly, an existing set of products. That is, most of the trade Martin found that the pass-through was lower for growth has occurred along the extensive rather inputs purchased from related parties. He also found than the intensive margin. Second, they noted that almost all imports from and exports to China are no evidence of asymmetry in pass-through: Import price declines were passed through at the same rate invoiced in dollars rather than yuan. For imports, as import price increases. the share invoiced in dollars increased from a low of The aspect of globalization that has perhaps about 97 percent around the turn of the century to attracted the most attention and generated the most 99 percent or more in recent years. All U.S. exports concern in some quarters is China’s increasingly to China were invoiced in dollars until 2009, when important role in global trade. In 1974, U.S. imports the euro was used for a small share of exports. Third, from China amounted to just less than $123 million. the authors found significant stickiness in the prices By 2010, such imports totaled $383 billion, account- of U.S. imports from China, with prices remaining ing for about one-fifth of all U.S. imports that year, unchanged for about 11 months on average. But and China had become the most important source there was some evidence that prices became less of imports to the United States. sticky after abandonment of the renminbi’s peg to The conference’s second paper, presented by the dollar in 2005. Finally, they used the microdata to Mina Kim of the U.S. Bureau of Labor Statistics (and estimate pass-through from changes in the exchange coauthored with Deokwoo Nam of City University rate to import prices and found that short-run pass- of Hong Kong, Jian Wang of the Federal Reserve through was about 0.2, while long-run pass-through Bank of Dallas and Jason Wu of the Federal Reserve’s was about 0.8 (comparable to estimates reported by Board of Governors) was a case study of how change Auer 2010). 32 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report As noted earlier, the choice of currency in importance of a trade partner in a specific sector. which to invoice imports is a key determinant of The greater the market share of a trade partner, the pass-through. This was the subject of the third paper, higher the long-run pass-through. For the specific “Micro, Macro and Strategic Forces in International case of China, they showed that the pass-through Trade Invoicing,” presented by Cédric Tille of the rate to U.S. import prices from changes in the trade- Geneva Graduate Institute for International and partner-specific U.S. dollar–renminbi exchange Development Studies. Tille and coauthor Linda rate is 0.81 at the six-month horizon and 1 at the Goldberg of the Federal Reserve Bank of New York 12-month horizon. used a highly disaggregated dataset on all Canadian imports between February 2002 and February 2009 Importance of a General-Equilibrium to uncover a number of new stylized facts about the Perspective determinants or correlates of which currency is used Pass-through regressions can be controversial. to invoice imports. While most Canadian imports Like all single-equation regressions, pass-through come from the U.S. and are invoiced in U.S. dollars, regressions are susceptible to omitted-variable Tille and Goldberg found that larger transactions bias. Specifically, failure to control for the types of were more likely to be invoiced in the importer’s cur- shocks hitting the economy may cause pass-through rency. They hypothesized that one possible implica- estimates derived from standard regressions to be tion is that a shift in the structure of importing from upwardly or downwardly biased. large numbers of small importers to small numbers For example, suppose that the domestic of larger ones (such as Wal-Mart, for example) might economy is hit by an expansionary nominal (monlead to greater use of the importers’ currency for etary) shock. This will typically cause the domestic transactions and, thereby, to less exchange rate pass- currency to depreciate and drive up nominal wages, through to import prices. The fourth paper, “The Origin of Exchange Rate increasing the prices of domestic goods. A passthrough regression that fails to control for such Shocks, Market Structure, and Pass Through,” pre- shocks would yield downwardly biased estimates of sented by Raphael Schoenle of Brandeis University, the pass-through coefficient. Alternatively, suppose investigates the importance of variation in firms’ that the domestic economy is hit by a favorable markups as an explanation for incomplete long- technology shock. Such a shock will cause wages— run pass-through. Schoenle said he and coauthor and, thus, domestic prices—to fall. At the same Auer started by decomposing bilateral exchange- time, for low values of the intertemporal elasticity of rate movements between the U.S. and its trading substitution, the currency will tend to depreciate and partners into two components, the first capturing the standard pass-through regression will generate the dollar against all currencies except that of the upwardly biased estimates of pass-through. specific trading partner and the second capturing Saroj Bhattarai’s presentation, “Exchange Rate the currency of the specific trade partner against the Pass-Through in General Equilibrium,” examined rest of the world. the extent to which standard pass-through regres- The authors showed that pass-through rates sions are susceptible to bias by writing down a of exchange rate movements to import prices are standard general-equilibrium model of a small open much higher for broad changes in the value of the economy. Estimating the model using data for three dollar than they are for changes in the currency of small open economies (Australia, Canada and New a specific trade partner. They also showed that it Zealand), he found in all three cases that long-run is not the overall economic importance of a trade pass-through is complete, in contrast to findings in partner that matters for pass-through but, rather, the the regression literature. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 33 “The Geography of Consumer Prices,” presented by Attila Rátfai (and coauthored with Ádám Reiff of Magyar Nemzeti Bank), also used a generalequilibrium model to shed new light on existing statistical studies. A seminal paper by Engel and Rogers (1996) estimates that the effective width of the U.S.–Canada border is 75,000 miles, based on a comparison of prices for the same goods in the U.S. and in Canada. Rátfai said he and Reiff first used data on the prices for 46 goods and services sold in both Hungary and Slovakia to estimate the effective width of the border between the two countries with the Engel and Rogers method and arrived at an estimate of 4,236 miles. They then calibrated a multiregion general-equilibrium model to the same data (with the feature that shopping at more distant Conference participants hear how globalization affects pricing. locations is costlier to the consumer) and found Agreement (ITA) of the World Trade Organization that the implied width of the border fell to just 89 caused the globalization of the IT sector to greatly miles, or about 2.1 percent of what is estimated in increase after 1995. (The ITA eliminated all tariffs on the reduced-form regression. The paper argues that IT goods globally in four stages between 1997 and part of the reason the reduced-form estimate of the 2000. The pact was signed by more than 50 coun- border effect is so distorted is that it “confounds the tries, accounting for over 95 percent of world trade in underlying border friction with the effect of lumpy ITA-covered products.) and staggered price-setting.” With the extensive use of cross-border production networks in IT, these tariff reductions had an Implications for Measurement amplified effect on final prices. The concomitant of The last two papers examined potential implica- this was rapid declines in the prices of imported IT tions of globalization for the measurement of macro- goods, which are not well-captured by the conveneconomic aggregates. Accurate measurement of the tional import and export price indexes. Specifically, macroeconomy is challenging in the best of times. the conventional indexes overstate the true rate of These challenges are amplified when prices for indi- price change because they fail to take proper ac- vidual goods and services rapidly change, and when count of substitution possibilities, changes in tariffs there is a lot of churning of products (arrival of new and, most importantly, increases in the variety of models or varieties, disappearance of older ones). imports and exports over time. The failure to fully The U.S. economy experienced a surge in capture these price declines also has implications productivity growth in the late 1990s (the so-called for the measurement of productivity. Mandel noted New Economy)—much of it attributed to innova- that, when properly measured, improvements in U.S. tion in the information technology sector. Benjamin terms of trade can account for about one-eighth of Mandel’s paper, “Effects of Terms of Trade Gains and the pickup in labor productivity growth that the U.S. Tariff Changes on the Measurement of U.S. Produc- experienced between 1996 and 2006, or one-fifth of tivity Growth” (Feenstra et. al 2011, coauthored with the increase in total factor productivity growth over Robert Feenstra, Marshall Reinsdorf and Matthew the same period. Slaughter) argues that the Information Technology Christopher Kurz presented the final paper, 34 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report “Offshoring Bias in U.S. Manufacturing: Implications highlights the biases associated with sourcing inter- for Productivity and Value Added” (Houseman et mediate goods overseas, it leaves for future research al. 2010, coauthored with Susan Houseman, Paul the potential biases associated with imported capital Lengermann and Mandel). It highlights a different inputs and services. Cavallo and Landry (2010) bias in the official statistics associated with glo- point out the important role that imports of capital balization—this one due to a shift of inputs to U.S. goods have played in U.S. productivity growth in manufacturers from (relatively high-cost) domestic recent decades but do not address the question of suppliers to (relatively low-cost) foreign ones. Price potential biases associated with shifting to low-cost declines associated with this change were not producers of those goods. The limited information captured by the official price indexes, with the result available on the prices of internationally traded that import prices were overstated, Kurz said. The services suggests the possibility of significant biases authors estimated that as a result of this bias in the associated with the growth of services offshoring. official import price statistics, multifactor productiv- Likewise, the biases associated with substitution ity growth in manufacturing was overstated by 0.1 to possibilities and increased variety that Feenstra et al. 0.2 percentage points from 1997 to 2007, while the (2011) investigate in the context of IT may also arise growth of real value added was overstated by 0.2 to in other traded-goods sectors. —Mark Wynne 0.5 percentage points. Conclusions As with all research programs, progress made in addressing the questions posed at the conference raised more questions. On the question of pass-through, the newer research using detailed price data suggests that long-run pass-through is a lot higher than previously estimated, although the empirical regularity between transaction size and choice of invoicing currency uncovered by Tille and Goldberg in the Canadian data suggests that pass-through may vary over time as market structures change. Given the critical importance of pass-through elasticity for the international transmission of inflation, further research on its determinants and magnitude is clearly warranted. In the measurement area, while there has been a significant amount of work documenting problems with measures of consumer price inflation (see, for example, Wynne and Sigalla 1996, and Wynne and Rodriguez-Palenzuela 2004), relatively little is known about the extent of biases in measures of import and export prices. Yet official measures of such prices are known to be subject to the same sorts of biases that affect measures of consumer price inflation. While the work of Houseman et al. (2010) Note Susanna Bosshard of the Swiss National Bank provided expert logistical support for the conference. References Auer, Raphael (2010), “Exchange Rate Pass-Through, Domestic Competition and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi,” Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper no. 68. Auer, Raphael, and Andreas Fischer (2010), “The Effect of Low-Wage Import Competition on U.S. Inflationary Pressure,” Journal of Monetary Economics 57 (4): 491–503. Cavallo, Michele, and Anthony Landry (2010), “The Quantitative Role of Capital Goods Imports in U.S. Growth,” American Economic Review Papers and Proceedings, 100 (2): 78–82. Engel, Charles M., and John H. Rogers (1996), “How Wide Is the Border?” American Economic Review 86 (5): 1,112–25. Wynne, Mark A., and Fiona Sigalla (1996), “A Survey of Measurement Biases in Price Indexes,” Journal of Economic Surveys 10 (1): 55–89. Wynne, Mark A., and Diego Rodriguez-Palenzuela (2004), “Measurement Bias in the HICP: What Do We Know and What Do We Need to Know?” Journal of Economic Surveys 18 (1): 79–112. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 35 Immigration Policy in an Era of Globalization: A Joint Conference with Southern Methodist University Migration is sometimes termed the “last fron- Canada, which accept immigration as a founding tier” of globalization. While markets such as those ideal; countries of immigration, such as Germany for goods and financial exchange are highly global- and the United Kingdom, which host large, well- ized, labor markets remain largely domestic. Only established immigrant populations; and latecom- 3 percent of the world’s population have migrated ers, such as Japan and Korea, which are slowly from their country of birth. The paucity of migration opening up to migrants and coming to terms with means that large cross-country wage differentials an increasing need for foreign workers and poli- persist, exacerbating global inequality. It also sug- cies governing such flows.1 gests that large gains from enhanced labor mobility remain possible. In free societies, these advances largely accrue Nations of Immigrants The U.S. is a “nation of immigrants” and prides to migrants. And while natives typically benefit itself on the idea that an enterprising individual from migration, gains are distributed unequally. can come to its shores and realize the American Immigration policy can improve matters, dream. Despite this ideal, there are relatively few though it often falls short. The inability of such visas available today for work-based immigrants. policies in many cases to regulate migration, such In their keynote address, Pia Orrenius, assistant as in the U.S., and to integrate migrants, which is vice president and senior economist at the Federal the perception in much of Europe, has produced a Reserve Bank of Dallas, and Madeline Zavodny, divergence between desired and actual outcomes. an economics professor at Agnes Scott College, In some cases, gaps have formed when a welcom- explained how only 7 percent of permanent resi- ing labor market, operating apart from the govern- dent visas (“green cards”) go to employment-based ment, has employed foreigners and thus spurred applicants. The U.S. lets in a significantly smaller illegal immigration. In other cases, immigrants share of work-based permanent migrants than have entered legally but failed to fully integrate, other Organization for Economic Cooperation according to natives, decades after becoming per- and Development (OECD) developed countries manent residents or naturalized citizens. (Chart 1), reserving the great majority of green The evolving migration and integration expe- cards for family and humanitarian migrants. riences and policy gaps in a number of advanced Employment-based migration is managed through industrial democracies were subjects of a 2011 a complex system of temporary visas for high- Federal Reserve Bank of Dallas conference co- skilled workers (such as H-1B, L-1 and TN visas) sponsored with the John Goodwin Tower Center and low-skilled, seasonal workers (H-2A, H-2B for Political Studies at Southern Methodist Univer- visas), Orrenius and Zavodny noted. The system is sity. The May 19–20 meeting convened academics limited by fixed visa quotas that are not responsive in political science, sociology and economics from to the business cycle, do not prioritize high-skilled around the world. immigrants and are allocated on a first-come, For the discussion, three groupings were iden- first-served basis. In a typical year, thousands of tified: nations of immigrants, such as the U.S. and would-be immigrants with high skills are turned 36 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Canadians are more likely to view immigration as an opportunity, not a problem, than are members Chart 1 U.S. an OECD Outlier in Share of Permanent Work-Based Visas of the public in other OECD countries (Chart 2). Canadians also have a strong commitment to mul- Percent 90 ticulturalism over traditional models of integration, Reitz said. 80 However, there may be cracks in the Cana- 70 dian model. Despite having high education levels, 60 more recent immigrants have lower employment 50 rates than those from prior immigration waves and 40 require more government assistance. As a result, some observers have questioned 30 the multiculturalist model and argued that im- 20 migrants must become more integrated. To better 10 match immigrants to labor market opportunities, 0 Korea Switzerland Spain Italy Germany U.K. Australia France Canada U.S. SOURCE: Organization for Economic Cooperation and Development, International Migration Outlook 2011. Reitz noted, the government has changed the point system to give greater preference to young immigrants with knowledge of official languages and experience in “shortage” occupations. The provincial nomination program gives provinces a say in immigrant selection, and the new “Canada away as the government runs out of visas; mean- experience class” allows temporary work-based while, many of those with low skills simply enter migrants and foreign students to eventually seek the country illegally. permanent residence. The U.S. population of unauthorized immi- Australian immigration contains elements of grants exceeded 11 million in 2010, according to the U.S. and Canadian experiences, said Stephen speaker Philip L. Martin, a professor in the Agri- Castles, a research professor of sociology at the cultural and Resource Economics Department at University of Sydney. Like the U.S., Australia has a the University of California, Davis. In a 2010 poll, long history of immigration, and like Canada, it has 73 percent of the U.S. public surveyed said they sought immigrants to help populate its vast nation. were dissatisfied with the immigration system, he By using a points system geared toward skilled said. The financial crisis raised anti-immigrant workers, Australia has brought in immigrants to sentiment, and recent immigration laws focus on permanently settle and quickly become citizens. 2 3 enforcement, including expulsion of unauthorized However, like the U.S., Australia has faced entrants, rather than providing a path to legalized increasing security concerns following 9/11 and status or granting admission to more high-skilled the Bali bombing in 2002. According to Castles, the immigrants. media and politicians have raised public fears that In stark contrast to the U.S., Canada favors Australia is about to be swamped by Indo–Chinese high-skilled individuals for admission under a “boat people,” who arrive illegally. Many believe point-based system, with public opinion support- these migrants are trying to take advantage of ing continued high levels of immigration, said asylum laws to receive government benefits. The another participant, Jeffrey G. Reitz, a sociology opposition party has vowed, if elected, to decrease professor at the University of Toronto. In fact, benefits to asylum seekers to help stem the flow. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 37 More recent migration policies focus on economically motivated temporary migrants rather than new groups of permanent settlers. Countries of Immigration Chart 2 Canadians Less Likely than Other Nations to See Problems with Immigration Percent viewing immigration more as a problem than opportunity 70 2008 In her discussion of German immigration, Terri E. Givens, associate professor of government at the University of Texas at Austin, highlighted 2009 60 50 striking changes that have occurred over the past 50 years. In the 1960s, the German government implemented guest-worker programs to bring in 40 30 temporary foreign labor to help fuel a booming economy. Many workers settled permanently but with mixed success. Decades later, for example, 20 10 Turkish immigrants and their descendants still have relatively high rates of unemployment and 0 Canada France Germany Netherlands Italy welfare dependency. More recently, German policy has focused on addressing two main policy gaps: integrating European avg.(EU5) U.S. SOURCE: German Marshall Fund, Transatlantic Trends: Immigration, 2010. Givens said. In a landmark change, a 2000 naturalization law granted citizenship to the Germanborn children of legal immigrants. Meanwhile, a tion. These were sharply increasing work permits new visa targeted information technology workers issued; adding new, temporary labor migration from India and other skilled workers from outside programs and expanding existing ones; opening the European Union. Both initiatives have had borders to newly added EU member states; and limited success. Muslim immigrants’ purported adopting an Australian-style points system. high-level authorities such as Chancellor Angela Hansen argued the search for high-skilled labor had its analogues in the EU, but the U.K. was other- Merkel, and an ensuing controversy over the multi- wise in a policy league of its own in Europe. Notably, cultural model has kept in place a perception that there was no gap between intent and outcomes as Germany remains a reluctant immigration state. the government deliberately sought out migrant Meanwhile, admissions under the high-skilled labor. A divide later emerged as the recession-weary work visa program have remained low. public became disenchanted with the meteoric rise Another country of immigration, the U.K., has also undergone dramatic change since the late in immigration and the new government, elected in 2010, promoted restrictive measures. 1990s, as described by Randall Hansen, who holds the Canada Research Chair in Immigration and Latecomers Governance in the political science department The immigration experience in Japan and at the University of Toronto. In the late ’90s, the Korea is far removed from that of other developed New Labour government made four decisions that countries, according to Erin Aeran Chung, the marked a fundamental break with previous regimes Charles D. Miller Assistant Professor of East Asian and contributed to a massive increase in immigra- U.K. NOTES: 2008 data not available for Canada and Spain. EU5 refers to France, Germany, Italy, the Netherlands and the U.K. migrants and attracting more skilled immigrants, failed integration has provoked criticism from Spain Politics at Johns Hopkins University. Both are 38 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report racially homogenous countries with low fertility da, the policy gaps and unintended consequences rates, which creates tension between the need for of immigration have produced a public opinion workers and the desire to preserve national iden- backlash. The impact of 9/11 and other terrorist at- tity and culture. Governments in both nations put tacks, combined with recent economic weakness, off formulating official immigration policies until has heightened calls for strengthened national very recently but left loopholes for coethnics and security, eroding faith in the multicultural model an industrial trainee program. and pressuring governments to curb immigration. Operating without an official policy led to Yet not all immigrant-receiving nations have had unintended consequences, as legal and illegal the same experiences, and with economic growth immigrants entered without laws to manage the increasingly concentrated outside traditional flow. Industrial trainee programs were rife with receiving countries, the future immigration debate employer abuse of migrants, and both countries may be more like the one in Japan and Korea than experienced pro-immigrant backlashes as the the familiar story playing out in Western Europe plight of migrant workers came to light. and North America. —Pia Orrenius and Christina Daly In Korea, the government passed workplace protections and new laws for naturalizing familybased migrants, particularly women who married Korean citizens. In Japan, the effort to protect immigrant rights was more decentralized, with many assistance programs and protections for immigrants championed at the local level through grassroots organizations. Local action produced a dramatic increase in the number of foreigners granted permanent residence, but few immigrants were given the opportunity to become citizens. Conclusion Getting immigration policy right may be an elusive goal. With the possible exception of Cana- Notes Other places covered by conference contributors but not summarized here included France, Italy, the Netherlands, Sweden, Denmark, Norway, Switzerland and the European Union. Conference papers will be published in the third edition of “Controlling Immigration: A Global Perspective,” Palo Alto, Calif.: Stanford University Press, forthcoming. 2 Estimates of the unauthorized population are based on “Unauthorized Immigrant Population: National and State Trends, 2010,” by Jeffrey Passel and D’Vera Cohn, Pew Hispanic Center, Washington, D.C., 2011. 3 “Poll Shows Most in U.S. Want Overhaul of Immigration Laws,” by Randal Archibold and Megan Thee-Brenan, New York Times, May 3, 2010. Data from New York Times/CBS News poll. 1 Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 39 Dynamic Stochastic General-Equilibrium Modeling: 10th Annual Advances in Econometrics Conference The Globalization and Monetary Policy Institute and economics department at Southern These models have their origins in the seminal contributions of Kydland and Prescott (1982) and Methodist University cosponsored the 10th annual Long and Plosser (1983), which revolutionized Advances in Econometrics Conference in 2011. The conference highlighted progress made in the development of dynamic stochastic general-equi- empirical macroeconomics. Early models in what was first known as the “real business cycle” literature were driven by real librium (DSGE) models for use in monetary policy shocks and did not feature the kinds of frictions analysis. Held Nov. 4–6 on the SMU campus in Dallas, that seem essential to understanding the role of monetary policy. Goodfriend and King (1997) the event was organized by Nathan Balke and Tom and Clarida, Galí and Gertler (1999) showed how Fomby of SMU and Mark Wynne of the Federal the basic real business-cycle framework could be Reserve Bank of Dallas. It featured presentations augmented with imperfectly competitive product by researchers from the Federal Reserve Banks of markets and Calvo price-setting to allow meaning- Dallas and Kansas City, Chiba Keizai University, the ful analysis of monetary policy within this class of University of Padova, the University of Kiel, the Uni- general-equilibrium models. versity of California at Irvine and Boston University. DSGE models have become an essential part of economists’ empirical toolkit in recent years. Subsequent work by Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007) laid the foundations for these models to become Attendees at the conference, held on the SMU campus, reviewed progress made in development of DSGE models for monetary policy analysis. 40 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report generate artificial data and then applying the standard Bayesian techniques to assess how well they recover the (known) structural parameters. The program’s second paper, “Inflation Rate and Nominal Exchange Rate Volatility Brought About by Optimal Monetary Policy Under Local Currency Pricing,” was presented by Eiji Okano of Chiba Keizai University in Japan. It sought to characterize the nature of optimal monetary policy in a globalized environment when firms engage in local currency pricing. Under producer currency pricing—that is, when firms set prices in the currency of the country in which production Enrique Martínez-García of the Dallas Fed discusses NOEM models and Bayesian estimation. occurs—the prices of imported goods fully reflect exchange-rate movements. Under such circum- the workhorse frameworks for policy analysis in stances, stabilizing domestic (or producer price most central banks. index) inflation is the optimal monetary policy. However, when firms engage in local currency The Papers The conference started with a presentation pricing, the law of one price no longer holds, and Okano showed that it is then optimal for central by Enrique Martínez-García on “NOEM Models banks to stabilize consumer price inflation (which and Bayesian Estimation: The Challenges that Lie is closer to actual central bank practice). Ahead?” (coauthored with Diego Vilán and Mark U.S. inflation, as measured by annualized Wynne). This paper is part of a long-standing quarterly changes in the gross domestic product project of Martínez-García and Wynne that seeks deflator, has ranged from lows of less than 1 per- to understand the potential role of global slack as a cent in the late 1990s to highs exceeding 12 percent determinant of U.S. inflation dynamics. In an earlier paper, Martínez-García and Wynne (2010) showed there is analytical content to the so-called global slack hypothesis, at least within the context of the widely used New Keynes- in the 1970s as the Great Moderation of the 1980s, 1990s and 2000s followed the Great Inflation of the 1960s and 1970s. In “Fitting U.S. Trend Inflation: A Rolling-Window Approach,” the program’s third paper, Efrem ian model. However, empirical support for the idea Castelnuovo of the University of Padova in Italy exis fragile at best. Simple reduced-form regressions amined how much of the variation in inflation was provide some support, but it would be prefer- due to shocks to the long-run or trend inflation rate able to evaluate the idea by taking a full structural post-World War II. Castelnuovo, using a closed- model to the data. economy variant of the standard New Keynesian In recent years, Bayesian techniques have model Martínez-García and Okano employed in become increasingly popular as a means of esti- their presentations, decomposes inflation move- mating structural DSGE models. In his presenta- ments into components attributable to cost-push tion, Martínez-García examined how well such shocks, demand shocks, policy shocks and, finally, techniques estimate key model parameters by shocks to the monetary authority’s inflation target using the simple, stripped-down, two-country or trend inflation rate. His main finding is that model in Martínez-García and Wynne (2010) to shocks to trend inflation account for a significant Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 41 amount of the variation in inflation and the federal els that are subsequently evaluated numerically funds rate over the period studied. on computers. Many steps in this process have All models are imperfect approximations of been automated, thanks to the development reality, with varying degrees of success in account- of sophisticated software packages. However, a ing for observed data series. When economists crucial first step in many cases is making a model have two alternative models that can account stationary, a step still dependent on old-fashioned for what is observed in reality, is there a way to pencil-and-paper techniques. In his presentation choose between them? The fourth paper, “Model “(Log) Linear Approximation of Stochastic Growth Comparison in Market Behaviors: A Formal Test Models: Why Scratch the Right Ear with the Left to New Keynesian Three-Equations and Structural Hand?” Martin Fukac of the Federal Reserve Bank Stochastic Volatility Models,” by Tae-Seok Jang of of Kansas City (coauthor with Jaromír Beneš of the the University of Kiel in Germany, illustrated the International Monetary Fund) argued that this ini- model comparison developed by Hnatkovska, tial step is in many cases unnecessary if the model Marmer and Tang (2011) to test alternative specifi- exhibits the balanced growth property. cations of the basic New Keynesian model and al- Fabio Milani of the University of California ternative models of structural stochastic volatility. at Irvine presented “Expectations Formation and Jang shows that while the hybrid New Keynesian Monetary DSGE Models: Beyond the Rational model (i.e., the model augmented to include price Expectations Paradigm,” coauthored with Ashish indexation) fits U.S. data better during both the Rajbhandari, also of UC–Irvine. The paper explored Great Inflation and Great Moderation periods than the consequences of departing from the strong form a purely forward-looking version of the model, the of the rational expectations hypothesis (wherein Hnatkovska, Marmer and Tang test finds the differ- economic agents incorporate all available informaences are not statistically significant. One of the most important drivers of progress tion in forming their expectations and are certain about the model’s structure) in the standard New in economic research has been the revolution Keynesian model. Milani showed how allowing for in computing power over the past two decades. news shocks, learning and using direct measures of Economists can build ever-more detailed mod- expectations from surveys can improve the fit and Participants heard that new models are needed to explain the financial system’s impact on the real economy and to better define international trade and financial linkages. 42 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report forecasting performance of the model. The final presentation, “Frequency Domain Analysis of Medium Scale DSGE Models with Ap- monetary policy is now made, models that take seriously international trade and financial linkages will be crucial to the policy process. —Mark Wynne plications to Smets and Wouters (2007),” by Denis Tkachenko (coauthor with Zhongjun Qu of Boston University) examined the issues of parameter References identification, estimation and inference in DSGE Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans (2005), “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy 113 (1): 1–45. models. In a related paper, Qu and Tkachenko (2010) provide necessary and sufficient conditions for local identification of the parameters of mediumscale DSGE models, and in his presentation, Tkachenko illustrated the method with the widely used and cited Smets–Wouters model. Echoing some of the key points of Martínez-García’s presentation that opened the conference, the paper derived the nonidentification curves for the Smets–Wouters model and showed which parameters must be fixed or calibrated to achieve local identification. Clarida, Richard, Jordi Galí and Mark Gertler (1999), “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature 37 (4): 1661–1707. Erceg, Christopher J., Luca Guerrieri and Christopher Gust (2006), “SIGMA: A New Open Economy Model for Policy Analysis,” International Journal of Central Banking 2 (1): 1–50. Goodfriend, Marvin, and Robert G. King (1997), “The New Neoclassical Synthesis and the Role of Monetary Policy,” in NBER Macroeconomics Annual 1997, ed. Ben S. Bernanke and Julio J. Rotemberg (Cambridge, Mass.: MIT Press), 231–96. Tkachenko also showed how parameter estimates and impulse-response functions can differ significantly when the model is estimated using data at business-cycle frequencies as opposed to the full spectrum. To the extent that most DSGE models are designed to understand the business cycle, omitting data at low and very high frequencies when estimating the model might be desirable. Conclusions The conference confirmed that New Keynesian DSGE models are useful tools for understand- Hnatkovska, Viktoria, Vadim Marmer and Yao Tang (forthcoming), “Comparison of Misspecified Calibrated Models: The Minimum Distance Approach,” Journal of Econometrics. Kydland, Finn E., and Edward C. Prescott (1982), “Time to Build and Aggregate Fluctuations,” Econometrica 50 (6): 1,345–70. Long, John B., and Charles I. Plosser (1983), “Real Business Cycles,” Journal of Political Economy 91 (1): 39–69. Martínez-García, Enrique, and Mark A. Wynne (2010), “The Global Slack Hypothesis,” Federal Reserve Bank of Dallas Staff Papers, no. 10. ing business fluctuations in closed and open economies and also for thinking about important monetary policy questions. However, the current models have nothing to say about how the financial system impacts the real economy; given the events of the past few years, that must now be a top priority for research. Also, to date, there have been relatively few attempts to develop openeconomy versions of these models (Erceg, Guerrieri and Gust 2006 being a notable exception). With globalization defining the environment in which Qu, Zhongjun, and Denis Tkachenko (2010), “Identification and Frequency Domain QML Estimation of Linearized DSGE Models,” Boston University, Department of Economics Working Paper (August). Smets, Frank, and Rafael Wouters (2007), “Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach,” American Economic Review 97 (3): 586–606. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 43 Working Papers Issued in 2011 All institute working papers are available on the Dallas Fed website at www.dallasfed.org/institute/wpapers/. No. 68 No. 76 Exchange Rate Pass-Through, Domestic Competition and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi Information Costs, Networks and Intermediation in International Trade Dimitra Petropoulou Raphael Auer No. 69 What Can EMU Countries’ Sovereign Bond Spreads Tell Us About Market Perceptions of Default Probabilities During the Recent Financial Crisis? No. 77 Export Basket and the Effects of Exchange Rates on Exports—Why Switzerland Is Special Raphael Auer and Philip Saure Niko Dötz and Christoph Fisher No. 78 No. 70 Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad Lian An and Jian Wang Alessandro Calza and Andrea Zaghini Published in The B.E. Journal of Macroeconomics, vol. 11, May 2011, article 12. No. 71 No. 79 Vertical Specialization, Intermediate Tariffs, and the Pattern of Trade: Assessing the Role of Tariff Liberalization to U.S. Bilateral Trade 1989–2001 Low Interest Rates and Housing Booms: the Role of Capital Inflows, Monetary Policy and Financial Innovation Shalah Mostashari Filipa Sá, Pascal Towbin and Tomasz Wieladek No. 72 No. 80 Global Banking and International Business Cycles Monetary Policy, Capital Inflows, and the Housing Boom Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions Robert Kollmann, Zeno Enders and Gernot J. Müller Published in European Economic Review, vol. 55, April 2011, pp. 407–26. No. 73 Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices Filipa Sá and Tomasz Wieladek No. 81 Lessons for Monetary Policy: What Should the Consensus Be? Otmar Issing Saroj Bhattarai and Raphael Schoenle No. 74 A Redux of the Workhorse NOEM Model with Capital Accumulation and Incomplete Asset Markets No. 82 Oil Shocks through International Transport Costs: Evidence from U.S. Business Cycles Hakan Yilmazkuday Enrique Martínez-García No. 75 International Liquidity Provision During the Financial Crisis: A View From Switzerland Raphael Auer and Sébastien Kraenzlin No. 83 Price Setting in a Leading Swiss Online Supermarket Martin Berka, Michael B. Devereux and Thomas Rudolph No. 84 Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap David Cook and Michael B. Devereux 44 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Working Papers (continued) No. 85 No. 95 Optimal Monetary Policy Under Financial Sector Risk Borders and Big Macs Anthony Landry Scott Davis and Kevin X.D. Huang No. 86 Do Banking Shocks Matter for the U.S. Economy? No. 96 A Real-Time Historical Database for the OECD Naohisa Hirakata, Nao Sudo and Kozo Ueda Adriana Z. Fernandez, Evan F. Koenig and Alex Nikolsko-Rzhevskyy No. 87 No. 97 Currency Blocs in the 21st Century Christoph Fischer No. 88 Immigrant Language Barriers and House Prices Andreas M. Fischer Will be published in Regional Science and Urban Economics, vol. 42, May 2012, pp. 389–95. Global Asset Pricing Karen K. Lewis No. 98 No. 89 Do Mood Swings Drive Business Cycles and Is It Rational? Financial Integration and International Business Cycle Co-Movement: The Role of Balance Sheets Paul Beaudry, Deokwoo Nam and Jian Wang Scott Davis Pubished in Journal of International Economics, vol. 85, November 2011, pp. 302–16. No. 99 No. 90 A Sentiment-Based Explanation of the Forward Premium Puzzle A Cross-Country Quarterly Database of Real House Prices: A Methodological Note Adrienne Mack and Enrique Martínez-García No. 100 Jianfeng Yu Thousands of Models, One Story: Current Account Imbalances in the Global Economy No. 91 Michele Ca’ Zorzi, Alexander Chudik and Alistair Dieppe Indeterminacy and Forecastability Ippei Fujiwara and Yasuo Hirose No. 92 Asian Financial Linkage: Macro-Finance Dissonance Ippei Fujiwara and Koji Takahashi No. 101 Aggregation in Large Dynamic Panels M. Hashem Pesaran and Alexander Chudik No. 102 No. 93 How Have Global Shocks Impacted the Real Effective Exchange Rates of Individual Euro Area Countries Since the Euro’s Creation? How Much Asymmetry Is There in Bond Returns and Exchange Rates? Matthieu Bussiere, Alexander Chudik and Arnaud Mehl Ippei Fujiwara, Lena Mareen Körber and Daisuke Nagakura No. 103 No. 94 Size, Openness, and Macroeconomic Interdependence Product Durability and Trade Volatility Alexander Chudik and Roland Straub Dimitra Petropoulou and Kwok Tong Soo Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 45 New Colleagues at the Institute New Research Associates New Economist Saroj Bhattarai Alexander Chudik is a Pennsylvania State University PhD graduate of the University of Cambridge, where Peter Egger he did research under the Swiss Federal Institute of Technology Zurich supervision of Professor Hashem Pesaran. His main Mina Kim Bureau of Labor Statistics research interests lie in openeconomy macroeconomics, international finance and econometrics. He has worked on a variety of Julien Martin topics, including macroeconomic modeling with a Paris School of Economics global perspective, transmission of shocks in highdimensional systems, cross-section dependence, Dimitra Petropoulou aggregation, global imbalances and exchange rate University of Oxford determination. Prior to joining the Globalization and Monetary Policy Institute in November 2011, Attila Rátfai Chudik was an economist in the international Central European University policy analysis division of the European Central Bank, where he focused on global systemic eco- Kim Ruhl nomic and financial issues. He also worked at the New York University International Monetary Fund and ING Bank. Filipa Sá University of Cambridge Tomasz Wieladek London Business School Hakan Yilmazkuday Florida International University Jianfeng Yu University of Minnesota 46 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report New Colleagues New Advisory Board Member Horst Köhler served as (continued) the ninth president of the Federal Republic of Germany between 2004 and 2010. Dur- New Senior Fellow ing his term, he not only was Michael Bordo is profes- engaged in the domestic sor of economics and director of the Center for Monetary and Financial History at Rutgers University. He has held previous academic positions at the University of South Carolina and Carleton University in Ottawa, Canada. He has been a visiting professor at the University of California, Los Angeles; Carnegie Mellon University; Princeton University; Harvard University; and Cambridge University, where he was Pitt Professor of American History and Institutions. Bordo has been a visiting scholar at the International Monetary Fund, Federal Reserve Banks of St. Louis and Cleveland, the Federal Reserve Board of Governors, the Bank of Canada, the Bank of England and the Bank for International Settlements. He also is a research associate of the National Bureau of Economic Research. He has published many articles in leading journals and 10 books on monetary economics and monetary history. He is editor of a series of books for Cambridge University Press: Studies in Macroeconomic History. He has a BA from McGill University, a MSc (economics) from the London School of Economics and a PhD from the University of Chicago. arena but also was committed to the field of foreign issues. He advocated a human dimension to globalization with clearly defined rules and was therefore a staunch campaigner for poverty eradication and the African continent. From 1976 until 1990, Köhler served in the Ministry of Economics, the State Chancellery, the Finance Ministry, the Policy Principles DirectorateGeneral and the Finance and Credit DirectorateGeneral. Appointed as state secretary in 1990, Köhler negotiated the German–German monetary union with the German Democratic Republic (GDR) leadership. Additonally, he achieved the agreement on the withdrawal of Soviet troops from the GDR. He was chief negotiator for the Maastricht Treaty on European Monetary Union, as well as the personal representative (sherpa) of Federal Chancellor Helmut Kohl for the World Economic Summits of the G-7. In 1993, Köhler became president of the German Savings Bank Association and worked to create a modern image of the organization. He recognized the particular responsibility of the savings banks for small and medium-sized enterprises and for the social climate in the municipalities. He served as president of the European Bank for Reconstruction and Development in London from 1998 until 2000, when he was proposed as the new managing director of the International Monetary Fund in Washington, D.C. He acted in that position until his election as federal president in 2004. Köhler obtained his doctorate from the University of Tübingen. His dissertation looked at the effect of technical advances on labor. Globalization and Monetary Policy Institute 2011 Annual Report • FEDERAL RESERVE BANK OF DALLAS 47 Institute Staff, Advisory Board and Senior Fellows Institute Director Mark A. Wynne Guillermo Ortiz Former Governor, Banco de México Staff Economists Alexander Chudik Scott Davis Anthony Landry Enrique Martínez-García Jian Wang Kenneth S. Rogoff Thomas D. Cabot Professor of Public Policy, Harvard University Advisory Board John B. Taylor, Chairman Mary and Robert Raymond Professor of Economics at Stanford University Charles R. Bean Deputy Governor, Bank of England Martin Feldstein George F. Baker Professor of Economics, Harvard University Heng Swee Keat Managing Director, Monetary Authority of Singapore R. Glenn Hubbard Dean and Russell L. Carson Professor of Finance and Economics, Graduate School of Business, Columbia University Otmar Issing President, Center for Financial Studies Horst Köhler Former President of the Federal Republic of Germany Finn Kydland Jeff Henley Professor of Economics, University of California, Santa Barbara Recipient, 2004 Nobel Memorial Prize in Economic Sciences Masaaki Shirakawa Governor, Bank of Japan William White Former Head of the Monetary and Economic Department, Bank for International Settlements Senior Fellows Marianne Baxter Professor of Economics at Boston University Michael Bordo Professor of Economics at Rutgers University W. Michael Cox Director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business Mario Crucini Professor of Economics at Vanderbilt University Michael B. Devereux Professor of Economics at the University of British Columbia Charles Engel Professor of Economics at the University of Wisconsin–Madison Karen Lewis Joseph and Ida Sondheim Professor in International Economics and Finance at the University of Pennsylvania’s Wharton School Francis E. Warnock Associate Professor of Business Administration at the Darden Graduate School of Business at the University of Virginia 48 Federal Reserve Bank of Dallas • Globalization and Monetary Policy Institute 2011 Annual Report Global Economic Data Resource Introduced in 2011 In February 2011, the Globalization and Monetary Policy Institute launched Global Economic Conditions, a weekly data presentation providing insight into world economic developments. Global Economic Conditions provides broad-based and timely coverage of aggregate activity, including data on production, unemployment, inflation, international capital and commodity markets, public finances and monetary policy. It also examines current topics such as global current account balances and the euro-area sovereign debt crisis. The collection of charts (see examples below) tracks changes in key advanced and emerging markets and serves as a valuable resource for those seeking a comprehensive, data-driven assessment. Global Economic Conditions is updated each Monday at 2 p.m. Central time and can be accessed through the institute’s website: www.dallasfed.org/institute/documents/global.pdf. Sampling of Charts in Global Economic Conditions