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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