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Contents
Letter from the President

Cheaper by the Box Load:
Containerized Shipping a Boon for World Trade

Measuring the External Value of the Dollar

Summary of Activities 2013

International Conference on Capital Flows
and Safe Assets

The Effect of Globalization on Market Structure,
Industry Evolution and Pricing

Inflation Dynamics in a Post-Crisis
Globalized Economy

Institute Working Papers Issued in 2013

Institute Staff, Advisory Board and
Senior Fellows

Research Associates

Published by the Federal Reserve Bank of Dallas, March 2014. 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.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 1

Letter from the
President

ive years ago, I made an extended trip
to Asia, visiting Japan, Singapore, Hong
Kong, China and South Korea. That trip
impressed upon me how the fortunes of
some of the biggest Asian economies had diverged since
I was a member of the team of U.S. officials that met with
China’s leader, Deng Xiaoping, in 1979 to settle outstanding counterclaims between China and the U.S. and I
lived and worked in Japan a decade later.
I arrived in Japan just as the great real estate and
stock market bubbles of the 1980s were about to burst.
But for most of the 1980s, commentators here and in Europe were obsessed with the prospect of Japanese manufacturing eclipsing manufacturing in the West. Over the
subsequent quarter century, Japan has languished, while China has grown by leaps and bounds.
Over the past year, there have been encouraging signs from Japan that its decades-long struggle
with deflation may be coming to an end. Structural reforms—which are essential to boosting the country’s long-term growth rate—may prove more challenging. China continues to grow at rates that put it on
track to be the world’s largest economy before the end of this decade.
As China grows in importance in the global economy, it is essential that the leading policymakers
there have a clear understanding of how we at the Federal Reserve operate. Globalization means that
policy actions by the major central banks have global repercussions, and it is important that the motivation for the Fed’s actions be understood, not just in the U.S. but around the world.
At the time of my trip to Asia, one of the best-sellers in China was a book titled Currency Wars
(货币战争) by Song Hongbing. This book was widely read by many leading Chinese policymakers and
unfortunately propagated many myths about the way the Fed operates.
This past year, one of the economists we hired to develop our research program on the implications of globalization for monetary policy—Jian Wang—undertook on his own time to write a book titled
Demystifying the Fed (还原真实的美联储). I think this book is a valuable contribution to greater understanding between the U.S. and China, and it has already become a best-seller in China.
This is just one of the highlights from the Dallas Fed’s Globalization and Monetary Policy Institute
over the past year. This annual report contains a series of essays summarizing the activities of the excellent group of researchers we have working here at the institute, and I recommend you read it carefully to
get a sense of the broad range of work going on in this important area of economic study.

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

It is important that
the motivation for
the Fed’s actions
be understood, not
just in the U.S. but
around the world.

2 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Cheaper by the Box Load:
Containerized Shipping a Boon for World Trade
By Janet Koech

t’s hard to believe that a vessel 20
stories tall, a quarter-mile long and
made from eight Eiffel Towers’ worth
of steel can float, much less be the
future of cargo transportation between continents.
But the world’s newest and largest containership, the Maersk Triple E, may become the most
common class of cargo carrier on the seas. Copenhagen-based Maersk chose the name to reflect the
ship’s economies of scale, energy efficiency and
environmental improvement. With a capacity of
18,000 standard 20-foot containers, or TEUs, the
Triple E can hold the equivalent of 36,000 cars.1
Ever-larger ships have made transportation
costs a smaller part of the prices consumers pay—
and helped create a world in which Americans
consume goods from around the globe. Ports
and canals are expanding to accommodate them.
The Triple E, which sails the Suez Canal between
Europe and Asia, is so massive it can’t yet navigate
North American ports or even the expanded
Panama Canal.
A vessel the size of the Triple E was unimaginable a half-century ago when the first containership, the Ideal X, sailed from Newark, N.J., to
Houston with 58 containers. The early containerships—modified bulk vessels or tankers—could
transport 1,000 TEUs or fewer. The increasing use
of ships dedicated to container handling led to the
construction of larger containerships.2 Capacity
quickly expanded from about 4,000 TEUs in the
1980s to more than 6,000 in the 1990s and 10,000
in the early 2000s.
Falling transportation costs have contributed
to segmentation of production networks—components are now made wherever it is most cost-effective. Marc Levinson, author of The Box: How the
Shipping Container Made the World Smaller
and the World Economy Bigger, notes that “low

transport costs help make it economically sensible
for a factory in China to produce Barbie dolls with
Japanese hair, Taiwanese plastics and American
colorants, and ship them off to eager girls all over
the world.”3
By sharply cutting costs and enhancing reliability, container-based shipping has enormously
increased the volume of international trade, made
complex supply chains possible, facilitated the
development of just-in-time logistics and simplified the large-scale transport of consumer goods.
The separate evolution of telecommunications
systems further increased the efficiency of cargo
handling and flows at major ports.
The economic integration of widely
separated regions has increased with expanded
international trade, financial flows and movement of people. Efficiently distributing freight and
transporting people have always been important
aspects of maintaining the cohesion of economic
systems, from empires to modern nation states
and economic blocs. The opposite—poor transportation and communication infrastructure and
remoteness—isolates countries from international
markets, inhibiting their participation in global
production networks. Transport costs are especially pronounced for landlocked countries, which
are concerned not only about the quality of their
transport networks, but also the ease of movement
of goods across boundaries.
Globalization Is Not New

Containerization, along with other technological innovations in maritime, air and land-based
systems, has reduced transport costs, improved
efficiency and increased trade. This has accelerated
the pace of global economic integration in recent
decades. However, integration of world economies
is not new. Historians single out two episodes

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 3

of significant advancement in global economic
integration. The first, from 1870 to 1913, was ended
by the two world wars and the Great Depression, according to Kevin O’Rourke and Jeffrey G.
Williamson in their textbook on globalization and
history.4 Postwar economic reintegration started in
1950 and continues today. During both episodes,
transportation costs fell, reflecting productivity
gains from innovations in transport technology.
Estimates of merchandise trade as a share
of world output rose from the beginning of the
19th century until 1913, substantially dropped
in the years leading to 1950, and recovered and
surpassed 1913 levels by 1973 before continuing
to still-higher levels (Table 1).
Between 1950 and 2012, the volume of
exports increased an average of 6 percent annually, paced by rapid industrialization in developing
countries beginning in the 1990s. Exports’ share of
gross domestic product (GDP) surged in the postwar period to 25 percent in 2012 from 14 percent
in 1960 (Chart 1).
Other factors contributing to increased
economic interdependence include falling tariffs
and increased demand for goods and services
amid rising income levels and living standards.
This article focuses on the role of transportation
technology, particularly containerization, in facilitating integration.
Technological Advances,
Falling Transport Costs

Transport innovations enable production
specialization and the division of labor, widening

Chart 1
World Exports Substantially Increase in Most Recent
Era of Globalization
Index, 2005 = 100
140

Percent of world GDP
30

120
25
100

Volume
of exports

0
’50

’55

’60

’65

’70

’75

’80

’85

’90

’95

’00

’05

’10

SOURCES: International Monetary Fund; World Bank’s World Development Indicators database;
World Trade Organization.

market areas and enhancing trade opportunities.
Mechanized transport and industrial production facilitated mass production and global and
regional trade. The development of high-capacity,
low-cost mechanized transport networks and
terminals dates back to the late 18th century.5
Before that, the speed and efficiency of transport
were very low and the cost of traveling long distances was prohibitively high. Largely subsistence
economies created little demand for transport,
and trade was minimal. Only the most prized

1820

1850

1913

1929

1950

1973

1998

2005

2012

4.6

7.9

5.5

11.4

17.6

22.4

24.6

Percent

Table 1
World Merchandise Exports as a Share of Gross Domestic Product
Year

Exports’ share
of GDP

SOURCES: Monitoring the World Economy, 1820–1992, by Angus Maddison, Paris: OECD Publishing, 1995, for 1820–1950 data;
World Bank and International Monetary Fund for post-1950 data.

4 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

merchandise—gold and silver, silk, spices, jewels
and medicines—moved between continents. Land
transportation was especially slow and costly
before the introduction of steam railways and iron
steamships, major 19th century innovations that
helped create high-volume international trade.
Merchandise exports as a proportion of
world output grew from just 1 percent in 1820 to
about 8 percent in 1913, enabled by numerous
transport innovations, low-cost mass-produced
goods in Europe and North America and low-tariff
trade. This growth in world trade created economic convergence and initiated interdependence
among increasingly specialized economies.
Modes of transportation and technology
evolved from small to large, slow to fast, simple
to complex and rigid to flexible in accordance
with internationally accepted standards. In Great
Britain, canals were built in the 1760s to transport
via horse-drawn barges the growing volumes of
industrial raw materials, goods and foodstuffs.
The canals, which replaced inadequate roads that

Chart 2
Freight Rates Decline in 19th Century
Index,1870 = 100
200
180
American
export routes

160
140
120
100
80
60

American
East Coast
export routes

40
20
0
1869

1873

1877

1881

1885

1889

1893

1897

1901

1905

1909

1913

NOTE: The freight rate indexes are aggregate rates on American export routes as reported
by Douglass C. North and are deflated by the U.S. Consumer Price Index.
SOURCE: “Late Nineteenth Century Anglo-American Factor-Price Convergence: Were Heckscher and Ohlin Right?” by Kevin O’Rourke and Jeffrey G. Williamson, Journal of Economic
History, vol. 54, no. 4, 1994, Table 1.

stifled economic expansion, slashed transport
costs and increased speed and reliability. For
instance, the Bridgewater Canal in 1764 cut by
one-third the average delivery cost per ton of
coal transported seven miles to Manchester. The
cost savings encouraged investment in a limited
network of canals that helped kick-start localized
industrialization in Britain’s coalfields.6
Steam-powered railways created a cheap
mode of transport that could move raw materials, goods and passengers and surmount difficult
topography. Steam railways, together with steampowered textile mills, helped Manchester become
the world’s first industrial city. By 1830, the first
commercial rail line was built, linking Manchester
to Liverpool, 40 miles away. Soon, rails were laid
throughout developed countries, and by 1850,
railroad towns were being established as trains
provided new access to resources and markets in
vast territories.
A thousand kilometers of railways operated
in England, and more lines were quickly constructed in western Europe and North America.
Railroads represented an inland transport system
that was flexible in geographic coverage and
could carry heavy loads. They were a significant
improvement from the stagecoaches widely used
in the 18th and early 19th centuries.7
Trains on the first railway networks traveled
20 to 30 mph, three times faster than stagecoaches. The journey between New York and Chicago
(a 700-mile distance) was reduced to 72 hours in
1850 from three weeks by stagecoach in 1830. The
2,600-mile transcontinental line between New
York and San Francisco, completed in 1869, was a
remarkable achievement that reduced the crosscountry journey to just one week from six months,
aiding territorial integration and opening a vast
pool of resources and new agricultural regions in
the western United States.8
Maritime routes linking harbors, especially between Europe and North America, were
established at the beginning of the 19th century
and mostly serviced by sailing ships until 1850.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 5

Development of fast and reliable intercontinental
shipping passage was aided by the creation of
accurate navigational equipment and mapping of
sea currents and winds.
By the end of the 19th century, improved
steam-power technology revolutionized maritime
trade. Shipbuilding advances increased 1914
ship capacity to more than 12 times the 1871
tonnage—from just 3,800 gross registered tons to
47,000 tons.9 The sailing ship’s commercial utility
faded as trade shifted to the steamship.
Accordingly, ocean freight rates dropped
by about 70 percent between 1840 and 1910.10
Douglass North, an economic historian, documented the revolutionary decline in transport costs
in the 19th century. Chart 2 plots North’s aggregate
freight-rate index among American export routes,
which declined more than 41 percent between 1870
and 1910. His wheat-specific American East Coast
freight factor—freight costs as a proportion of the
overall value of shipments, including insurance and
other charges—fell 53 percent between 1870 and
1913.11 Cotton freight-rate data from three American
ports—Charleston, New Orleans and New York—
similarly declined from 1840 to 1850 (Chart 3).
The Suez and Panama canals further
shortened travel times and stimulated trade flows
between East and West. The Suez, which opened
in 1869, linked the Mediterranean Sea with the Red
Sea and Indian Ocean. London to Bombay, India—
separated by 6,274 nautical miles—was a 47 percent
shorter journey via the Suez than around South
Africa’s Cape of Good Hope.12 The Panama Canal,
completed in 1914, similarly reduced trip times
between the Atlantic and Pacific oceans (Chart 4).
Commodity prices illustrate the impact of
these advances. Mainly due to transport improvements, commodity prices in Britain and the U.S.
tended to converge between 1870 and 1913.
Wheat prices in Liverpool exceeded prices in Chicago by 58 percent in 1870, by 18 percent in 1895
and by 16 percent in 1913.
The Boston–Manchester cotton textile price
gap fell from 14 percent in 1870 to almost zero

Chart 3
Cotton Freight Rates Steadily Fall in 1800s
Pence per pound
1.4

1.2
New Orleans
1
Charleston
.8

.4
New York
.2

1820

1830

1840

1850

1860

NOTE: Cotton freight rate data are missing for New Orleans (1821-1824) and Charleston
(1825-1826).
SOURCE: “Ocean Freight Rates and Productivity, 1740-1913: The Primacy of Mechanical
Invention Reaffirmed,” by C. Knick Harley, The Journal of Economic History, vol. 48, no. 4,
1988, Table 10.

Chart 4
Suez and Panama Canals Shorten Maritime Distance
Panama Canal
12,000

New York –
Sydney

9,332
13,522

Liverpool –
San Francisco

7,836
13,135

New York –
San Francisco

5,262
Via Straits of Magellan

Via Panama Canal

Suez Canal
11,740

London –
Singapore

8,362
10,667

London –
Bombay

6,274
Via Cape of Good Hope

2,000

4,000

6,000

Via Suez Canal
8,000

10,000

12,000

14,000

Nautical miles

SOURCE: “Transport Shaping Space: Differential Collapse in Time-Space,” by Richard D.
Knowles, Journal of Transport Geography, vol. 14, no. 6, 2006, Table 2.

6 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

in 1913; the Philadelphia–London iron bar price
gap declined from 75 percent to 21 percent, according to historians O’Rourke and Williamson.
The authors note that the “impressive increase
in commodity market integration in the Atlantic
economy [of] the late 19th century” was a consequence of “sharply declining transport costs.”

Similar trends can be documented for price gaps
between London and Buenos Aires, Argentina,
and between Montevideo, Uruguay, and Rio de
Janeiro.13
However, even as such technological
improvements as motorized shipping continued
reducing transport costs through the first half of
the 20th century, rising wartime protectionism
and the Great Depression largely unraveled economic integration achieved in the 19th century.
After World War II, governments around the world
undertook the difficult task of rebuilding both
physical infrastructure and international trade.
Global integration was slowly reestablished
in the second half of the 20th century, and export
shares of world output edged higher, into the
double digits, as seen in Table 1. Development of
propeller aircraft, flying at 300 to 400 mph by the
1950s, greatly reduced journey times, although the
benefits were limited to a tiny sliver of the wealthy.
Beginning in the late 1950s, the introduction of jet engines increased aircraft speed by 50

percent, further shortening travel times. Airlines
also used larger planes to reduce the cost per seat,
accelerating adoption. Today, air transport is an
important carrier of high-value, low-bulk cargoes.
For a wide array of products, including fresh flowers, electronic components and airplane parts,
air cargo is a cost-effective means of international
delivery. International aviation moves about 40
percent of world trade by value, although far less
in physical terms.14
International trade has expanded by unprecedented proportions in the past half-century. Even
with goods moving by air and electronically, as
in the case of high-value cargo such as software,
ships still carry more than 90 percent of world
trade by volume. Many commodities are transported in bulk, with specialized vessels developed
to accommodate this trade. Giant tankers move
petroleum products from producers to consumers, and other vessels carry such cargo as cement,
coal, iron ore and grain.
Just about everything else that’s not considered bulk—flat-screen TVs, clothing, shoes
and boxes of cereal—travels across the sea from
factory to market aboard fleets of containerships.
These vessels have played a critical role in furthering the integration and interdependence of world
economies. To be sure, technology has aided the
process through expanded use of computers and
telecommunications that manage and track the
intermodal movement of containers.
Frustration Spurs Innovation

A trucker, Malcolm McLean, grew increasingly irritated by lengthy port waits as dockworkers
offloaded bales of cotton from his truck to ships
for export. He wondered whether the transfer
could be expedited were he to drive his truck onto
the ship and drive it off at the destination, without
anyone dockside touching his cargo.
Before 1956, ocean transport of general cargo
used break-bulk methods of loading cargo—pallets
were moved, generally one at a time, from a truck
or railcar that carried them from the factory to the

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 7

docks. There, each pallet was unloaded and hoisted
by dockworkers (or by cargo net and crane for
heavier loads). Once a pallet was in the ship’s hold,
it had to be positioned and braced to protect it from
damage during sometimes rough ocean crossings.
The process was slow, labor intensive and expensive. Cargo ships typically spent as much time in
port loading and unloading as sailing.
McLean’s big idea of handling cargo only
twice, once at the shipper’s location and again at
the final destination—never while in transit—came
to fruition on April 26, 1956, during the containership Ideal X’s five-day trip from New Jersey to
Houston. There, cranes hoisted the containers
from the ship onto 58 trucks that hauled the
big boxes to their final destinations. The voyage
marked the beginning of a maritime shipping
revolution in the global movement of goods.
Cargo in that era typically took a week’s worth
of labor to load, and another week to unload, at a
cost of about $5.83 a ton. The Ideal X’s loading costs
were a tiny fraction of that, approximately 15.8
cents a ton.15 With containerization, the movement
of general cargo became less labor intensive and
more capital intensive, spelling the end of thousands of cargo handlers’ jobs. Worldwide, about
70 percent of dockworkers lost their jobs with the
adoption of containerization.16 Mechanization of
ship loading and unloading reduced loss, damage
and pilferage and, in the process, lowered insurance
costs and greatly reduced ships’ time in port.17
Containerization facilitated the integration of
separate transport systems to allow the seamless
shifting of cargoes between transport modes. The
emergence of intermodal transportation was also
hastened by improved technology and techniques
for transferring freight. Today, containers filled
with goods quickly move between warehouse,
ship, train and truck.

vessel capacity remained limited in scale and in
geographic deployment, and the ships used to carry
containers were converted World War II tankers.
McLean’s initial design for a container was a box—8
feet tall, 8 feet wide and 10 feet long—constructed
from 2.5 millimeter-thick corrugated steel. At the
outset of the development of the container system
in the late 1950s and early ’60s, there was no standard for container size and construction.
Like many technological innovations, the
container faced an initial period of experimentation. Shippers were unwilling to immediately
adopt it, preferring to wait until they were sure
containerization would prevail and an industry
standard for containers and handling was established. In the mid-1960s, the adoption of standard
container sizes—the now-universal 20 and 40
TEUs—hastened global acceptance.
The container itself was not new; railroad box
cars were transported on ships as early as 1929 between New York and Cuba.18 What was revolution-

ary was the seamless transfer of cargo from one
mode of transport to the next, including integrated
inland transport with trucks, barges and trains—
with the boxes never opened while in transit.
Standardization Increases Adoption

Following widespread adoption of containerization in the 1970s (Chart 5), construction began
on the first cellular containerships, on which
shipments were stacked in “cells.”19 Economies of
scale have driven construction of ever-larger containerships since 1980. The greater the number of
containers carried, the lower the cost per unit of
good being shipped.
Transport efficiencies captured the economic impact of containerization. Quicker handling
and less time in storage meant faster transit from
manufacturer to customer, reducing financing costs for inventories sitting unproductively
on railway sidings or in dockside warehouses
awaiting a ship. Containerization, combined with

Chart 5
Adoption of Containerization Increases Following
Container Standardization
Percent of countries adopting relative
to total adopters, 2000 = 100
100
90
80
70
60
50
40
30
20
10
0
’56 ’64 ’66 ’67 ’68 ’69 ’70 ’71 ’72 ’73 ’75 ’76 ’77 ’78 ’79 ’80 ’81 ’82 ’83 ’85 ’89 ’92 ’93 ’95 ’98 ’00

What Was Revolutionary?

Container shipping has a dynamic history of little more than a half-century, an era that
began with the Ideal X’s voyage. In the early years,

NOTES: Containerization adoption is defined as the year when the first container port was
constructed. The chart plots the cumulative share of countries engaged in international
maritime trade that adopted containerization by a given date, relative to the total adpoters
at the beginning of the 21st century. Some years are not shown either because no container ports were constructed in those years or container adoption data were not available.
SOURCE: Containerisation International Yearbooks, several editions.

8 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

telecommunications advances, made just-in-time
manufacturing practices possible—producing
goods as customers need them and shipping with
the expectation that they will arrive at a specified
time.
These efficiencies also became an essential
driver in reshaping supply-chain practices and
allowing multinational global sourcing strategies.
As freight costs plummeted, manufacturers shifted
production to the most cost-effective locations.
Segmentation of production would have been unattainable without containerization and development of the intermodal transport network.
Closing Distances, Spurring Trade

The distance between countries has a negative impact on the volume of trade, according to
the so-called gravity model of international trade
(which is based on Newton’s universal law of
gravitation). This model explains trade flows between two countries as being directly proportional
to the product of each country’s “economic mass,”
as measured by GDP, and inversely proportional
to the distance between the countries.20
Ambitious public works projects in the late
19th and early 20th centuries significantly shortened the effective maritime distances between
regions of the world. The Suez and Panama canals
stimulated bilateral trade flows between East and
West. The Suez Canal not only provided remarkable
cost savings on distance, making the far reaches of
Asia and Australia accessible, but it also provided
impetus to the building of large, fast and economical
steamships that eventually led to the decisive switch
from sail power over the 1870 to 1880 period.21
Ship size grew dramatically, with the largest
going from 3,800 gross registered tons in 1871 to
47,000 tons in 1914. With the advent of containerization, vessels have significantly increased to
Triple E capacity of 18,000 TEUs—three times
the size of ships in the 1990s. Port infrastructure
has expanded to meet the needs of the increased
vessel size.
A hundred years after the Panama Ca-

nal’s completion, its latest expansion is nearly
complete, with improvements made to allow the
passage of larger ships—oil supertankers, military
ships and larger containerships. The canal significantly shortens the trip between the U.S. East and
West coasts.
Following the canal’s expansion, ships double
the size of current Panamax vessels—the largest
that can ply the original canal—will be accommodated, dramatically increasing the volume of
goods that can be carried.22 U.S. manufacturers
may realize new opportunities to expand exports
at considerably lower cost to new markets, such as
between the U.S. West Coast and South America’s
eastern coast, particularly Brazil, an important
emerging-market economy.
Inland Nations Less Able to Benefit

The trade benefits of broader market access from distance reduction contrast with the
increased costs that landlocked countries incur to
access world markets because of separation from
maritime transport networks. These countries’
transport costs average 50 percent more than
those with readily available world market access,
and they engage in about 60 percent less trade
than their coastal counterparts.23 Landlocked
nations also must depend on neighbors’ infrastructure while maintaining sound cross-border
political relations and administrative practices.
The container has substantially contributed to
the integration of various transport systems that link
maritime and inland transport networks as goods
move from producers to consumers. Containerization offers ship, rail and road networks greater ease
of movement and standardization of loads, improving efficiency and reducing transportation costs.
Conversely, poor infrastructure and connection of
the various transport modes increases costs, which
inhibits access to international markets and curtails
global competitiveness.
The quality of infrastructure is even more
important for countries that lack direct access to
the sea. Their overall transport costs are affected

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 9

by the quality of other countries’ infrastructure in
addition to the distance to get goods to consumers. Transportation infrastructure improvements
and the ease of transit between countries are
significant factors facilitating trade and economic
integration. Additionally, increased intraregional
trade and collaboration can bolster economies of
scale from the export of large quantities of products, improving cost competitiveness.
An Era of Greater Integration

Societies and economies around the world
have generally become more integrated due to
increases in the speed of trade, factor movements
and communication of information. More recently,
the pace of economic globalization has been particularly rapid and stands in contrast to the earlier
period of integration halted by two world wars and
the Great Depression in the 20th century.
Over the past 200 years, technology has
transformed the scale of transport systems from
small to large and improved transport speed from
slow to fast, slashing costs and increasing trade
flows and global interdependence.
Containerization, a technological improvement in shipping, has revolutionized the ocean
transport of general cargo and simultaneously
facilitated intermodal transportation, in which
ocean, inland waterway, highway, railway and air
transport form continuous interrelated networks,
increasing efficiency and reliability. Production
processes as a result have become more segmented—instead of producing goods in a single
process at a single location, firms are increasingly
breaking manufacturing processes into discrete
steps and performing each at whatever location
minimizes costs.
Notes
TEU stands for 20-foot equivalent unit, which is used to
measure a ship’s cargo-carrying capacity. One TEU represents the cargo capacity of a standard intermodal container,
20 feet long and 8 feet wide. There is a lack of standardization with regard to height, which ranges between 4 feet
and 9 feet.
1

All containerships are composed of cells that hold containers in stacks of different heights depending on ship capacity. Cellular containerships also offer the advantage of using
an entire ship, including below deck, to stack containers.
3
See The Box: How the Shipping Container Made the World
Smaller and the World Economy Bigger, by Marc Levinson,
Princeton, N.J.: Princeton University Press, 2006.
4
See Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, Cambridge, Mass.: MIT
Press, 1999, for details on the two globalization episodes.
5
See “Transport Shaping Space: Differential Collapse in
Time-Space,” by Richard D. Knowles, Journal of Transport
Geography, vol. 14, no. 6, 2006, pp. 407–25.
2

See An Economic History of Transport, by Christopher I.
Savage, London: Hutchinson University Library, 1966.
7
A stagecoach is a type of covered wagon, drawn by
horses, for transporting passengers and goods. Stagecoaches were widely used before the introduction of railway
transport.
8
See The Geography of Transport Systems, by Jean-Paul
Rodrigue, Claude Comtois and Brian Slack, London and New
York: Routledge, 2013.
9
See note 5.
10
See note 8.
11
See “Late Nineteenth-Century Anglo-American FactorPrice Convergence: Were Heckscher and Ohlin Right?”
by Kevin O’Rourke and Jeffrey G. Williamson, Journal of
Economic History, vol. 54, no. 4, 1994, pp. 892–916.
12
See note 5.
13
See “Real Wages, Inequality and Globalization in Latin
America Before 1940,” by Jeffrey G. Williamson, Revista de
Historia Económica, vol. 17, no. S1, 1999, pp. 101–42.
14
See “International Air Transport: The Impact of Globalisation on Activity Levels,” by Ken Button and Eric Pels, in
Globalisation, Transport and the Environment, Paris: Organization for Economic Cooperation and Development (OECD)
Publishing, 2010, pp. 81–120.
15
See note 3.
16
See The Blackwell Companion to Maritime Economics, by
Wayne K. Talley, Oxford, U.K.: Wiley-Blackwell, 2012.
17
See note 16, chapter 1, for a description of the nature of
work and activity of a container port.
18
See “Growing World Trade: Causes and Consequences,”
by Paul Krugman, Brookings Papers on Economic Activity,
vol. 26, no. 1, 1995, pp. 327–77.
19
“Adoption of containerization period” refers to the year a
country’s first container port was constructed.
20
See “The Gravity Equation in International Trade: Some
Microeconomic Foundations and Empirical Evidence,”
by Jeffrey H. Bergstrand, The Review of Economics and
Statistics, vol. 67, no. 3, 1985, pp. 474–81.
6

See “The Suez Canal and World Shipping, 1869–1914,”
by Max E. Fletcher, The Journal of Economic History, vol. 18,
no. 4, 1958, pp. 556–73.
22
A class of ships known as Panamax was built to the
maximum capacity of the Panama Canal and its locks.
23
See “Infrastructure, Geographical Disadvantage,
Transport Costs, and Trade,” by Nuno Limao and Anthony
J. Venables, World Bank Economic Review, vol. 15, no. 3,
2001, pp. 451–79.
21

Suggested Reading
Bernhofen, Daniel M., Zouheir El-Sahli and Richard Kneller
(2013), “Estimating the Effects of the Container Revolution
on World Trade,” CESifo Working Paper no. 4136 (Munich,
Germany: CESifo Group, February).
Bordo, Michael D., Alan M. Taylor and Jeffrey G. Williamson (2007), Globalization in Historical Perspective (Chicago:
University of Chicago Press).
Clark, Ximena, David Dollar and Alejandro Micco (2004),
“Port Efficiency, Maritime Transport Costs, and Bilateral
Trade,” Journal of Development Economics 75 (2): 417–50.
Estevadeordal, Antoni, Brian Frantz and Alan M. Taylor
(2003), “The Rise and Fall of World Trade, 1870–1939,” The
Quarterly Journal of Economics 118 (2): 359–407.
Faye, Michael L., John W. McArthur, Jeffrey D. Sachs and
Thomas Snow (2004), “The Challenges Facing Landlocked
Developing Countries,” Journal of Human Development 5
(1): 31–68.
Hummels, David (2007), “Transportation Costs and International Trade in the Second Era of Globalization,” Journal of
Economic Perspectives 21 (3): 131–54.
Talley, Wayne K. (2000), “Ocean Container Shipping:
Impacts of a Technological Improvement,” Journal of
Economic Issues 34 (4): 933–48.

10 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Measuring the External Value of the Dollar
By Mark Wynne

and Adrienne Mack

ow much is a dollar worth? The
value of a dollar is most generally
defined in terms of its purchasing
power over the goods and services
that households and individuals consume on a
regular basis. As goods and services become more
expensive, the purchasing power—or value—of
the dollar falls. Over long periods of time, the
tendency has been for most goods and services to
become more expensive in dollar terms. The result
is that the purchasing power of a dollar in 2014 is
a lot less than the purchasing power of a dollar in
1914.
One way to keep track of changes in the purchasing power of the dollar is by monitoring measures such as the Consumer Price Index or the
deflator for Personal Consumption Expenditures.
These measures attempt to summarize in a single
statistic the changes in all of the prices confronted
by consumers in the United States. To a first approximation, we might think of these indexes as
tracking changes in the internal purchasing power
of the dollar.1
But we might also be interested in the
external purchasing power of the dollar—the ability of a dollar to purchase a bundle of goods and
services in another country. Since most countries
use their own currencies rather than the dollar, an
important determinant of the external purchasing power of the dollar will be the exchange rate
of the dollar against other currencies. If the dollar
depreciates against other currencies, goods and
services produced overseas will become more
expensive for American consumers. If the dollar
appreciates against other currencies, goods and
services produced overseas will become cheaper
for American consumers.
How do we track the value of the dollar
against other currencies over time? Each week the
Federal Reserve’s H.10 statistical release reports
the daily noon New York City buying rates for
some 23 currencies against the dollar. The Wall
Street Journal reports the bilateral value of the
dollar against 53 currencies every day. In combin-

ing these different exchange rates in a single
measure that captures the movement in the value
of the dollar against other currencies, we contrast
the traditional approach to a new method that
recognizes the extraordinary growth of financial
globalization over the past two decades.
Dollar’s Value Based on Trade Flows

There are approximately 200 states in the
world, and almost all of them issue currency.
Some currencies (such as the dollar and the euro)
are used by more than one state, and some states
(typically those that have experienced episodes
of high inflation) use more than one currency.
So there is a dollar exchange rate against a large
number of currencies.
One option for combining the various bilateral exchange rates of the dollar is to construct a
simple average value of the dollar’s movements.
For example, if the dollar appreciated by some
amount against half the currencies (that is, it took
fewer dollars to purchase them) and depreciated
by the same amount against the other half, we
might say that on average the value of the dollar
was unchanged. However, some exchange rate
movements are more important than others. For
example, a 10 percent appreciation of the dollar
against the Zambian kwacha might be regarded
as less significant in terms of its implications for
the U.S. economy than a 10 percent appreciation
of the dollar against the euro. Zambia’s economy
is a lot smaller than that of the euro area, and U.S.
trade and investment relations with Zambia are
on a much smaller scale than those with the euro
area.
Movements in the value of the dollar against
other currencies are relevant because these shifts
have implications for international trade flows
and—through their impact on trade—domestic
economic activity and employment. A decline in
the dollar’s value will in some circumstances make
U.S. imports more expensive and U.S. exports less
expensive. So, one approach to constructing a
single measure of the dollar’s value against differ-

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 11

ent currencies is to weight the currencies by the
importance in U.S. international trade.
Since the 1970s, the Federal Reserve System
Board of Governors has published a broad measure of the value of the dollar against a large number of currencies.2 The weight each currency gets
in the index (or rather, indexes, because there is
more than one) is based on its importance in U.S.
international trade. Importantly, the weights are
allowed to change over time to capture changing
trade patterns. The weights assigned to the currencies of different countries have evolved since the
index was created in the 1970s (Chart 1). When
the index first appeared, U.S. international trade
was dominated by the countries that subsequently
became the euro area, along with Canada and
Japan. Since then, trade with emerging markets,
such as Mexico and especially China, has grown
in importance. As of today, the Chinese renminbi
has the largest weight in the index, surpassing the
euro in 2008.
The Board of Governors reports both a
nominal and a real trade-weighted measure of the
dollar’s value. The nominal trade-weighted value
of the dollar is simply the trade-weighted average
of the various bilateral exchange rates. The real
trade-weighted value includes an adjustment for
changes in the overall level of prices in each country as well and is arguably the more appropriate
measure for assessing the importance of exchange
rate movements for international trade. (Simply
put, a decline in the value of the dollar that is
accompanied by an equal-sized increase in U.S.
prices might not give U.S. exporters much of an
edge in overseas markets.)
Chart 2 plots the evolution of the tradeweighted value of the dollar since 1973, along with
sub-indexes for major currencies and other important trading partners. This offers some perspective on recent concerns that extraordinary policy
actions by the Fed have debased the currency.
There was a significant appreciation of the
dollar in 2008, driven by safe-haven capital flows
to the U.S. at the height of the financial crisis. These

Chart 1
U.S. Trade Patterns Reflected in Trade-Weighted Value of the Dollar
Currency weights
100
90
80
70
60
50
40
30
20
10
0
1973

1978

1983

1988

1993

1998

2003

2008

Other

Korea

China

Canada

India

Taiwan

Mexico

Euro area

Brazil

U.K.

Japan

2013

SOURCE: Federal Reserve Board.

Chart 2
Real Trade-Weighted Value of the U.S. Dollar Since 1973
Index, March 1973 = 100
140
130
120
110
100
90
80
70
60
1973

Trade-weighted exchange value of U.S. dollar vs. important trading partners
Trade-weighted exchange value of U.S. dollar vs. major currencies
Broad trade-weighted exchange value of the U.S. dollar
1978

1983

SOURCE: Federal Reserve Board.

1988

1993

1998

2003

2008

2013

12 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Movements in the
value of the dollar
matter for more
than international
trade flows. The
liberalization of
capital accounts
over the past
three decades
has produced a
massive increase
in international
financial flows.

flows have now been largely reversed, and the real
trade-weighted value of the dollar as of December
2013 was 84.91, compared with 86.69 in August
2008, immediately prior to the worst phase of the
financial crisis and the launch of unconventional
monetary policy. That is, between August 2008
and December 2013, the broadest measure of the
value of the dollar declined about 2 percent.
These movements in the value of the dollar
are dwarfed by what happened in the 1980s, when
the dollar appreciated 31 percent between June
1980 and March 1985 before declining 42 percent
between March 1985 and April 1988.3 During the
1990s, the dollar appreciated 7 percent, peaking at
112.82 in February 2002 and declining 34 percent
between February 2002 and April 2008.

while all of our international assets were denominated in foreign currencies. An unanticipated
appreciation of the dollar would generate a
capital loss for the U.S.: We would still owe the
same amount in dollars to our overseas creditors,
but our foreign assets would now be worth less
in dollar terms. Likewise, an unanticipated depreciation of the dollar would generate a capital
gain. If the situation were reversed—that is, our
liabilities were all denominated in foreign currencies, while our foreign assets were somehow
denominated in dollars—an unanticipated appreciation of the dollar would generate a capital
gain for the U.S.
It turns out that, in practice, almost all U.S.
foreign liabilities are denominated in dollars,
while about 70 percent of our foreign assets
An Alternative Approach
are denominated in foreign currencies.4 The
But movements in the value of the dollar
currency composition of U.S. international
matter for more than international trade flows.
assets and liabilities differs in important ways.
The liberalization of capital accounts—inMoreover, international financial relationships
vestments—over the past three decades has
tend to be more complex than international trade
produced a massive increase in international
relationships. For example, it seems reasonable
financial flows. The U.S. simultaneously borrows to assume that U.S. foreign direct investment in
a lot from the rest of the world and invests a
the euro area will fluctuate in value with fluctuations in the dollar–euro exchange rate. More
lot overseas. Changes in the value of the dollar
concretely, it seems reasonable to assume that
against a foreign currency then create valuation effects depending on how important that
fluctuations in the value of foreign direct investment positions in specific countries will be tied
currency is in U.S. international borrowing and
lending. And the importance of a currency in in- to fluctuations in the values of those countries’
ternational financial transactions may not be the currencies against the U.S. dollar.5
same as its importance in international trade.
However, the denomination of foreign debt
U.S.-owned assets overseas were valued at
held by U.S. investors may not be the same as
$20.8 trillion at year-end 2012, while foreigners
the currency of the issuing country. For example,
owned assets in the U.S. totaling $25.2 trillion.
firms in the euro area may issue debt denominated in euros, dollars or pounds sterling. So the
The U.S. is a net debtor to the rest of the world
value of a bond issued by a French company but
by just less than $5 trillion, and it has been a net
denominated in pounds sterling will be deterdebtor since 1986. Movements in the dollar’s
value against the currencies in which these assets mined more by movements in the dollar–pound
exchange rate than by movements in the dollar–
and liabilities are denominated generate capital
gains and losses that in turn affect the purchasing euro exchange rate.
Chart 3 plots the currency composition
power of U.S. consumers.
of U.S. foreign assets over time. For purposes of
Suppose, for example, that all U.S. international liabilities were denominated in dollars,
constructing this chart, the countries depicted

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 13

are limited to those also included in the tradeweighted value of the dollar index produced by
the staff of the Fed Board. Note that about onequarter of U.S. assets are denominated in U.S.
dollars and, thus, unaffected by changes in the
dollar’s exchange rate. Second, note the prominent and relatively stable shares of the euro area,
the U.K., Canada and Japan (or rather, the euro,
the pound sterling, the Canadian dollar and the
yen). The Chinese renminbi barely registers
(“other”), in marked contrast to its importance in
the U.S. trade relationship seen in Chart 1.
We can construct a similar chart showing
the evolution of the currency composition of U.S.
foreign liabilities over time (Chart 4). The bulk
of U.S. foreign liabilities are denominated in U.S.
dollars, with the euro the only other currency
registering a significant share. Thus, fluctuations
in the external value of the dollar have a minimal
impact on the ability of the U.S. to service its
external debt, in marked contrast to countries
whose external liabilities are denominated in a
foreign currency.6
Recently, researchers have proposed constructing financial exchange rates to complement
the well-known trade-weighted measures shown
in Chart 2.7 The idea behind these indexes is to
weight currencies by their importance to the U.S.
international investment position. To capture
how exchange rates affect the net financial
position, two separately weighted indexes are
constructed: one weighted by the currency
composition of international assets, the other by
international liabilities. These two indexes are
then used to create a third, net asset index that
captures the currency composition of the U.S. net
financial position.
Chart 5 plots five different measures of the
foreign exchange value of the U.S. dollar based on
different weighting schemes.8 The four financial
exchange rate indexes are based on asset weighting of currencies, liability weighting, total investment position (assets plus liabilities) and net
liabilities (liabilities minus assets). For the sake of

Chart 3
Currency Composition of U.S. Foreign Assets
Currency weight
100
90
80
70
60
50
40
30
20
10
0
’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12
Other

Brazil

Japan

Euro area

Singapore

Australia

Canada

U.S.

Mexico

Switzerland

U.K.

SOURCES: “Monthly Estimates of U.S. Cross-Border Securities Positions,” by Carol C.
Bertaut and Ralph W. Tryon, International Finance Discussion Paper no. 2007-910, Federal
Reserve Board, 2007; Bureau of Economic Analysis; U.S. Treasury; Bank for International
Settlements; authors’ calculations.

Chart 4
Currency Composition of U.S. Foreign Liabilities
Currency weight
100
90
80
70
60
50
40
30
20
10
0
’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12
Other

Hong Kong

Switzerland

Euro area

Sweden

Mexico

Japan

U.S.

Australia

Canada

U.K.

14 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Chart 5
Five Measures of the International Value of the Dollar
Index,1994 = 100
150
Trade-weighted index
Liability index
Total investment
Net liability index
Asset index

140

130

120

110

100

90
’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13

SOURCES: “Monthly Estimates of U.S. Cross-Border Securities Positions,” by Carol C. Bertaut
and Ralph W. Tryon, International Finance Discussion Paper no. 2007-910, Federal Reserve
Board, 2007; Bureau of Economic Analysis; U.S. Treasury; Bank for International Settlements;
authors’ calculations.

On a financially
weighted basis—
whether by assets,
liabilities, total
investment position
or net liabilities—
the value of the
dollar in 2013 was
about the same as it
was in 1994.

comparison, we also include the trade-weighted
value of the dollar, recomputed to conform to
the exchange rate convention used to calculate
the financial indexes and rebased to equal 100
in 1994.
The chart shows that the largest movements
in the external value of the dollar arise when
different currencies are weighted based on their
importance in U.S. international trade. The dollar
cost of a unit of foreign currency declined more
than 27 percent between 1994 and 2001 on a
trade-weighted basis but only 21 percent on an
asset-weighted basis. On a financial liability basis,
the decline in cost was less than 3 percent over
the same period because the bulk of U.S. international liabilities are denominated in dollars.
A second important point to note is that
on a financially weighted basis—whether by
assets, liabilities, total investment position or net
liabilities—the value of the dollar in 2013 was
about the same as it was in 1994. However on a
trade-weighted basis, relative to 1994, the dollar

cost of foreign currency in 2013 was about 10
percent lower.
Properly Valuing the Dollar

There is no unique “right” way to combine
different exchange rates into a single measure of
the dollar’s external value; it all depends on the
question you want that measure to address. The
value of the Chinese renminbi against the U.S.
dollar has important implications for international trade given the importance of China as
a trading nation. However, movements in the
value of the renminbi against the U.S. dollar have
limited implications for capital gains and losses
on U.S. international investments. China holds a
large amount of U.S. debt, but all of it is denominated in U.S. dollars. A change in the value of the
dollar against the renminbi has no implications
for the U.S. in terms of its international liabilities;
it simply determines whether China experiences
capital gains or losses on its U.S. debt holdings.9
Recent movements in the value of the dollar

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 15

(over the past five years) are remarkably small
in comparison with some historical episodes,
as seen in Chart 2. Switching the focus from
international trade to international investments
offers a different interpretation of exchange rate
movements. If different currencies are weighted
by their importance in U.S. assets and liabilities
rather than their importance to U.S. international
trade, the dollar is worth about as much in 2013
as it was in 1994. Financial globalization necessitates that new measures be added to the toolkit
for tracking international developments.
More information about the methodology used in
this article can be found online at www.dallasfed.
org/institute/annual/index.cfm.
Notes
We say to a first approximation because the basket
of goods and services consumed by the typical U.S.
household will usually include some imported products
as a result of globalization, and the prices of these goods
will be determined in part by changes in the value of the
dollar against other currencies, or the external value of
the dollar.
2
The methodology behind the Board’s indexes is described
in “Indexes of the Foreign Exchange Value of the Dollar,”
by Mico Loretan, Federal Reserve Bulletin, Winter 2005,
pp. 1–8.
3
The dramatic appreciation of the dollar in the first half
of the 1980s took place against the background of Volcker
disinflation.
4
Data found in “From World Banker to World Venture
Capitalist: U.S. External Adjustment and the Exorbitant
Privilege,” by Pierre-Olivier Gourinchas and Hélène Rey,
in G7 Current Account Imbalances: Sustainability and
Adjustment, Richard H. Clarida, ed., Chicago: University of
Chicago Press, 2007.
5
This is not to imply that there is a unique causal
relationship from exchange rate movements to the value
of foreign direct investment positions. Capital flows (of all
types) also affect exchange rates.
6
The debt crises experienced by many Latin American
countries during the 1980s were due in no small part to
the fact that essentially all of their external debt was
denominated in dollars rather than pesos, reals, etc.
1

See “Financial Exchange Rates and International Currency Exposure,” by Philip R. Lane and Jay C. Shambaugh,
7

American Economic Review, vol. 100, no. 1, 2010, pp.
518–40.
To compute the financial weighted exchange rates, we
follow Lane and Shambaugh (2010) and measure all of
the exchange rate series in units of dollars per unit of
foreign currency. Thus, a decline in one of the exchange
rate indexes corresponds to an increase in the value of
the dollar—fewer dollars are needed to purchase a unit of
foreign currency. This convention is followed rather than
the alternative convention of measuring exchange rates in
units of foreign currency per dollar so as to facilitate the
calculation of the financial exchange rates. By measuring
exchange rates this way, a rapidly depreciating foreign
currency converges toward zero rather than infinity. We
then invert them to make them comparable to the tradeweighted value of the dollar.
8

Of course, financial linkages and trade linkages are not
independent. For example, the value of foreign direct
investment by U.S. firms in China will be affected by
changes in the U.S. dollar–renminbi exchange rate: A
depreciation of the renminbi will make those investments
less valuable. But if the U.S. firm is producing in China
for export to the U.S., a cheaper renminbi will also make
the goods produced at the Chinese facilities cheaper in
the U.S., which will give the firm a competitive edge and
potentially raise its value.
9

Financial
globalization
necessitates that
new measures
be added to the
toolkit for tracking
international
developments.

16 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Summary of Activities 2013

In terms of policy
work, the institute
launched a series
of initiatives in 2013
to support President
Richard Fisher in his
Federal Open Market
Committee duties.

ne of the core business products
of the Globalization and Monetary
Policy Institute since its creation
in 2007 has been policy-relevant
research that is circulated through the institute’s
dedicated working paper series.
As of the end of 2013, the institute had
circulated 166 working papers, with 32 of those
appearing in 2013.
A reasonable proxy for the impact of these
working papers is the frequency with which
papers are downloaded from the Bank’s website.
(The ultimate measure of impact is the frequency
with which the papers—whether in working paper
or published form—are cited.) Total downloads of
institute working papers increased from 1,963 in
2012 to 2,207 in 2013. Abstract views were also up,
from 4,563 to 7,840.
In terms of policy work, the institute
launched a series of initiatives in 2013 to support
President Richard Fisher in his Federal Open
Market Committee duties.
The first of these initiatives was to develop
a database of global economic indicators that
will allow for standardization across briefings,
international economic updates and speeches.
The second was to develop a “nowcasting” model
to allow for more accurate forecasting of global
economic activity in real time. And the third was
to develop a multicountry model that can be
used for scenario analysis as part of the briefing
process.
The institute made significant progress on all
three initiatives, and a description of the database
is provided in institute working paper no. 166. And
Jian Wang independently published a book titled
还原真实的美联储 (Demystifying the Fed, Hangzhou, China: Zhejiang University Press).
Staff made progress on other fronts as well,
presenting their work at a variety of research
forums, moving papers through the publication
process and initiating new projects. The institute
also deepened its global network of research associates.

Academic Research

Journal acceptances in 2013 were down from
2012. Alexander Chudik’s paper, “How Have Global
Shocks Impacted the Real Effective Exchange Rates
of Individual Euro Area Countries Since the Euro’s
Creation?” was accepted for publication in the B.E.
Journal of Macroeconomics, and Anthony Landry’s
“Borders and Big Macs” was accepted for publication in Economics Letters.
At year-end, staff had papers under review at
the Journal of International Economics, Journal of Econometrics, Review of Economics and
Statistics, Journal of Monetary Economics, Journal
of Applied Econometrics, Journal of Economic
Interaction and Coordination, Journal of Urban
Economics and European Economic Review.1
Conferences

The institute organized three conferences
during the year, the first with Shanghai’s Fudan
University, the London-based Center for Economic Policy Research and the Geneva-based
Graduate Institute of International and Development Studies, and the other two with the Swiss
National Bank.
“International Conference on Capital Flows
and Safe Assets” was held in Shanghai in May
as part of the Shanghai Forum and featured
presentations on financial globalization, the role
of safe assets in the global financial system and
the global business cycle.
“The Effect of Globalization on Market
Structure, Industry Evolution and Pricing,”
cosponsored with the Swiss National Bank in
May, was a sequel to an earlier joint conference
and further explored the impact of economic
integration in firms’ pricing decisions. “Inflation
Dynamics in a Post-Crisis Globalized Economy,”
also cosponsored with the Swiss National Bank
and held in Zurich in August, explored the macro
dimensions of globalization on the evolution
of prices. Summaries of papers presented at all
three conferences by Jian Wang, Michael Sposi
and Mark Wynne are included in this report.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 17

As in previous years, institute staff in 2013
presented their work at external forums. Among
them were the:
• Annual Meeting of the American Economic
Association
• Annual Meeting of the Southern Economic
Association
• Annual Meeting of the Western Economic
Association International
• Barcelona Graduate School of Economics
Summer Workshop
• Conference on Structural Change, Dynamics
and Economic Growth
• Federal Reserve Bank of Atlanta/New York
University Stern School of Business Workshop
on International Economics
• International Conference on Computing in
Economics and Finance
• International Panel Data Conference,
University of Texas at Dallas
• North American Summer Meeting of the
Econometric Society
• Shanghai Macroeconomics Workshop
• Society for Economic Dynamics
• System Committee on International Economic
Analysis
• System Committee on Macroeconomics
Staff also presented their work at central
banks and universities, including the Bank
of Mexico, Board of Governors of the Federal
Reserve System, Chinese University of Hong
Kong, Durham University, Federal Reserve Bank
of Philadelphia, Fudan University, International
Monetary Fund, Shanghai University of Economics and Finance, Swiss National Bank, Tsinghua
University, University of Alicante and University
of Arkansas.

Bank Publications

People

Staff contributed to several Bank publications, including the institute annual report
and Economic Letter, which are intended to
disseminate research to a broader audience than
technical experts in economics. They produced
six Economic Letters in 2013:

One staff member spent the spring semester on leave at the University of Pennsylvania’s
Wharton School and subsequently resigned to
stay at Wharton.
The institute recruited 13 new research
associates: Matthieu Bussière (Bank of France),
Matteo Cacciatore (HEC Montreal), Richard
Dennis (Australian National University), Gee
Hee Hong (Bank of Canada), Arnaud Mehl (European Central Bank), Daniel Murphy (University of Virginia), Giulia Sestieri (Bank of France),
Vanessa Smith (University of Cambridge), Jeff
Thurk (University of Notre Dame), Ben Tomlin
(Bank of Canada), Eric van Wincoop (University
of Virginia), Yong Wang (Hong Kong University
of Science and Technology) and Zhi Yu (Shanghai University of Finance and Economics).

• “Technological Progress Is Key to Improving
World Living Standards,” by Enrique MartínezGarcía
• “Value-Added Data Recast the U.S.–China
Trade Deficit,” by Michael Sposi and
Janet Koech
• “Economic Shocks Reverberate in World of
Interconnected Trade Ties,” by Matthieu
Bussière, Alexander Chudik and Giulia Sestieri
• “A Short History of FOMC Communication,”
by Mark Wynne
• “Asia Recalls 1997 Crisis as Investors Await Fed
Tapering,” by Janet Koech, Helena Shi and
Jian Wang
• “The Euro and Global Turbulence: Member
Countries Gain Stability,” by Matthieu Bussière,
Alexander Chudik and Arnaud Mehl
Scott Davis and Adrienne Mack’s paper,
“Cross-Country Variation in the Anchoring of
Inflation Expectations,” was published in the
Bank’s Staff Papers series.

Note
Specifically, institute working papers nos. 64, 89, 103,
107, 119, 129, 137, 139, 146, 162 and 165.
1

18 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

International Conference on
Capital Flows and Safe Assets
By Jian Wang

2013 Conference Summary
When: May 26–27
Where: Fudan University, Shanghai, China
Sponsors: Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute, Finance
Research Center of Fudan University, Center for
Economic Policy Research and Graduate Institute
of International and Development Studies

rom just after the Great Depression
until the beginning of the 2007–09
financial crisis, the global financial
system was relatively quiet, with
no major calamity afflicting advanced economies. Although emerging markets periodically
confronted crises, these events were usually
limited to a small set of countries that tended to
recover quickly. The devastating consequences of
the financial crisis caught most policymakers and
economists off guard.
Policymakers and researchers from the U.S.,
China and Europe who studied triggers of the crisis gathered to discuss global financial industry
stability and implications for monetary policy at
the “International Conference on Capital Flows
and Safe Assets” in Shanghai, China. Presenters
explored the role of capital flows and the scarcity
of global safe assets in financial markets and
exchanged ideas about crucial global economic
issues such as monetary policy in the U.S. and
China, the euro-area debt crisis and flaws in the
global monetary system.
Two keynote speeches, nine paper presentations and three panel discussions examined
the “puzzle” of insufficient safe assets—liquid
debt claims with negligible default risk—as well
as other economic concerns such as global
liquidity and exchange rates and the unconventional monetary policies adopted worldwide as a
result of the crisis.
Keynote Speeches

Richard Portes, an economics professor at
the London Business School and president of the
Center for Economic Policy Research (CEPR),
opened the conference with his keynote speech,
“The Safe Asset Meme.”
Safe assets are crucial for modern finan-

cial systems. For instance, they serve as reliable stores of value, as collateral in financial
transactions and as assets to meet prudential
institutional requirements. A global shortage of
safe assets and its impact on the global financial
system have been significant themes in recent
policy debates. A safe-asset shortage can lead to
financial instability, Portes said, noting that such
scarcity had depressed real interest rates, forcing
investors into excessively risky assets. A lack of
safe assets, attributable to high savings rates in
emerging markets, is believed to be a cause of
global imbalances and asset bubbles before 2007.
Depending on the definition of “safe assets,”
there are conflicting indicators of a shortage,
Portes said. U.S. dollar- and euro-denominated
safe assets declined relative to emerging market
foreign exchange reserves, especially after 2008.
However, if safe assets include government debt
of all Organization for Economic Cooperation
and Development (OECD) countries rated AA
and higher, there is no evidence of a safe-asset
shortage. Such scarcity also isn’t obvious based
on the prices (interest rates) of safe assets.
Downward-trending long-term real interest
rates in the U.S. and the U.K. after the 1990s have
been cited as evidence of a safe-asset shortage.
But similarly low interest rates with no shortage
of safe assets occurred in those same countries
in the 1950s and 1970s. Therefore, Portes argued,
we should be cautious when using safe-asset
shortages to explain recent financial market instability. More theoretical and empirical studies
are needed to further examine this issue.
Maurice Obstfeld, an economics professor
at the University of California, Berkeley, gave the
second keynote, “Finance at Center Stage: Some
Lessons of the Euro Crisis.” Obstfeld reviewed
the roots of the euro crisis and praised the euro

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 19

area for quickly correcting some of the currency
union’s design flaws. For instance, the euro area’s
decision to reform its financial sector and initiate
centralized financial supervision will improve
future financial stability.
However, Obstfeld also highlighted a
financial/fiscal “trilemma”: Euro-area countries
cannot simultaneously enjoy financial integration among member states, financial stability and
fiscal independence. He argued that with those
countries’ financial integration, the cost of banking
rescues may now exceed national fiscal capacity.
Therefore, it is necessary to establish centralized
fiscal backstops to finance deposit insurance and
bank resolution on top of the centralized financial
supervision. This argument provides additional
support for fiscal constraints in a monetary union.
Session One: Safe Assets
and Shadow Banking

The first session, chaired by Hans Genberg
of the International Monetary Fund (IMF),

featured three papers on the consequences of
increased demand for global safe assets—the
shortage of such assets, the dollar’s safe-haven
effect and shadow banking.
Pierre-Olivier Gourinchas, an economics
professor at the University of California, Berkeley,
presented “Global Safe Assets,” coauthored with
Olivier Jeanne, an economics professor at Johns
Hopkins University. They demonstrated in a
model of stores of value that supplying public
safe assets is a natural way to eliminate the
financial instability associated with a safe-asset
shortage. The crucial issue in creating safe assets
is how to make them truly safe, which usually requires a monetary backstop. Sufficiently safe assets can immunize the economy against bubbles
by eliminating private-label, supposedly safe
assets, Gourinchas and Jeanne’s model shows.
“The definition of safe assets has a key
impact on the financial sector and so should not
be left entirely to the private sector,” they argued.
“The authorities should commit themselves to a

Presenters and discussants at the “International Conference on Capital Flows and Safe Assets.”

20 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Chart 1
Foreign Exchange Reserves Increase After 2000
U.S. dollars (trillions)
12

’99

’00

’01

’02

’03

’04

’05

SOURCE: International Monetary Fund.

’06

Matteo Maggiori, an assistant professor at
New York University, presented “The U.S. Dollar Safety Premium.” The U.S. dollar acts as the
reserve currency for the international monetary
system and thus becomes a safe haven during
World total
global financial crises when international investors chase safe assets in the market. Because of
this flight to quality, investors are willing to hold
dollars despite a lower return than on other curEmerging and
rencies. Maggiori quantified the U.S. dollar safety
developing economies
premium and found that during the period of
the modern floating exchange rate (1973–2010),
Advanced
economies
the annual return on dollars was 1 percent lower
than on a basket of foreign currencies. The return
differential is much higher in financial crises.
’07 ’08 ’09 ’10 ’11 ’12 ’13
For instance, in October 2008, it was as large as
52 percent following the collapse of Lehman
Brothers.
“Velocity of Pledged Collateral” was preclear definition of safe assets and back it with a
sented by Manmohan Singh, a senior economist
policy regime that makes those assets credibly safe.” at the IMF. One explanation of the recent global
Gourinchas and Jeanne document that the
financial crisis suggests that a safe-asset shortage
increased demand for U.S. safe assets comes
led to the private sector’s creation of assets such
mainly from the U.S. financial sector and the rest
as mortgage-backed securities. These private safe
of the world, while U.S. private nonfinancial sector assets are used as collateral in short-term financdemand remains remarkably stable. Increased
ing, Singh showed. The use and reuse of pledged
financial system demand reflects destruction of
financial collateral contributes significantly to
internal liquidity during the global financial crisis. the supply of credit to the real economy and has
Rest-of-the-world demand is mainly driven by
become a key source for short-term financing
precautionary accumulation of foreign reserves by in the U.S. and many other advanced econothe foreign official sector (Chart 1).
mies. The process is analogous to the traditional
Following the 1997–98 Asian crisis, foreign
money-creation process, in which collateral acts
reserves in emerging economies (especially
like high-powered money.
emerging Asian countries) skyrocketed, reflecting
Singh detailed the shadow banking system’s
these countries’ fear that no international lender
use of private safe assets as pledged collateral
of last resort would provide them liquidity if there and how there are systemic risks to global finanwere an international investor run on their financial markets if the collateral turns out to be less
cial markets. Economic frictions and inefficiencies safe than labeled.
are responsible for both instances of increased
demand for safe assets. Therefore, it remains an
Session Two: Capital Flows and
open question whether the priority of solving the
Portfolio Choice
safe-asset shortage should be given to reducing
Paul Luk, an economist at the Hong Kong
demand by addressing these underlying ineffiInstitute for Monetary Research (HKIMR)
ciencies or to increasing the supply of safe assets.
presented “A Micro-Founded Model of Chinese

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 21

Capital Account Liberalization” during the
second session, chaired by Enrique MartínezGarcía of the Dallas Fed. Luk and coauthor Dong
He, director of HKIMR, examined China’s capital
account liberalization in a general equilibrium
model with endogenous portfolio choice. Their
model predicts that Chinese households will increase their holdings of U.S. equity but decrease
U.S. bond positions after China removes capital
account restrictions. Indeed, China will short
U.S. bonds to offset excess real exchange rate
exposure to holding U.S. equity.
Yanliang Miao, an economist at the IMF,
presented “Coincident Indicators of Capital
Flows,” coauthored with IMF colleague Malika
Pant. Capital-flows data become available with
a lag of three to six months, which substantially
constrains timely policy analysis of important capital-flow issues. To address this difficulty, Miao and Pant proposed two coincident
composite indicators for capital flows. The first
provides a timely proxy for net capital inflows
and is based on the difference between the
trade balance and the change in international
reserves, augmented with other regional and
global coincident correlates of capital flows. The
second indicator augments data from Emerging
Portfolio Fund Research with regional and global
correlates of capital flows in an error-correction
model and provides a real-time proxy for gross
bond and equity inflows.
Miao and Pant showed that their indicators predict one- or two-quarter-ahead actual
capital flows considerably better than standard
measures used in the literature. At the same time,
their indicators are simple enough to be easily
constructed and used in policy analysis.
Shu Lin, an economics professor at Fudan
University, presented the session’s last paper,
“Monetary Policy, Credit Constraints and International Trade,” jointly authored with Jiandong
Ju, an economics professor at Tsinghua University and the University of Oklahoma, and ShangJin Wei, a professor of finance and economics

at Columbia University. Previous empirical
evidence shows that external credit is important
in facilitating firm export activities, and credit
market conditions generally worsen during
monetary policy tightening. Thus, monetary
policy may have an important impact on exports
by affecting firms’ access to external financing.
Lin, Ju and Wei tested this hypothesis, studying
the effect of monetary policy on international
trade through the credit channel. Employing
a gravity-model approach and a large bilateral
trade dataset, the authors found that exports fall
much more following monetary policy tightening
in sectors that are more financially constrained.
This supports the credit channel transmission of
monetary policy on exports.
Session Three: Global Assets and Prices

Lin chaired the third session, which featured
three papers on international asset returns and exchange rates. Hélène Rey, an economics professor
at the London Business School, presented “World
Asset Markets and Global Liquidity,” coauthored
with Silvia Miranda Agrippino, a postdoctoral
researcher at the London Business School.
Rey and Agrippino decomposed a panel of
world risky-asset prices into three components:
global, regional and idiosyncratic asset-specific
factors. They found that one global factor—global
banks’ time-varying degree of risk aversion—explains most of the variance of world risky-asset
prices. U.S. monetary policy is found to negatively
affect the risk aversion of global banks; following a positive shock to the federal funds rate,
global banks reduce their risk appetite. At the
same time, U.S. monetary policy is also found to
respond to global risk aversion (loosening when
risk aversion increases).
Yi Huang, an assistant professor at the
Graduate Institute of International and Development Studies (IHEID) presented the second
paper, “The External Balance Sheets of China and
Returns Differentials.” As a result of China’s huge
current-account surplus in the past 10 years, it

Singh detailed the
shadow banking
system’s use
of private safe
assets as pledged
collateral and how
there are systemic
risks to global
financial markets if
the collateral turns
out to be less safe
than labeled.

22 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Wang and Nam show
that anticipated
technology
improvement in the
U.S. will appreciate
the dollar, but an
unanticipated
development will
depreciate the
currency.

accumulated a large amount of foreign assets. Yi,
seeking to learn how those holdings performed,
calculated excess returns on China’s net foreign
assets. The task was challenging because of data
issues, including unavailability of some crucial
information.
Yi found that China’s net foreign assets incurred a substantial loss—as much as 6.6 percent
annually. The asymmetric structure of China’s
foreign assets is an important reason: China
holds a short position in equity and a long position in debt. The return on debt is lower than the
return on equity—especially government debt,
which accounts for a large portion of China’s
foreign reserves.
Jian Wang, a senior economist and advisor at the Dallas Fed, presented “The Effects of
Surprise and Anticipated Technology Changes
on International Relative Prices and Trade,”
coauthored with Deokwoo Nam, an assistant
professor of economics at the City University
of Hong Kong. Exchange rate movement is an
important consideration for international capital
flows and trade.
How does the exchange rate respond to a U.S.
productivity increase? Previous empirical findings
are mixed: The U.S. dollar is found to appreciate in
some studies but depreciate in others. Wang and
Nam argue that the response of the dollar depends
on the nature of productivity increases.
The authors decomposed changes in U.S.
technology into two components: anticipated
changes and unanticipated ones. An example of
anticipated technology improvement is a new
invention in a firm’s pipeline. It is expected to
increase the firm’s future productivity, but has
no impact on today’s technology. Wang and
Nam show that anticipated technology improvement in the U.S. will appreciate the dollar, but an
unanticipated development will depreciate the
currency. Additionally, these two types of technology changes induce different dynamics for international trade, as well as for macroeconomic
variables such as consumption and investment.

Thus, Wang and Nam argue that the nature
of technology change should be carefully investigated when evaluating cross-country transmission of technology change.
Policy Panel Discussions

The first policy panel discussion, “Unconventional Monetary Policies in U.S. and
Euro Zone and Monetary Policy in China,”
was chaired by Mark Wynne, director of the
Globalization and Monetary Policy Institute.
Xiaoling Wu, former deputy governor of the
People’s Bank of China; John Rogers, a Federal
Reserve Board of Governors senior advisor; Lars
Oxelheim, chair of international business and
finance at the Lund Institute of Economic Research, Lund University; and Lijian Sun, director
of the Financial Research Center at Fudan
University, discussed monetary policies during
the global financial crisis.
Rey from the London Business School
chaired the second policy panel, “Safe Assets
and Capital Flows.” Panelists were Yongding Yu,
director of the Institute of World Economics and
Politics, Chinese Academy of Social Sciences;
Steven Kamin, director, division of international
finance, Federal Reserve Board; Hans Genberg,
assistant director, independence evaluation
office at the IMF; and Gourinchas from the
University of California, Berkeley. Speakers discussed the shortage of global safe assets and the
impact on advanced and emerging markets.
Portes from the London Business School
and CEPR chaired the last policy discussion
panel, “China and Global Financial Crisis:
Implications and Future Perspective.” Benhua
Wei, former vice chair of State Administration of
Foreign Exchange of China; Chun Chang, a professor of finance and executive director of the
Shanghai Advanced Institute of Finance; and
Alexandre Swoboda, an emeritus professor of
economics at the IHEID, discussed China’s role
in global financial systems and lessons learned
from the recent global crisis.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 23

Conclusion

The two-day conference shed light on
important lessons of the recent crisis and also
prompted questions that may inspire additional
research.
First, global banks and shadow banking
represent a crucial channel for global economic
linkages and policy transmissions. As Rey and
coauthor Agrippino found, a global factor highly
related to the risk appetite of global banks explains most of the variation in risky-asset prices
in many countries. Singh showed that shadow
banking system participants—global investment
banks and bank holding companies—contributed significantly to the short-term credit supply
across the world. Economies are more interlinked than ever through financial markets. The
understanding of such ties is increasingly crucial
for conducting monetary policy.
Another important issue discussed was the
shortage of global safe assets. The insufficient
supply of (or, alternatively, excess demand for)
safe assets depressed interest rates after the
1990s and is believed to be one of the main
factors that led to the recent financial crisis. Low
rates forced investors to put money into risky
assets (for example, real estate) for higher returns
and created asset price bubbles that burst
around 2007. The safe-asset shortage also motivated the private sector to create “safe” assets that
were far riskier than labeled. It is important to examine the source of the safe-asset shortage—was
it a decline in supply or an increase in demand?
Or was there really a shortage of safe assets at all?
Additional study can clarify the issue.
Conference participants also examined
flaws within the global financial system that are
believed to be the underlying cause of the global
financial crisis. Emerging-market demand for foreign-exchange reserves accounts for some of the
heightened global demand for safe assets. Asian
countries learned a difficult lesson regarding the
lack or insufficiency of an international lender
of last resort during the 1997–98 Asian financial

crisis. As a result, these countries accumulated a
large amount of foreign reserves following that
crisis to defend their economies from bank runs
by international investors.
With emerging markets’ share of world GDP
growing bigger, it becomes increasingly difficult
for the U.S. to provide enough safe assets to
meet emerging-market foreign exchange reserve
demand. In the long run, a more sustainable solution may rely on developing a global monetary
system in which the U.S. dollar is no longer the
only major reserve currency.

The insufficient
supply of (or,
alternatively, excess
demand for) safe
assets depressed
interest rates after
the 1990s and is
believed to be one
of the main reasons
that led to the recent
financial crisis.

24 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

The Effect of Globalization on
Market Structure, Industry Evolution and Pricing
By Michael Sposi

2013 Conference Summary
When: May 31–June 1
Where: Federal Reserve Bank of Dallas
Sponsors: Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute and Swiss
National Bank

he Globalization and Monetary
Policy Institute and Swiss National
Bank enlisted researchers from both
sides of the Atlantic for a conference
focused on the determinants and dynamics of
prices in a globalized economy. Increased globalization has heightened research and policy interest in external factors as drivers of inflation. Firms’
pricing decisions are at the core of the analysis.
When firms sell in multiple markets, they
face greater competition and experience additional complexities in their choice of a currency in
which to set prices. Globalization has fundamentally altered the pricing power of many firms as
markets become more competitive.
All papers considered various aspects of
prices. One section focused on cross-country price
differences and attempted to outline the sources
of cross-country variation: from currency invoicing
to market power as well as pricing to market and
quality differentiation. Another section focused
on how external factors affect price dynamics. It
examined the role of currency invoicing, industrial
composition and firm heterogeneity. Yet another
section examined and quantified how responsive
quantities are to changes in external factors, such as
exchange rate movement and trade liberalization.

countries is crucial to the way we think about the
dynamics of prices. Does industrial composition
matter? Do developments in foreign economies
have any impact on domestic prices? Does the
currency in which goods are invoiced matter? If
so, how much?
Roberto Rigobon from the Massachusetts Institute of Technology (MIT) and National Bureau
of Economic Research (NBER) opened with his
paper, “Product Introductions, Currency Unions
and the Real Exchange Rate” (coauthored with
Alberto Cavallo of MIT and Brent Neiman of the
University of Chicago and NBER). This research
uses novel data from the Billion Prices Project, an
academic initiative at MIT. The dataset contains
weekly prices for about 90,000 goods in 81 countries from 2008 to 2012 that are “scraped” from
web pages of online retailers. First, the detailed
nature of the data avoids issues of noncommon
baskets encountered in price indexes. Second,
by comparing the same product and retailer
combination, researchers eliminate the issue of
differences in quality of similar goods. Third, given
that the data are from online retailers, as opposed
to brick-and-mortar stores, there is no issue of
price variability within a country that could arise
from local-distribution cost differences.
A key finding is that the LOP holds almost
Significance of Cross-Country Prices
perfectly within currency unions for thousands
There is substantial variation in prices of
of goods. That is, the real exchange rate at a good
goods across countries, even for goods that are
level for many tradable goods equals 1 within currency unions. However, prices of the same goods
traded. For instance, Chart 1 shows a histogram
deviate from LOP in countries outside of currency
representing the distribution of prices of consumption goods across 19 developed countries
unions even when the nominal exchange rate is
in 2010. The key challenges are to, first, carefully
pegged. Rigobon and his coauthors argue this evidence suggests that it is the common currency per
measure where the deviations from the law of
se, and not a lack of nominal volatility, that results
one price (LOP) exist, and second, to identify the
in the lack of price deviations across countries
sources of deviations from LOP. The underlying
mechanism that drives differences in prices across within a currency union.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 25

Rigobon then argues that cross-sectional
variation in real exchange rates at the level of
individual goods reflects differences in prices at the
time a product is introduced in various locations.
International relative prices measured at the time
of introduction move together with the nominal
exchange rate. This is important because it implies
that differences in prices across countries are not
a result of price changes during the life of a good.
The implications for measuring differences in real
exchange rates stretch far. For instance, LOP deviations are best understood by measuring relative
price levels at the time a product is introduced.
Moreover, the evidence suggests that there is a limit
on how much change among external factors can
pass through into domestic prices of existing goods.
Economists often face complications when
using cross-country price data arising from aggregation of nonidentical baskets of goods, differences in distribution costs and quality differences.
Moreover, in the presence of imperfect competition, firms can charge different markups for the
same good across different locations. Thus, there is
still much room in decomposing price differences
that stem from these other sources.
Benjamin Mandel of the Federal Reserve
Bank of New York provides a new method to decompose prices of imports into a cost component
and a markup component in his paper, “Chinese
Exports and U.S. Import Prices.” He uses this methodology to study how competition from Chinese
imports affects U.S. prices and found that increased
competition from China leads other foreign
producers (and domestic ones as well) to decrease
their markup. In addition, increased competition
also leads to higher marginal costs, which he argues
could be the result of producers changing their
output composition to higher-quality varieties or of
increased demand for industry-specific factors. So,
pricing to market as well as quality differentiation
appear to be important features of pricing behavior
and are dependent on industrial structure.
In “Export Destinations and Input Prices:
Evidence from Portugal,” Paulo Bastos of the World

Chart 1
Distribution of the Price of Consumption Across Countries
Number of countries
8
7
6
5
4
3
2
1
0
0–.8

.81–.95

.96–1.1
1.11–1.25
Price relative to U.S.

1.26–1.4

NOTE: Chart depicts the price of consumption relative to the U.S. for the 17 euro-area
countries, the U.K. and Japan.
SOURCE: Penn World Tables, version 7.1, 2010.

Bank (with World Bank colleague Joana Silva and
Eric Verhoogen of Columbia University) argue that
cross-country price differences reflect, at least in
part, differences in the quality of goods. Countryspecific prices of similar goods are positively
correlated with income. Two strands of literature
have attempted to reconcile why. One focuses
on pricing to market. This theory requires some
degree of pricing power. Another theory hinges
on the fact that the quality of the goods is higher in
rich countries, and thus, rich countries pay higher
prices. The quality argument has been difficult to
test empirically because measuring and quantifying quality are extremely challenging tasks. This paper provides new evidence in line with the quality
theory using a novel idea. Producing higher-quality
output requires higher-quality inputs. This paper
looks at firm-level data for Portuguese exporters
and finds that firms that export to richer destinations pay higher prices for imported inputs. This fits
the notion that firms produce different quality for
different destinations and also pay a higher price

26 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

This fits the notion
that firms produce
different quality for
different destinations
and also pay a higher
price for higherquality inputs. This
evidence suggests
that pricing to market
is not the full story.

for higher-quality inputs. This evidence suggests
that pricing to market is not the full story. If the
export prices were purely due to pricing to market,
the firms would not pay more for inputs.
The paper’s focus on differences in relative
prices offers important insight regarding the
origination of variation in real exchange rates.
This insight is key to how economists think about
pass-throughs, on which a large portion of the conference was focused.
Understanding Pass-Through

It is widely accepted that prices respond
less than fully to exchange rate and cost changes.
An implication is that the nominal exchange rate
tracks movements in the real exchange rate very
closely, as shown in Chart 2. If prices responded
fully to nominal exchange rates, the real exchange
rate would be constant over time because the
prices in each country would adjust to offset any
changes in the nominal exchange rate.
Chart 2 plots the real and nominal exchange

rates of the dollar and the euro from January 2000
to July 2013. The fact that the real exchange rate
moves closely with the nominal exchange rate
suggests that factors such as distribution costs or
pricing to market influence prices after a good is
produced and even after it is shipped.
Understanding exchange rate pass-through
is crucial to understanding the dynamics of real
exchange rates, which depend on the nominal
exchange rate and the relative price levels across
countries. Understanding cost pass-through is
equally important because models of price dynamics must be able to identify the source of price
shocks, particularly to understand the effects of
monetary policy and its implications for inflation.
Additionally, the extent that firms can absorb cost
shocks carries implications for how much prices
respond to external shocks affecting productivity
and wages, for example.
As Rigobon’s paper suggests, currency invoicing helps determine whether any two countries
have similar pricing. A follow-up question might

Chart 2
Dynamics of Real and Nominal Exchange Rates
Exchange rate, dollar/euro
1.8

1.6

1.4

1.2

Real exchange rate
Nominal exchange rate

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

NOTE: The real exchange rate is computed as the ratio of consumer prices in the U.S. relative to consumer prices in the euro
area times the nominal exchange rate. The real exchange rate is normalized to be equal to the nominal exchange rate in 2005.
SOURCES: Organization for Economic Cooperation and Development; Haver Analytics; Federal Reserve Board.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 27

probe whether currency invoicing affects how
much prices respond to exchange rate movements. Ben Tomlin from the Bank of Canada
addressed this in his presentation, “Exchange
Rate Pass-Through, Currency Invoicing and Trade
Patterns.” The paper (coauthored with Michael
Devereux of the University of British Columbia
and Wei Dong of the Bank of Canada) constructs
a novel dataset and documents that the invoicing
currency of imported goods affects pass-through
arising from exchange rate and import price
changes. The dataset focuses on Canadian-apparel
imports and separates these imports into two
groups: goods invoiced in U.S. dollars and those
invoiced in Canadian dollars.
There were two key findings. First, the
authors found that exchange rate pass-through is
much higher for U.S. dollar-invoiced goods than
for Canadian dollar-invoiced goods. Second, the
pass-through coefficient for goods shipped directly from China or India to Canada is higher than
the pass-through coefficient for the same goods
that have a “layover” in the U.S. during shipment,
even if in both cases the goods are invoiced in U.S.
dollars. Thus, a key challenge for economists is to
understand why the currency in which goods are
invoiced matters.
In “Market Structure and Cost Pass-Through
in Retail,” Nicholas Li of the University of Toronto
(with Gee Hee Hong of the Bank of Canada)
focuses on how vertical and horizontal market
structures affect cost pass-through to retail prices.
Previous literature has looked at each structure
individually but has not combined them. The
authors focus on three types of goods: national
brands, private-label goods that are not produced
by the retailer and private-label goods that are retailer-manufactured. The paper employs scanner
transaction data for thousands of UPC barcodes
that contain both prices and quantities.
The authors estimate pass-through from
commodity to wholesale price, and from wholesale to retail price. They find that firms and goods
with a large market share tend to have lower cost

Participants (from left) Michael Devereux of the University of British Columbia, Mario Crucini of Vanderbilt
University and Roberto Rigobon of the Massachusetts Institute of Technology.

pass-through because these goods/firms have
more pricing power and are thus able to absorb
cost shocks. In terms of vertical market structure,
they find that intrafirm prices exhibit greater passthrough. One explanation is that vertical integration leads to goods priced closer to marginal cost,
which eliminates variable markups that may serve
as a buffer between costs and prices. The authors
then argue that vertical and horizontal market
structures are not independent of one another.
For instance, increased vertical specialization
can increase market share. Since these both have
opposite effects on the extent of pass-through,
the authors develop a framework that decomposes these two effects. Their main finding: When
controlling for increased market share, increased
vertical integration still increases pass-through but
by a lesser degree than when market share is not
controlled for.
Another aspect of exchange rate passthrough is heterogeneity among firms. Oleg Itskhoki of Princeton University presented “Importers,
Exporters and Exchange Rate Disconnect,” cowritten with Mary Amiti of the Federal Reserve Bank

28 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

exchange rate pass-through and external adjustment depend critically on the size of elasticities.
Raphael Auer of the Swiss National Bank
presented “The Mode of Competition Between Foreign and Domestic Goods, Pass-Through and External Adjustment,” a paper cowritten with Raphael
Schoenle of Brandeis University, which focuses on
how “origin differentiation” affects exchange rate
pass-through and external adjustment.
First, the authors estimate that the elasticity
of substitution between different goods of the
Conference attendees examined how globalization has altered the pricing power of firms
same origin and within the same sector is more
as markets become more competitive.
than twice as large as the elasticity between
of New York and Jozef Konings of the University of domestic and foreign goods within the same
Leuven, which provides a novel perspective on the sector. The small elasticity between foreign and
behavior of aggregate exchange rate pass-through domestic goods implies that foreign goods and
by exploiting heterogeneity in pass-through across domestic goods are relatively differentiated, and
thus, the quantity of imported goods does not
different firms. Small exporters that import none
change very much in response to changes in the
of their intermediate inputs exhibit almost full
relative price of imports.
pass-through. Exporters with large market shares
But there are also key implications for pricthat import a large share of their intermediate
ing behavior on which the authors shed light.
inputs exhibit substantially lower pass-through
rates: An increase in the exchange rate may make Foreign firms, even if relatively small, can employ
substantial price discrimination. In addition,
marginal costs higher, but it will also reduce the
domestic firms will not alter their price by a subprice of exports. Because large exporters are also
stantial amount in response to changes in import
large importers, these firms account for a bulk of
prices. As a result, both external adjustment and
total trade, and hence, we observe low levels of
exchange rate pass-through are limited by the
pass-through at the aggregate level.
large degree of origin differentiation—that is, the
These implications shed light on a large
relatively small elasticity of substitution between
puzzle in international economics: why large
movements in nominal exchange rates have small foreign and domestic goods.
The elasticity of substitution is clearly an
effects on prices of traded goods. That is, the real
important
parameter. However, depending on the
exchange rate does not move closely with the
type of models being used, there is disagreement
nominal exchange rate.
as to what value should be assigned. For instance,
calibrated open-economy macro models such
Assessing Elasticities
as the classic international real business cycle
The values assumed for certain structural
require a small elasticity of substitution between
parameters, such as elasticities of substitution
home and foreign goods to match comovements
between different types of goods, are key to
between relative prices (real exchange rates)
determining price sensitivity through modeling.
Elasticities of substitution have important implica- and relative quantities. Trade models require
tions for the degree of market power each firm has substantially larger elasticities of substitution
and, thus, are crucial in understanding the pricing between home and foreign goods to account for
decisions firms make. In turn, the degrees of both how trade changes in response to changes in trade

Firms appear to
take actions that
affect their current
and future revenue
in response to past
tariff reductions.
These findings are
consistent with the
fact that exports
respond very little
to movements in
the exchange rate
and more to tariff
reductions.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 29

costs. Leading explanations in the literature are
tied to sunk costs of entry into export markets. In
particular, if business-cycle shocks that lead to exchange rate movement are less persistent or more
volatile than trade liberalization shocks, sunk costs
of entry imply that the extensive margin of trade
will react more to trade liberalization than to real
exchange rate movements.
Doireann Fitzgerald from Stanford University presented “Exporters and Shocks,” cowritten
with Stefanie Haller of University College Dublin,
which provides evidence of how firms respond to
both exchange rate shocks and to trade liberalization shocks.
The authors find that the sales of existing exporters (intensive margin) are more responsive
to tariff reductions than they are to movements
in the real exchange rate, and the estimated elasticities at the firm level are close to the aggregate
elasticity. Also, they find that export participation
(extensive margin) is also more sensitive to tariffs
than to exchange rate movements and supports
the sunk-cost story. However, the magnitudes
are small and the sizes of entering/exiting firms
are small and, thus, the extensive margin of trade
cannot fully account for the elasticity puzzle.
As a result, the authors argue that much of
the answer to the elasticity puzzle lies in better
understanding the intensive margin. In particular, the authors argue that market-specific
costs of adjustments for continuing exporters
may significantly explain the elasticity puzzle.
Such adjustment costs may include changing
the currency in which goods are invoiced after a
trade-agreement episode.
To support this hypothesis, they find that a
firm’s probability of exit is negatively related to its
attachment to that market. They also find that the
growth rate of a firm’s sales in a particular market
is negatively related to tenure in that market and
that the growth rate responds to lagged tariff
changes but not to lagged real exchange rate
movements. That is, firms appear to take actions
that affect their current and future revenue in

response to past tariff reductions. These findings
are consistent with the fact that exports respond
very little to movements in the exchange rate and
more to tariff reductions.
Globalization and Pass-Throughs

In recent years we have experienced increasing globalization. Firms sell output in more markets than ever, while supply chains have become
increasingly fragmented across multiple locations.
This has led to increased competition, changes in
the market structure in which firms operate and
altered pricing strategies.
Conference papers can be classified into
three broad sections: 1) cross-country differences
in price levels, 2) channels through which changes
in external factors pass through to price changes
and 3) the sensitivity of both prices and quantities
to changes in external factors.
These three elements are, however, intimately linked. For instance, we learned that the
currency of invoicing matters for differences in
price levels across countries, as well as how prices
in one country respond to external factors.
We also learned that market structure matters
for price-level differences as well as how prices respond to external factors. Competitive changes alter
the landscape of markets through vertical and horizontal integration—both of which affect firm costs,
the markups that firms apply to their prices and the
quality of output produced. Quality differences are
reflected in price levels and can explain why prices
are higher in rich countries than in poorer ones.
Firm heterogeneity also plays a key role in determining how external factors pass through into prices.
Finally, modeling the extent to which prices
respond to various external factors requires carefully measuring elasticities of substitution. The
degree to which goods from various sources are
differentiated affects the price-setting environment as well as how quantities respond to prices.
Recognizing adjustment costs of existing firms
is an important channel for understanding why
trade flows are so sensitive to tariff changes.

Competitive
changes alter the
landscape of markets
through vertical
and horizontal
integration—both
of which affect firm
costs, the markups
that firms apply to
their prices and the
quality of output
produced.

30 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Inflation Dynamics in a
Post-Crisis Globalized Economy
By Mark Wynne

2013 Conference Summary
When: Aug. 22–23
Where: Swiss National Bank, Zurich
Sponsors: Federal Reserve Bank of Dallas
Globalization and Monetary Policy Institute, Swiss
National Bank, Bank for International Settlements, Center for Economic Policy Research

he Great Recession that accompanied the global financial crisis—from
which many advanced economies
are still struggling to recover—
prompted extraordinary policy responses from
central banks around the world. Some of these responses were coordinated, but all were directed at
fulfilling purely domestic mandates for price stability and, in some cases, maximum employment.
Fears that the dramatic expansion of central bank
balance sheets would lead to higher inflation at
the consumer level have so far proven unfounded,
whether due to still-abundant slack in many countries or well-anchored inflation expectations.
But some have argued that an extended period
of ultra-easy monetary policy is manifesting itself in
excessive risk taking, bubbles in certain asset classes
and price pressures in countries that are recipients of
capital flows in search of yield, which will ultimately
lead to higher inflation globally. At the same time, the
debate has increasingly focused on the rapidly growing emerging and developing economies as their
share of global output keeps rising. The disinflationary impact of the integration of these (generally) lowwage economies into the global trading system has
challenged our understanding of the price-setting
process at the national and international level and
our understanding of exchange rate pass-through.
This forum discussing these and other
aspects of inflation and price-setting follows
two other joint Dallas Fed–Swiss National Bank
conferences, “Microeconomic Aspects of The Globalization of Inflation” in 2011 and, more recently,
“The Effect of Globalization on Market Structure,
Industry Evolution and Pricing” (see page 24).
Globalization and Inflation Dynamics

The first two papers considered how globalization has affected inflation dynamics. This sub-

ject has been at the core of the institute’s research
since the program was launched in 2007.1 A key
question is whether the greater integration of the
global economy now means that measures of
global, rather than domestic, resource utilization
matter when assessing inflation pressures. Chart
1 shows measures of output gaps, one for the U.S.,
the other for the rest of the world excluding the
U.S.
In “What Helps Forecast U.S. Inflation? Mind
the Gap!” Enrique Martínez-García of the Dallas
Fed and Ayse Kabukçuoglu of Koç University address this question from a forecasting perspective.
A widely cited study by Andrew Atkeson and Lee
Ohanian (2001) raised doubts about the ability
of measures of resource utilization, or slack, to
improve simple time-series-based forecasts of
inflation.2 Other studies have since documented
a decline in the relationship between measures
of domestic resource utilization and subsequent
inflation. This decline coincides with the integration of large, emerging-market economies into
the global trading system. So on the surface, it is
plausible that global rather than domestic slack is
the relevant driving force for inflation.
Martínez-García and Kabukçuoglu find that
measures of global slack have limited predictive
power for U.S. inflation. However, they also find
that the terms of trade (or rather, the deviation
of the terms of trade from trend) help forecast
inflation in the U.S. Moreover, this seems to be a
relatively robust result because the terms of trade
work well for different measures of inflation and
over different time periods. In some sense, this
result is not too surprising. In an earlier paper,
Martínez-García and Mark Wynne (2010) had
shown that the open-economy Phillips curve
can be written either as a relationship between
inflation and domestic and foreign slack, or as a

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 31

Chart 1
U.S. and Foreign Output Gaps
Percent of trend
4
U.S. output gap

3
2
1
0
–1

Rest-of-the-world
output gap

–2
–3
–4
–5
’75

’80

’85

’90

’95

’00

’05

’10

SOURCE: Author’s calculations.

relationship between inflation, domestic slack and
the terms-of-trade gap.3
Measuring resource utilization is challenging
in the best of times; measuring resource utilization
in rapidly growing emerging-market economies
undergoing structural change is even more challenging. But measuring the terms of trade—the
relative price of imports in terms of exports—is a
lot easier because data on the prices of imports
and exports are more readily available. MartínezGarcía and Kabukçuoglu go a step further in their
paper and try to understand the reasons for their
forecast results by simulating a workhorse New
Keynesian open-economy model and investigating what factors might account for their findings.
They conclude that a run of good luck (in the
period prior to the financial crisis) in conjunction
with better monetary policy can best account for
their findings, with globalization playing an important complementary role.
In “Globalization and Inflation: Structural
Evidence from a Time Varying VAR Approach,”
Francesco Bianchi of Duke University and An-

drea Civelli of the University of Arkansas evaluate
the global slack hypothesis using data from 18
countries. Instead of focusing on whether measures of global slack can help forecast domestic
inflation in the group of Organization for Economic Cooperation and Development (OECD)
countries they include in their study, they ask
whether there is any evidence that globalization
has altered inflation dynamics in these countries
in a manner consistent with the global slack
hypothesis. Importantly, they use a methodology
(time-varying coefficient vector autoregressions)
that allows the impact of global factors to change
over the sample period (1971 to 2006; they end
their study before the onset of the recent global
financial crisis).
They find that—consistent with the global
slack hypothesis—global slack affects the dynamics of inflation in many countries, but, contrary
to the global slack hypothesis, the effects of
global slack do not get stronger over time as these
countries become more integrated into the global
economy. This puzzling finding is similar to the

A key question is
whether the greater
integration of the
global economy now
means that measures
of global, rather than
domestic, resource
utilization matter
when assessing
inflation pressures.

32 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

results reported by Martínez-García and Wynne
(2012) for the U.S.4
In discussing the paper, conference participants noted that the global slack hypothesis matters more for movements of inflation around trend
because movements in trend inflation are largely
determined by the actions of central banks. Others
questioned the inclusion of measures of foreign
slack and terms of trade in the specifications of
the open-economy Phillips curve given that both
variables capture the same thing. (This point is
also made in some detail in Martínez-García and
Wynne 2012.)
Small open economies provide a natural
laboratory in which to study the role of global
forces in inflation dynamics. Such economies
are more exposed to external shocks, and inflation may be more responsive to global resource
utilization. Poland is a classic example of a small
open economy. In the third paper in the session,
“Does Domestic Output Gap Matter for Inflation
in a Small Open Economy?” Aleksandra Hałka and

Jacek Kotłowski of the National Bank of Poland
examine the drivers of inflation in Poland.
The authors’ empirical strategy is to estimate
a series of Phillips curves at the sectoral level. They
use data from the Polish consumer price index at
the four-digit COICOP (classification of individual
consumption by purpose) level, which gives them
110 price series. Their sample period runs from
1999 through second quarter 2012.
Hałka and Kotłowski find that more than half
of the components of the Polish consumer price
index (CPI) are sensitive to changes in domestic
activity in Poland as measured by the Polish
output gap. This is somewhat surprising given the
highly open nature of Poland’s economy. They also
report that the category of goods whose prices are
most sensitive to changes in the exchange rate is
durable goods.
Finally, Hałka and Kotłowski construct a new
Index of the Demand for Sensitive Goods (IDSG);
that is, an index of the prices of those goods that
seem to be most sensitive to the domestic business cycle in Poland. They find that while the new
series tends to track the headline CPI reasonably
Participants (from left) Andreas Fischer and Raphael Auer of the Swiss National Bank and Mark Wynne of the Dallas Fed. well, the two series diverge significantly in 2007
to 2009. Specifically, headline CPI inflation was
significantly lower than IDSG inflation during
these years, possibly because the global financial
crisis was associated with an increase in global
slack that restrained the headline number. Poland
came through the recent financial crisis in better
shape than most other European countries. It
experienced only one quarter of negative growth,
fourth quarter 2008.
During the discussion, a question was posed:
Why isn’t there more deflation in the euro area
given the paper’s findings? If domestic inflation is
as sensitive to domestic economic activity as the
paper claims, we might expect to see a lot more
deflation in some euro-area countries where there
is clearly a large negative output gap (for example,
Spain and Greece). It may be that the measures
of the output gap used in this (and the previous
papers in this session) are poor proxies for the pri-

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 33

mary driver of inflation in New Keynesian models,
namely marginal costs. Conference participants
also asked about the degree to which the domestic
output gap in Poland can be differentiated from
the output gap in, say, Germany given the high
degree of integration between the two economies.

of a firm’s pricing problem in a multicountry world
that can generate estimates of exchange rate passthrough greater than zero. That is, in response to
a depreciation of the euro against the dollar, a U.S.
exporter might raise rather than lower the dollar
price of exports.
Naknoi’s model is related to earlier work
Price Setting
by Paul Bergin and Robert Feenstra (2009) that
A key element in modern international
examines pricing decisions in a simple threemacroeconomic models is how firms set prices in country environment.5 Whereas Naknoi works
foreign and domestic markets. Selling internation- from a quadratic specification of preferences over
ally means that a firm has to decide whether to set differentiated goods (to generate variable elasticities of demand), Bergin and Feenstra start with a
its prices in the currency of the country where a
translog specification of the consumer expendigood is produced (producer currency pricing) or
ture function. Bergin and Feenstra use their model
in the currency of the country where the good is
to account for changes in measured exchange
sold (local currency pricing). The option chosen
rate pass-through to U.S. import prices. Naknoi
will determine how much of a change in the
exchange rate between the two currencies shows reports simulations showing that her model can
in principle account for the variation in estimates
up in the prices of the final good.
of exchange rate pass-through to export prices
Under local currency pricing, exchange rate
pass-through should be zero; under producer cur- reported in the existing literature. An important
rency pricing, the pass-through should be 1. A 10
open question is how her framework would perpercent depreciation of the dollar against the euro, form in a general-equilibrium setting.
The second paper in this session addressed
for example, should be reflected in a 10 percent
an important puzzle in international economics:
increase in the price of U.S. imports from the
Why are prices of tradable consumption goods
euro area. However, in practice, estimates of the
higher in rich countries than in poor countries? It
degree of exchange rate pass-through fall outside
has been long known that there are large differthe theoretical range of zero to 1, or, in the case of
export prices, zero to minus 1. Empirical estimates ences in the prices of nontradable goods across
countries, with nontradables a lot cheaper in poor
range from -2.26 to 2.55.
In “Exchange Rate Pass-Through and Market than in rich countries. Often this is attributed to
Structure in a Multi-Country World,” Kanda Naknoi differences in productivity between the traded
of the University of Connecticut proposes a simple and nontraded sectors in these countries, but
solution to this puzzle. Naknoi argues that the key recent research has shown that differences in
to understanding the discrepancy is that exporting productivity levels between traded and nontraded
firms typically do not compete against firms from sectors is not large enough to account for the
observed price differences. Tradable price differjust one country (or, more specifically, against
firms pricing in just one other currency) but rather ences are even more puzzling because they imply
significant deviations from the law of one price
against firms from many countries. Thus, when
(goods have one price in various locations after
the dollar appreciates against, say, the euro, U.S.
exporters also need to factor into their pricing de- giving effect for exchange rate differences).
cisions what is happening to the value of the dollar
Ina Simonovska (2010) proposes that
against the yen, the pound sterling and so on. She consumers in rich countries pay more for tradable
presents a simple static partial-equilibrium model goods because they have a lower price elasticity of

Simonovska
proposes that
consumers in rich
countries pay more
for tradable goods
because they have a
lower price elasticity
of demand for such
goods, which arises
from the fact that
consumers in these
countries typically
import a wider
variety of goods.

34 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

At the peak of the
crisis, firms with
weaker balance
sheets tended to
increase prices,
while those with
stronger balance
sheets lowered their
prices.

demand for such goods, which arises from the fact
that consumers in these countries typically import
a wider variety of goods.6 In his presentation, “Why
are Goods and Services More Expensive in Rich
Countries? Demand Complementarities and
Cross-Country Price Differences,” Daniel Murphy
from the University of Virginia proposes an alternative explanation.
Murphy centers on the existence of complementary catalyst goods in rich countries. For example, consumers in rich countries are willing to
pay more for cars because of the existence of good
roads in these countries. Likewise, consumers in
these countries are willing to pay more for electrical goods because of the presence of a reliable
supply of electricity. Murphy tests his theory using
data on Chinese and U.S. export prices and finds
support for the core idea in the data. For example,
a percentage-point increase in the fraction of
roads that are paved is associated with a (statistically significant) 0.6 percent increase in the price
of new cars. Likewise, a megawatt-hour increase
in per capita electricity consumption (a proxy for
access to electricity) is associated with an increase
in the prices of electrical goods of between 2 and
6 percent (depending on whether we look at
the prices of U.S. or Chinese exports of electrical
goods). An important open consideration for
future research is quantifying the role of demand
complementarities in a more precise manner.

sented his joint paper with Simon Gilchrist of Boston University and Jae Sim and Egon Zakrajsek of
the Federal Reserve Board on “Inflation Dynamics
During the Financial Crisis.” The recent financial
crisis was the most severe since the Great Depression, and Schoenle et al. ask whether firms’ pricing
decisions during the crisis depended on the
strength of their balance sheets. A major contribution of the paper is to match data on firms’ pricing
from the Bureau of Labor Statistics’ producer price
program with data on firms’ financial conditions
from Compustat.
They find that at the peak of the crisis, firms
with weaker balance sheets tended to increase
prices, while those with stronger balance sheets
lowered their prices. Specifically, in fourth quarter
2008, firms with relatively weak balance sheets (as
measured by the ratio of a firm’s cash and other
liquid assets to total assets) set prices in such
a way as to produce a 20 percentage-point differential in factory gate inflation relative to firms
with stronger balance sheets. Having documented
these facts, the authors propose a theory of price
setting that incorporates a financial constraint
(in the form of a need to raise external finance to
cover production costs through equity issuance).
Their model is capable of generating widely differing inflation responses to various shocks depending on whether the financial friction is assumed
binding or not.
The zero lower bound on policy rates—the
Monetary Policy Impact
inability to set interest rates below zero due to
Ultimately, of course, we are interested in
the existence of cash as an alternative store of
how economic integration might impact the
value—was once thought to be a pathology of
conduct of monetary policy. The benchmark for
interest only to scholars of the Great Depression
monetary policy in most countries is a variant
or of Japan following the bursting of its twin real
of the rule first proposed by John Taylor (1993),
estate and stock market bubbles in the late 1980s
which states that the policy rate should respond
and early 1990s. However the policy response to
to deviations of inflation from target and deviathe global financial crisis pushed interest rates
7
tions of output from potential. There is no role
to historic lows by early 2009, where they have
for external factors (such as the terms of trade or
remained (Chart 2).
foreign slack) in such a rule. The final three papers
Analyses of how economies respond to
address this question from different angles.
shocks now routinely take explicit account of the
Raphael Schoenle of Brandeis University pre- existence of the zero lower bound (see, for example,

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 35

Chart 2
Policy Rates in the Advanced Economies
Percent
7
Canada

Euro area
U.K.

U.S.
Japan

0
2007

2008

2009

2010

2011

SOURCES: National central banks; Haver Analytics.

the paper by Schoenle et al.). A paper by Gregor
Bäurle and Daniel Kaufmann of the Swiss National
Bank, “Exchange Rate and Price Dynamics at the
Zero Lower Bound,” examines Switzerland’s experience with policy rates at the zero bound to see
how the response of the economy differs in such
circumstances. (Switzerland experienced two such
episodes: the first from March 2003 to June 2004,
and the second from January 2009 through May
2012.)8 A key determinant of the response to shocks
in such an environment is how the central bank sets
policy. If the central bank is engaged in inflation
targeting, and long-run inflation expectations are
anchored, a temporary shock may have permanent
effects on the exchange rate and the price level (the
idea of letting bygones be bygones). By contrast, if
the central bank targets the price level rather than
the inflation rate, these permanent effects of temporary shocks at the zero lower bound can be avoided.
How trade integration might impact the
conduct of monetary policy is addressed explicitly
in Matteo Cacciatore and Fabio Ghironi’s paper,
“Trade, Unemployment and Monetary Policy.”

Cacciatore of HEC Montreal and Ghironi of Boston College examine how the optimal conduct of
policy changes as trade linkages grow, developing
a rich two-country model with multiple distortions
(due to sticky prices and wages, firm monopoly
power, labor market search and incomplete
financial markets) that can potentially be offset by
monetary policy. They report three major findings.
First, when trade linkages between countries are
weak, optimal monetary policy is inward-looking
and gives little weight to foreign developments.
Optimal monetary policy in this situation calls for
a low but positive rate of inflation to offset some
of the distortions in the economy. Second, as
international trade increases and more productive
firms gain market share, there is less need to use
inflation to offset these distortions. And third, as
trade becomes more integrated, business cycles
become more synchronized across countries
and there is less to be gained from conducting
monetary policy in a cooperative versus noncooperative manner.

2012

2013

36 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Conclusions and Future Directions

At a minimum,
globalization
changes the
sources of
the shocks
to which
monetary
policy makers
must respond
in fulfilling
their mandate
for price
stability.

As with most research conferences, this conference raised as many questions as it answered.
The key question driving the research agenda of
the globalization institute is how the increased
integration of the global economy through trade
and financial channels affects the conduct of monetary policy in the U.S. At a minimum, globalization changes the sources of the shocks to which
monetary policy makers must respond in fulfilling
their mandate for price stability (and, as in the
case of the U.S., maximum sustainable employment). But it could potentially alter the nature of
optimal monetary policy and the design of policy
rules.
An ongoing challenge is accurate measurement of the output gap. The basic New Keynesian
Phillips curve is usually written as a relationship
between inflation, expected inflation and real
marginal costs. The relationship can also be written in terms of the output gap if one is willing to
make certain assumptions about the structure
of the labor market. However, the concept of the
output gap that is consistent with New Keynesian theory is very different from the concept
commonly employed in empirical exercises such
as those reported in the Martínez-García and
Kabukçuoglu, Bianchi and Civelli, and Hałka and
Kotłowski papers presented at the conference.
This point has been known for some time
(see, for example, Neiss and Nelson 2003).9 Indeed, Martínez-García and Kabukçuoglu mention
it in their paper and report some figures showing
that, depending on how a model is parameterized,
there may be a positive, a negative or no relationship between the theory-consistent measure of
the output gap and a measure constructed using
a Hodrick–Prescott filter. Of course, one option
would be to rely on measures of real marginal
costs instead as the driving variable, but finding
the data necessary to construct such measures
for emerging-market economies that play such an
important role in global inflation dynamics is an
enormous challenge.
A second theme that emerged in conference

discussions dealt with the behavior of inflation during the recent financial crisis. Given the
enormous amount of slack that emerged during
the crisis, it is perhaps surprising that inflation did
not fall by more than it did, or that more countries
did not experience outright deflation. Some have
attributed this to strong anchoring of inflation
expectations.
However, as the discussion of the Hałka and
Kotłowski paper showed, if domestic factors truly
are as important in driving price developments
at the sectoral level, we should have seen more
deflation. One possible resolution to this puzzle is
suggested by the Schoenle et al. paper that draws
attention to the importance of firms’ financial
conditions in setting prices. Of course, Schoenle et
al. are only able to study price developments at the
producer level. Central banks are more interested
in price developments as measured by consumer
price indexes, but the pricing decisions of retailers
and the factors influencing them involve many
more margins that are only imperfectly understood. Bäurle and Kaufmann’s paper also provided
evidence based on the Swiss experience that the
transmission of shocks may differ when a central
bank sets its policy rate at the zero lower bound,
suggesting that the response to the financial recession may have also played a role in changing the
transmission mechanism for monetary policy.
And, finally, there is the question of how
monetary policy ought to be conducted in a
highly integrated global economy. The paper by
Cacciatore and Ghironi seems to suggest that
inward-looking policies continue to deliver good
outcomes even as the world becomes more
integrated. But such findings tend to be sensitive
to the details of the model environment used to
study monetary policy and, in particular, to the
degree of business-cycle synchronization that the
economies attain under a given policy framework.
Robust policy rules and guidelines for monetary
policy are still some way off.
Cacciatore and Ghironi model trade integration as coming about through trade in final goods.

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 37

However, trade in intermediate goods is a defining
feature of the modern era of globalization, and it
would be useful to know how robust the Cacciatore and Ghironi results are to such an extension.
In light of the Naknoi results—how going
from a two-country to a multicountry setting can
help explain certain results in the exchange rate
pass-through literature—it might also be useful
to see an extension of the Cacciatore and Ghironi
framework that allows for foreign trade partners
that adopt different exchange regimes vis-à-vis the
home country, specifically fixed and floating.
Notes
See, for example: “Openness and Inflation,” by Mark A.
Wynne and Erasmus Kersting, Federal Reserve Bank of Dallas Staff Papers, no. 2, April 2007; “Obstacles to Measuring
Global Output Gaps,” by Wynne and Genevieve R. Solomon,
Federal Reserve Bank of Dallas Economic Letter, vol. 2,
no. 3, 2007; “The Global Slack Hypothesis,” by Enrique
Martínez-García and Wynne, Federal Reserve Bank of Dallas Staff Papers, no. 10, September 2010; and “Global Slack
as a Determinant of U.S. Inflation,” by Martínez-García and
Wynne, Federal Reserve Bank of Dallas, Globalization and
Monetary Policy Institute Working Paper no. 105, August
2012.
Also see: “Global Slack and Domestic Inflation Rates: A
Structural Investigation for G-7 Countries,” by Fabio Milani,
Journal of Macroeconomics, vol. 32, 2010, pp. 968–81;
“Has Globalization Transformed U.S. Macroeconomic Dynamics?” by Milani, Macroeconomic Dynamics, vol. 16, no.
2, 2012, pp. 204–29; “Globalization, Domestic Inflation and
Global Output Gaps: Evidence from the Euro Area,” by Alessandro Calza, Federal Reserve Bank of Dallas, Globalization
and Monetary Policy Institute Working Paper no. 13, May
2008; and “Some Preliminary Evidence on the Globalization–Inflation Nexus,” by Sophie Guilloux and Enisse Kharroubi, Federal Reserve Bank of Dallas, Globalization and
Monetary Policy Institute Working Paper no. 18, July 2008.
2
“Are Phillips Curves Useful for Forecasting Inflation?” by
Andrew Atkeson and Lee Ohanian, Federal Reserve Bank of
Minneapolis Quarterly Review, Winter 2001, pp. 2–11.
3
See note 1, Martínez-García and Wynne (2010).
4
See note 1, Martínez-García and Wynne (2012).
5
See “Pass-Through of Exchange Rates and Competition
Between Floaters and Fixers,” by Paul R. Bergin and Robert
C. Feenstra, Journal of Money, Credit and Banking, vol. 41,
no. s1, 2009, pp. 35–70.
1

See “Income Differences and Prices of Tradables,” by Ina

Conference participants considered how the increased integration of the global economy
through trade and financial channels affects monetary policy.

Simonovska, Federal Reserve Bank of Dallas, Globalization
and Monetary Policy Institute Working Paper no. 55, July
2010.
7
See “Discretion Versus Policy Rules in Practice,” by John
B. Taylor, Carnegie Rochester Conference Series on Public
Policy, vol. 39, no. 1, 1993, pp. 195–214.
8
Switzerland also experienced episodes of zero interest
rates (as measured by the call money rate) in the 1970s,
from 1977 through 1979.
9
See “The Real-Interest-Rate Gap as an Inflation Indicator,”
by Katharine Neiss and Edward S. Nelson, Macroeconomic
Dynamics, vol. 7, no. 2, 2003, pp. 239–62.

38 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Institute Working Papers Issued in 2013
Working papers can be found online at
www.dallasfed.org/institute/wpapers/index.cfm.

No. 135
International Trade Price Stickiness and
Exchange Rate Pass-Through in Micro Data:
A Case Study on U.S.–China Trade

Mina Kim, Deokwoo Nam, Jian Wang and
Jason Wu
No. 136
The GVAR Approach and the Dominance of
the U.S. Economy

Alexander Chudik and Vanessa Smith
No. 137
Distribution Capital and the Short- and LongRun Import Demand Elasticity

No. 144
A Bargaining Theory of Trade Invoicing and
Pricing

Linda Goldberg
No. 145
Financial Globalization and Monetary
Transmission

Simone Meier
No. 146
Common Correlated Effects Estimation of
Heterogeneous Dynamic Panel Data Models
with Weakly Exogenous Regressors

Alexander Chudik and M. Hashem Pesaran

Mario J. Crucini and J. Scott Davis
No. 138
Spatial Considerations on the PPP Debate

Michele Ca’Zorzi and Alexander Chudik

No. 147
Tractable Latent State Filtering for NonLinear DSGE Models Using a Second-Order
Approximation

Robert Kollmann
No. 139
Trade Barriers and the Relative Price Tradables

Michael Sposi

No. 148
Large Global Volatility Shocks, Equity Markets and Globalisation: 1885–2011

No. 140
Merchanting and Current Account Balances

Arnaud Mehl

Elisabeth Beusch, Barbara Döbeli, Andreas
M. Fischer and Pinar Yesin

No. 149
Heterogeneous Bank Loan Responses to
Monetary Policy and Bank Capital Shocks:
A VAR Analysis Based on Japanese Disaggregated Data

No. 141
Exchange Rate Pass-Through, Firm Heterogeneity and Product Quality: A Theoretical
Analysis

Naohisa Hirakata, Yoshihiko Hogen, Nao
Sudo and Kozo Ueda

Zhi Yu
No. 142
Sovereign Debt Crises: Could an International
Court Minimize Them?

Aitor Erce
No. 143
Sovereign Debt Restructurings and the IMF:
Implications for Future Official Interventions

Aitor Erce

No. 150
Optimal Monetary Policy in a Currency Union
with Interest Rate Spreads

Saroj Bhattarai, Jae Won Lee and Woong
Yong Park
No. 151
International Reserves and Rollover Risk

Javier Bianchi and Juan Carlos Hatchondo

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 39

No. 152
Price Indexation, Habit Formation and the
Generalized Taylor Principle

Saroj Bhattarai, Jae Won Lee and Woong
Yong Park
No. 153
Large Panel Data Models with Cross-Sectional
Dependence: A Survey

Alexander Chudik and M. Hashem Pesaran
No. 154
Commodity House Prices

No. 161
Is the Net Worth of Financial Intermediaries
More Important than That of Non-Financial
Firms?

Naohisa Hirakata, Nao Sudo and Kozo Ueda
No. 162
Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel
Data Models

Alexander Chudik, Kamiar Mohaddes,
Hashem Pesaran and Mehdi Raissi

Charles Ka Yui Leung, Song Shi and Edward
Tang

No. 163
Institutional Quality, the Cyclicality of Monetary Policy and Macroeconomic Volatility

No. 155
Is Monetary Policy a Science? The Interaction
of Theory and Practice over the Last 50 Years

Roberto Duncan

William R. White
No. 156
Why are Goods and Services more Expensive
in Rich Countries? Demand Complementarities
and Cross-Country Price Differences

Daniel P. Murphy
No. 157
How Does Government Spending Stimulate
Consumption?

Daniel P. Murphy
No. 158
A Shopkeeper Economy

Daniel P. Murphy
No. 159
Micro Price Dynamics During Japan’s Lost
Decades

Nao Sudo, Kozo Ueda and Kota Watanabe
No. 160
U.S. Business Cycles, Monetary Policy and
the External Finance Premium

Enrique Martínez-García

No. 164
Testing for Bubbles in Housing Markets: New
Results Using a New Method

José E. Gómez-Gónzalez, Jair N. Ojeda-Joya,
Catalina Rey-Guerra and Natalia Sicard
No. 165
Monitoring Housing Markets for Episodes of
Exuberance: An Application of the Phillips et
al. (2012, 2013) GSADF Test on the Dallas Fed
International House Price Database

Efthymios Pavlidis, Alisa Yusupova, Ivan Paya,
David Peel, Enrique Martínez-García, Adrienne
Mack and Valerie Grossman
No. 166
Database of Global Economic Indicators
(DGEI): A Methodological Note

Valerie Grossman, Adrienne Mack and Enrique
Martínez-García

40 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Institute Staff, Advisory Board
and Senior Fellows
Institute Director

Board of Advisors

John B. Taylor, Chairman
Vice President and Associate Director of Research, Senior Fellow, Hoover Institution
Mary and Robert Raymond Professor of Economics,
Federal Reserve Bank of Dallas
Stanford University
Undersecretary of the Treasury for International
Staff
Affairs, 2001–05
Mark A. Wynne

Jian Wang

Senior Research Economist and Advisor

Charles R. Bean

Alexander Chudik

Deputy Governor, Bank of England
Executive Director and Chief Economist,
Bank of England, 2000–08

Senior Research Economist
Enrique Martínez-García

Senior Research Economist
Scott Davis

Martin Feldstein

Research Economist

George F. Baker Professor of Economics,
Harvard University
President Emeritus, National Bureau of
Economic Research

Michael J. Sposi

Research Economist
Janet Koech

Assistant Economist
Adrienne Mack

Heng Swee Keat

Research Analyst

Minister for Education, Parliament of Singapore
Managing Director, Monetary Authority of
Singapore, 2005–11

Valerie Grossman

Research Assistant

R. Glenn Hubbard

Dean and Russell L. Carson Professor of Finance
and Economics, Graduate School of Business,
Columbia University
Chairman, Council of Economic Advisers, 2001–03
Otmar Issing

President, Center for Financial Studies (Germany)
Executive Board Member, European Central Bank,
1998–2006

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 41

Horst Köhler

Senior Fellows

President, Federal Republic of Germany, 2004–10
Managing Director, International Monetary Fund,
2000–04

Michael Bordo

Finn Kydland

Jeff Henley Professor of Economics,
University of California, Santa Barbara
Recipient, 2004 Nobel Memorial Prize in
Economic Sciences

Professor of Economics, Rutgers University
Research Associate, National Bureau of Economic
Research
Mario Crucini

Professor of Economics, Vanderbilt University
Michael B. Devereux

Guillermo Ortiz

Governor, Bank of Mexico, 1998–2009

Professor of Economics, University of British
Columbia
Visiting Scholar, International Monetary Fund

Kenneth S. Rogoff

Thomas D. Cabot Professor of Public Policy,
Harvard University
Director of Research, International Monetary
Fund, 2001–03

Charles Engel

Professor of Economics, University of Wisconsin–
Madison
Research Associate, National Bureau of Economic
Research

Masaaki Shirakawa

Director and Vice Chairman, Bank for International Settlements
Governor, Bank of Japan, 2008–13
Professor, School of Government, Kyoto University
2006–08

Karen Lewis

Joseph and Ida Sondheimer Professor of
International Economics and Finance, Wharton
School, University of Pennsylvania
Codirector, Weiss Center for International
Financial Research

William White

Head of the Monetary and Economic
Department, Bank for International Settlements,
1995–2008

Francis E. Warnock

James C. Wheat Jr. Professor of Business Administration, Darden Graduate School of Business,
University of Virginia
Faculty Research Fellow, National
Bureau of Economic Research
Research Associate, Institute for International
Integration Studies, Trinity College Dublin

42 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

Research Associates
Raphael Auer

Ester Faia

Swiss National Bank

Goethe University Frankfurt

Simone Auer

Rasmus Fatum

Swiss National Bank

University of Alberta School of Business

Chikako Baba

Andrew Filardo

International Monetary Fund

Bank for International Settlements

Pierpaolo Benigno

Andreas Fischer

LUISS Guido Carli

Swiss National Bank

Martin Berka

Marcel Fratzscher

Victoria University of Wellington

German Institute for Economic Research

Saroj Bhattarai

Ippei Fujiwara

Pennsylvania State University

Australian National University

Javier Bianchi

Pedro Gete

University of Wisconsin–Madison

Georgetown University

Claudio Borio

Bill Gruben

Bank for International Settlements

Texas A&M International University

Hafedh Bouakez

Sophie Guilloux

HEC Montreal

Bank of France

Matthieu Bussière*

Ping He

Bank of France

Tsinghua University

Matteo Cacciatore*

Gee Hee Hong*

HEC Montreal

Bank of Canada

Alessandro Calza

Yi Huang

European Central Bank

The Graduate Institute Geneva

Bo Chen

Erasmus Kersting

Shanghai University of Finance and Economics

Villanova University

Hongyi Chen

Enisse Kharroubi

Hong Kong Institute for Monetary Research

Bank for International Settlements

Yin-Wong Cheung

Mina Kim

University of California, Santa Cruz/
City University of Hong Kong

Bureau of Labor Statistics

Dudley Cooke

University of Exeter Business School

European Center for Advanced Research in
Economics and Statistics

Richard Dennis*

Charles Ka Yui Leung

Australian National University

City University of Hong Kong

Roberto Duncan

Nan Li

Ohio University

Ohio State University

Peter Egger

Shu Lin

Swiss Federal Institute of Technology Zurich

Fudan University

Aitor Erce

Tuan Anh Luong

Bank of Spain

Shanghai University of Finance and Economics

Robert Kollmann

Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 43

Julien Martin

Bent E. Sorensen

Paris School of Economics

University of Houston

Césaire Meh

Cédric Tille

Bank of Canada
Arnaud Mehl*

Graduate Institute for International and
Development Studies

European Central Bank

Jeff Thurk*

Fabio Milani

University of Notre Dame

University of California, Irvine

Ben Tomlin*

Philippe Moutot

Bank of Canada

European Central Bank

Kozo Ueda

Daniel Murphy*

Waseda University, Tokyo

University of Virginia

Eric van Wincoop*

Deokwoo Nam

University of Virginia

City University of Hong Kong

Giovanni Vitale

Dimitra Petropoulou

European Central Bank

University of Sussex

Yong Wang*

Vincenzo Quadrini

University of Southern California

Hong Kong University of Science and
Technology

Attila Rátfai

Tomasz Wieladek

Central European University

London Business School

Kim Ruhl

Hakan Yilmazkuday

Stern School of Business

Florida International University

Katheryn Russ

Jianfeng Yu

University of California, Davis

University of Minnesota

Filipa Sá

Zhi Yu*

University of Cambridge
Raphael Schoenle

Shanghai University of Finance and
Economics

Brandeis University

Yu Yuan

Giulia Sestieri*

University of Iowa

Bank of France
Etsuro Shioji

Hitotsubashi University
Shigenori Shiratsuka

Bank of Japan
Ina Simonovska

University of California, Davis
L. Vanessa Smith*

University of Cambridge
Jens Søndergaard

Capital Strategy Research

*New to the institute in 2013.

44 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report

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