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Globalization and
Monetary Policy Institute

FEDERAL RESERVE BANK OF DALLAS
2015 ANNUAL REPORT

Contents
Letter from the President

The Trilemma in Practice: Monetary Policy Autonomy
in an Economy with a Floating Exchange Rate

Navigating the Structure of the Global Economy

Summary of Activities 2015

Spillovers of Conventional and Unconventional
Monetary Policy: The Role of Real and Financial
Linkages

Diverging Monetary Policies, Global Capital Flows
and Financial Stability

Institute Working Papers Issued in 2015

Institute Staff, Advisory Board and
Senior Fellows

Research Associates

Published by the Federal Reserve Bank of Dallas, April 2016. 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 online at www.dallasfed.org.

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 1

Letter from the
President

took office as the 13th president

these countries in 2016. On the other hand,

insights on key global trends, challenges and

of the Federal Reserve Bank of

India’s GDP growth rate improved in 2015

overall global developments.

Dallas in September 2015 fol-

and is expected to increase further in 2016.

lowing a career in banking and

academia.
This is a complex time to be a central

While the Fed’s mandate is U.S. price

Through these and other programs, the
Globalization Institute aims to continue to

stability and maximum sustainable employ-

be on the forefront of thought leadership

ment, assessing economic conditions outside

and to explore key considerations relating to

banker. In recent years, the Federal Reserve

the United States is critical because the world

global economic developments. The world

has pursued extraordinarily aggressive mon-

is becoming more and more interconnected.

will become more interconnected in the

etary policies to stabilize economic activity in

Companies increasingly think about their

years ahead, and this interconnectedness

response to the global financial crisis, first by

labor, products and services, and investment

will affect both the U.S. economy and how

cutting interest rates to their effective lower

decisions with a global mindset. Additionally, central bankers think about monetary policy.

bound and then by expanding the size of its

global demographic trends, high levels of

I look forward to having the Dallas Fed play a

balance sheet through a series of large-scale

debt to GDP, and levels of capacity utiliza-

meaningful role in understanding how these

asset purchase programs.

tion impact demand for commodities as

links impact world economic conditions.

At its December 2015 meeting, the Fed-

well as capital flows, and ultimately have the

eral Open Market Committee (FOMC) took

potential to spill over to economic conditions

a first step towards normalizing monetary

in the U.S.

policy by raising the target range for the

For these reasons, I am excited to build

federal funds rate from 0-to-25 basis points to

on the work of my predecessor, Richard

25-to-50 basis points. Even with this action,

Fisher, by further developing the Global-

monetary policy remains accommodative.

ization Institute of the Dallas Fed. We will

The Federal Reserve has said that any future

pursue two key focuses in this effort. First,

removals of accommodation will be done

Mark Wynne, the director of the institute, will

gradually subject to our assessment of under-

continue to emphasize creation of superb

lying economic conditions.

peer-reviewed research on policy-relevant

Looking outside the U.S., we have been

topics as the foundation on which all of the

lowering our estimates of 2016 global GDP

other activities of the institute rest. Second, I

growth, excluding the U.S. Beneath the

am working closely with Mark and our team

headline growth rates, the underlying picture

to build out the institute’s public outreach

is very uneven. For example, emerging

activities. We have repurposed our public

economies with high levels of exposure to

lecture series in a new program called Global

commodities have had significant declines

Perspectives. The objective of this program

in growth rates. Brazil, Russia and Venezuela

will be to bring thought leaders from the

were in outright recession during 2015, and

worlds of academia, business and public

we expect negative GDP growth again in

policy to the Eleventh District to share their

Robert S. Kaplan
President and CEO
Federal Reserve Bank of Dallas

2 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

The Trilemma in Practice: Monetary Policy
Autonomy in an Economy
with a Floating Exchange Rate
By J. Scott Davis

he most important concept in

impose restrictions on international capital

international macroeconomics

flows.2

may be the trilemma of international finance (also called the

bank allows its exchange rate to float, it

impossible trinity). The trilemma states that a

should have complete monetary autonomy.

country cannot simultaneously have an open

While this is certainly true in theory, some

capital account, a stable exchange rate and

have begun to question whether it is actually

autonomous monetary policy (Chart 1).

true in practice. In a recent paper, Rey (2013)

The trilemma is a constraint on mon-

“For many emergingmarket economies,
swings in the global
financial cycle make
the trilemma more of
a dilemma. Without
restrictions on
international capital
flows, monetary
independence is
not possible, even
for a country with a
floating exchange
rate.”

By the logic of the trilemma, if a central

discusses the “global financial cycle,” which

etary policymaking in any country. The

is the fact that large swings in capital flows

United States has chosen to maintain an

into many emerging-market economies are

independent monetary policy and an open

driven by global factors such as risk and risk

capital account, but as a result, the Federal

aversion in major developed markets. These

Reserve must allow the value of the dollar to

swings in capital flows are exogenous from

be market-determined. Countries in the euro

the point of view of the emerging market

zone have opted to stabilize their exchange

receiving the capital, the author argues. For

rate, and they enjoy the free movement of

many emerging-market economies, swings in

capital. But as a result, individual nations

the global financial cycle make the trilemma

no longer have an independent monetary

more of a dilemma. Without restrictions on

policy. Policymakers in China, on the other

international capital flows, monetary inde-

hand, have chosen to stabilize the exchange

pendence is not possible, even for a country

rate and maintain an independent monetary

with a floating exchange rate.

policy; but to make this work, they need to

The fact that a country with open capital

Chart 1
The Trilemma of International Finance
Enjoy free capital flow

Policymakers
must decide
which one
to give up

Stabilize the exchange rate

Have sovereign monetary policy

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 3

Chart 2
Fed QE Impacts Floating, Fixed Emerging-Market Exchange Rates

markets loses monetary policy autonomy
when it adopts a fixed exchange rate is purely

Percent change, year over year
30

mechanical. As discussed in Rey’s article,
swings in trade and capital flows increase

or decrease demand for a currency, and a
central bank that tries to maintain a stable

exchange rate must adjust currency supply
to ensure the exchange rate stays constant as

demand fluctuates. Adjusting the supply of
the currency means adjusting the size of the

–10

central bank’s balance sheet and, thus, ac–20

tions to hold down the value of the currency

EME with fixed exchange rate

are indistinguishable from accommodative

All emerging markets (EME)

–30

open-market operations.3
The loss of monetary autonomy when a

–40

central bank does not try to maintain a fixed

EME with floating exchange rate

2006

2007

2008

2009

2010

2011

2012

2013

2014

SOURCES: International Monetary Fund; author’s calculations.

exchange rate is less mechanical. Theoretically, without the constraint of trying to stabilize the value of the exchange rate, a central
bank with a floating exchange rate can use

that the optimally chosen monetary policy

its balance sheet however it likes. Nonethe-

is nearly indistinguishable from a policy of

less, as shown by Davis and Presno (2014),

exchange rate stabilization.

even when monetary policy is determined

To see how, in the face of large swings

allows its currencies to float.4
Floating emerging-market currencies
went on a wild ride between 2008 and 2011.
The global financial crisis led to a global flight

optimally to maximize a domestic objective

in international capital flows, central banks

to quality in which capital flows to emerg-

function, optimal policy could still focus

in countries with floating currencies can end

ing markets dropped sharply, leading to

on managing volatile capital inflows and

up following policies that mirror exchange

exchange rate depreciation. However, as we

outflows. Calvo and Reinhart (2002) discuss

rate stabilization, we will examine the actions

shall see, during the crisis, emerging-market

a “fear of floating,” where even central banks

of some major emerging-market central

central banks with nominally floating cur-

that profess to follow a floating exchange rate

banks during the global financial crisis and

rencies actively intervened in the foreign-

policy still actively intervene in foreign-ex-

subsequent recovery. The rapidly changing

exchange market to prevent further exchange

change markets to manage the value of their

fortunes of the emerging markets during

rate declines. This intervention is akin to

currency.

this period can be summed up by examining

contractionary monetary policy.

This is especially true in an environment where a country is subject to large and
volatile swings in capital flows. Even though,

the path of emerging-market exchange rates
(Chart 2).
The chart plots the value of the exchange

The recovery from the financial crisis
saw a return in those capital flows, and this
led to a sharp appreciation in emerging-

in theory, the central bank has complete

rate versus the U.S. dollar for a group of

market currencies. It was during this period

monetary autonomy, in practice, its actions

emerging-market economies and for two

that the term “currency wars” was first used.

to stabilize the economy in the face of large

subgroups—one that actively attempts to

It was initially coined by Brazilian Finance

and volatile swings in capital flows will mean

stabilize exchange rates and the other that

Minister Guido Mantega in September 2010.

4 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

At the time, the Federal Reserve was about

crisis. Net capital inflows (capital inflows mi-

to embark on a second round of quantitative

nus capital outflows) into the major emerg-

easing (QE).

ing-market economies are plotted in Chart 3.

Many emerging-market policymak-

“Many emergingmarket policymakers
worried that the
ultra-accommodative
monetary policies
in the United States
and throughout the
developed world
were leading to a
sharp increase in
capital flows into
emerging markets.”

The chart shows a dramatic fall in

ers worried that the ultra-accommodative

emerging-market capital flows during the

monetary policies in the United States

darkest days of the financial crisis in 2008.

and throughout the developed world were

Just before the crisis, capital moved into

leading to a sharp increase in capital flows

emerging markets at a rate of 3 percent of

into emerging markets. Abundant liquidity

gross domestic product (GDP). However, the

released by programs such as quantitative

chart shows that in late 2008, these capital

easing streamed into emerging markets,

flows reversed quickly. In late 2008, capital

chasing higher returns, which pushed up

was flowing out of emerging markets at a rate

the value of their currencies.5 However, we

of 3 percent of GDP, and for the subgroup of

shall see that central banks in countries with

countries with a floating exchange rate, this

floating currencies intervened in the foreign-

rate of capital outflow exceeded 6 percent of

exchange market during this period to slow

GDP.

the appreciation of their currencies. This

Emerging-market capital flows rebound-

intervention by central banks with floating

ed in the early days of the recovery, and

exchange rates was nearly indistinguishable

capital flowed into all emerging markets at a

from the intervention by central banks with

rate of 3 percent of GDP from 2009 through

fixed exchange rates.

the first half of 2011.

Capital Flows, Balance of Payments

identity states that a country’s current ac-

and Exchange Rate Fluctuations

count plus its capital and financial account

The fundamental balance of payments

Dramatic capital flow swings into

must equal the net change in central-bank

emerging-market economies accompanied

reserves. The current account measures the

the period surrounding the global financial

net flow of capital into a country because of
currently produced goods and services. The
current account includes the trade balance
(exports minus imports) and the net income
from investments held abroad and also some

Chart 3
Net Capital Inflows Volatile Among Floating-Rate
Emerging Economies

unilateral transfers such as remittances and
foreign aid.6 The capital and financial account measures the net flow of capital into a

Percent of gross domestic product (two-quarter moving average)
6

country because of private capital transactions (purchase or sale of stocks, bonds, etc.).

The sum of these two items measures the net
flow of capital coming into a country. If this

net flow is not equal to zero, it must end up as
an increase or a decrease in foreign-exchange

reserves held by the central bank.
–2

The balance of payments identity encapsulates the forces of supply and demand

–4

that determine the fundamental value of the

EME with fixed exchange rate
–6

–8

2006

2007

2008

2009

All emerging markets (EME)

exchange rate. The supply is determined by

EME with floating exchange rate

the central bank and the accumulation of

2010

2011

2012

SOURCES: International Monetary Fund; author’s calculations.

2013

2014

reserves on the central bank’s balance sheet;
the demand comes from two sources, the
current account and the capital and financial

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 5

account (for simplicity, from here on, we will

response to the sharp drop in capital inflows

refer to the capital and financial account as

plotted in Chart 2, these central banks could

the capital account).

have allowed the exchange rate to fall further

When the sum of the current and capital

until equilibrium was reached, where the

accounts is greater than zero, there is excess

sum of the current and capital accounts was

demand for the currency. This is referred

equal to zero. Instead, they chose to inter-

to as a balance of payments surplus, and it

vene by drawing down reserves.

puts upward pressure on the value of the
exchange rate. If the central bank does not

Furthermore, Chart 3 shows that, during
the recovery, these same central banks were

try to actively manage the exchange rate and

actively accumulating reserves. We saw ear-

allows the currency to “float,” this upward

lier how, during the recovery, there was a re-

pressure leads to exchange rate appreciation.

versal in emerging-market capital flows and

When the exchange rate appreciates,

there were large positive net capital inflows

foreign goods and assets become cheaper

into the emerging markets from the middle

to domestic residents, and domestic goods

of 2009 through the middle of 2011. Central

and assets become more expensive to foreign

banks in all emerging markets—both those

residents. This change in relative prices in the

that follow a policy of exchange rate stabiliza-

goods market causes the trade balance, and

tion and those that allow their exchange rate

thus, the current account balance, to fall. This

to float—accumulated a massive amount of

change in relative prices in the asset market

reserves, which grew at around 20 percent

causes the capital account balance to fall. The

per year during the period.

exchange rate will appreciate until the point

Capital inflows during the 2009 to 2011

where the balance of payments is no longer

period put upward pressure on the value

in surplus, the sum of the current and capital

of emerging-market currencies. Central

accounts is equal to zero and there is no

banks that follow a policy of exchange rate

excess demand that pressures the exchange

stabilization were mechanically accumulat-

rate.

ing foreign-exchange reserves to relieve this
If, on the other hand, a country’s central

bank actively tries to manage the exchange
rate, it may respond to this excess demand
by increasing the supply of the currency.
By increasing the supply of the currency,
it expands the liabilities side of its balance
sheet. The central bank releases this newly
created currency into the market by buying

Chart 4
Emerging-Market Central Banks Accumulate
Reserves Before Crisis
Percent change, year over year
40

foreign-exchange reserves (usually bonds
denominated in U.S. dollars or some other

major “reserve” currency). This expands the
asset side of its balance sheet.

The path of emerging-market central
bank reserves over the past 10 years is plot-

ted in Chart 4. During the crisis, reserves fell
sharply in countries that followed a policy

of allowing their currencies to float. This fall
in reserves is a sign that, during the crisis,

EME with fixed exchange rate
–10

All emerging markets (EME)
EME with floating exchange rate

central banks in these countries were actively
engaging in the foreign-exchange market
to support the value of their currencies by
decreasing their supply in the market. In

–20

2006

2007

2008

2009

2010

SOURCES: Haver Analytics; author’s calculations.

2011

2012

2013

2014

6 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

upward pressure. The chart shows that, at the
same time, central banks in countries that allow their exchange rates to float were also folChart 5
Emerging-Market Central-Bank Balance Sheet Growth Slows

lowing a policy of accumulating reserves that
was nearly indistinguishable from countries

Percent change, year over year
40

that fix their exchange rates.

Monetary Autonomy?
During the crisis, central banks in countries with a floating exchange rate intervened

heavily in the foreign-exchange market
and drew down reserves to stabilize their

exchange rates. During the recovery, when
capital inflows reversed, the same central

banks accumulated reserves to relieve some
EME with fixed exchange rate
–10

of the upward pressure on their currencies.

All emerging markets (EME)

The effect of this on central-bank balance

EME with floating exchange rate
–20

sheets is shown in Chart 5. The chart shows
2006

2007

2008

2009

2010

2011

2012

2013

2014

SOURCES: Haver Analytics; author’s calculations.

that emerging-market central-bank balance
sheet growth slowed sharply during the
2008–09 period.
For countries that follow an exchange
rate stabilization policy, balance sheet
growth fell from 35 percent per year in
early 2008 to 10 percent per year by 2009. To
maintain a stable exchange rate in the face of
a sharp drop in capital inflows, central banks
in countries with a fixed exchange rate were
forced to slow the growth in their balance

Chart 6
Post-Crisis M1 Money Supply Growth Similar
Among Emerging Markets

sheets during the crisis. This is part of the
mechanical monetary tightening that is re-

Percent change, year over year

quired to maintain a stable exchange rate and

is simply a consequence of the constraints on
30

monetary policy autonomy imposed by the
trilemma.

Countries that follow a policy of allowing
10

the exchange rate to float should have been
free to engage in monetary loosening during

this period. However, the chart shows that,
–10

for this group of floaters, balance sheets went
from a 20 percent expansion in early 2008 to

–20

EME with fixed exchange rate

–40

a contraction of 15 percent in 2009. There-

All emerging markets (EME)

–30

fore, countries that allowed their exchange

EME with floating exchange rate

rate to float and should have had complete
2006

2007

2008

2009

2010

SOURCES: Haver Analytics; author’s calculations.

2011

2012

2013

2014

monetary autonomy still engaged in sharp
monetary tightening during the crisis.
Similarly, central banks in countries that
float their currencies rapidly expanded their
balance sheets during the 2010–11 recovery.

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 7

Central-bank balance sheets grew 10 to 20

stop. Similarly, the central bank may respond

percent per year between 2009 and 2011. The

with expansionary monetary policy in re-

rate of balance sheet expansion for central

sponse to an increase, or a “surge,” in capital

banks with a fixed exchange rate is nearly

inflows. Without central bank action to accu-

identical. At a time when policymakers

mulate foreign-exchange reserves, this surge

were talking about currency wars and fears

could lead to unwanted credit expansion

of overheating in many emerging markets,

and an overheating economy. Knowing this,

emerging-market central banks in countries

a central bank with a floating exchange rate

with a floating exchange rate were following a

may find it worthwhile to sacrifice monetary

highly accommodative monetary policy.

independence and use its balance sheet to

The effect of this central-bank balance
sheet contraction and subsequent expansion
on M1 money supply growth in the emerg-

“manage” this surge in capital inflows by accumulating foreign-exchange reserves.
With the aim of managing volatile

ing-market economies is shown in Chart 6.

swings in capital inflows and retaining mone-

It illustrates how, in emerging markets with a

tary policy autonomy, a number of emerging-

floating exchange rate, money growth slowed

market central banks have used capital-flow

sharply during the global financial crisis in

management measures (capital controls) to

late 2008 and then increased sharply during

“manage” volatile capital flows while leaving

the 2009–11 period. It is interesting to note

the size of the central-bank balance sheet un-

that money growth has been nearly identical

touched, thereby retaining monetary policy

in the two subgroups of emerging markets

autonomy. These are commonly described as

since early 2010.

“sterilized” foreign-exchange interventions.

When discussing how a central bank will adRegaining Lost Monetary Autonomy

just its holdings of foreign-exchange reserves

It is important to note that a central bank and the direct effect on balance sheet size, we
in an economy with a fixed exchange rate has

are considering unsterilized intervention. If

to intervene in the foreign-exchange market

instead a central bank adjusts the size of its

by selling reserves in response to a capital

foreign-exchange holdings to keep the cur-

inflow decline and a balance of payments

rency stable but at the same time performs

deficit, but a central bank with a floating

the exact opposite open-market operation in

exchange rate does not.

the domestic bond market, it can then inter-

It is certainly true that a central bank
with a floating exchange rate can respond
to a drop in net capital inflows and retain

vene in the foreign-exchange market without
affecting the size of its balance sheet.
For instance, in response to an increase

monetary policy independence by allowing

in capital inflows that would push up the

the exchange rate to depreciate to the point

value of the exchange rate, the central bank

where the sum of the current and capital ac-

absorbs those capital inflows by buying

counts is again zero. But in reality, the pain of

foreign-exchange assets. In an unsterilized

this balance of payments adjustment may be

intervention, it would finance the purchase

too great, particularly in an environment of

by expanding the liability side of its balance

volatile shifts in capital flows. A sharp drop in

sheet (i.e., “printing money”). In a sterilized

capital inflows is also referred to as a “sudden

intervention, the central bank will instead

stop” and usually entails a sharp tightening in

finance the purchase of foreign-exchange

credit in the economy. The central bank may

assets by selling domestic-currency bonds

sell reserves to fill the gap left by this drop in

on its balance sheet, replacing one central

capital inflows. Even though this causes the

bank asset for another and leaving the overall

central bank’s balance sheet to shrink and is,

size of its balance sheet unchanged (i.e., a

thus, contractionary monetary policy, it may

foreign-exchange intervention without print-

be worth it to stave off the effects of a sudden

ing money).

“At a time when
policymakers
were talking about
currency wars and
fears of overheating
in many emerging
markets, emergingmarket central
banks in countries
with a floating
exchange rate were
following a highly
accommodative
monetary policy.”

8 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

recovery. The chart shows that these measures were reduced in late 2008 in response
to the crisis. Emerging-market central banks

Chart 7
Capital Controls in Emerging Markets with a
Floating Exchange Rate

were trying to attract capital, not repel it.
The number of capital controls increased

Average number of capital control measures, normalized to 0 in first quarter 2007
4.0

significantly starting with the recovery in

3.5

period when emerging markets were seeing

the second half of 2009. This was during the
large capital inflows, and many emerging

3.0

markets responded by trying to block them
by using legal restrictions.

2.5

The evidence for the effectiveness of
2.0

capital controls is mixed. Klein (2012) and
Klein and Shambaugh (2015) argue that

1.5

permanent fixed capital controls (which
1.0

Klein refers to as “walls”) can be effective,
but temporary capital controls (which Klein

refers to as “gates”) are less effective.
0

2007

2008

2009

2010

2011

However, many emerging-market

2012

SOURCE: “The Two Components of International Capital Flows,” by Shaghil Ahmed, Stephanie
Curcuru, Frank Warnock and Andrei Zlate (2015), mimeo.

central banks with a floating exchange rate
have attempted to impose capital flow management measures over the past few years,
particularly during the recovery and surge of

But these two actions—buying foreign-

capital inflows into emerging markets in 2009

currency-denominated bonds and selling

to 2011. The fact that so many emerging-mar-

domestic-currency-denominated bonds—

ket central banks turned to capital controls to

cause the interest rate on foreign-currency-

“manage” capital flows is an indication that

denominated bonds to fall and the interest

even though the exchange rate was allowed

rate on domestic-currency bonds to rise.

to float, these central banks were finding that

If there are no capital account restrictions,

their monetary autonomy was restricted. The

private investors will simply buy domestic-

theory of the trilemma states that a country

currency bonds and finance them by selling

with a floating exchange rate should have

foreign-currency bonds. This is the exact

complete monetary independence. But the

opposite of what the central bank is doing!

actions of many central banks over the past

Without capital account restrictions, private

few years show that in practice, in an envi-

investors will act in a way to exactly offset any

ronment of volatile capital flows, monetary

sterilized intervention by the central bank,

independence is limited, even when an

rendering it ineffective. Consequently, absent

exchange rate is allowed to float.

capital account restrictions, the only way to
effectively stabilize the value of the exchange

Notes

rate is through an unsterilized intervention,

The trilemma is a constraint on monetary policymaking not
only at the national level, but at the subnational level. Texas
has a stable exchange rate vis-à-vis the other 49 states, and
there is free movement of capital within the United States.
As a result, the Federal Reserve Bank of Dallas cannot set
monetary policy independently of the rest of the Federal
Reserve System.

which requires the central bank to adjust
the size of its balance sheet and, therefore,
entails the loss of monetary policy autonomy.
Chart 7 plots the GDP-weighted average
of the number of capital flow management
measures applied in the emerging-market
countries with a floating exchange rate during the global financial crisis and subsequent

As Chinese policymakers begin to loosen these controls
and allow greater international holding of the Chinese yuan,
a feature of the recent decision to include the currency
2

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 9

in the Special Drawing Rights (SDR), they will be forced
to either allow the currency to float or sacrifice monetary
independence.
3
This describes an “unsterilized” foreign-exchange
intervention by the central bank. In a “sterilized” intervention, the central bank intervenes in the foreign-exchange
market without adjusting the size of its balance sheet.
However, the sterilized intervention is only effective when
sufficient capital flow restrictions are in place. This form of
intervention is further explored later in this article as part
of a discussion of how some emerging-market countries are
resorting to capital controls to insulate themselves against
swings in the global financial cycle.
4
Countries that fix their exchange rate are defined as ones that
receive a score of 1–2 on the course classification scheme in
Ilzetzki et al. (2008). Countries that float are ones that receive a
score of 3–4 on this course classification scheme.

Davis, Scott, and Ignacio Presno (2014), “Capital Controls
as an Instrument of Monetary Policy,” Globalization and
Monetary Policy Institute Working Paper no. 171 (Federal
Reserve Bank of Dallas, June).

Whether programs like quantitative easing had such an
effect on emerging-market currencies and interest rates is a
topic of much controversy. Rey (2013) argues that quantitative easing has had such an effect. In a recent lecture,
former Federal Reserve Chairman Ben Bernanke (2015)
disagrees with this assessment. Bernanke’s argument is
based partially on recent research from economists at the
Board of Governors that argues that quantitative easing had
no more of an effect on emerging-market currencies and
financial markets than normal monetary loosening in the
United States (Bowman, Londono and Sapriza, 2014).
6
This article focuses on the financial aspects of the current
account, where the current account measures the net
flow of capital coming into a country because of currently
produced goods and services. The trade balance is the largest component in the current account. For more discussion
of trade and its effect on exchange rates, see the article by
Michael Sposi in this report.
7
M1 is the most liquid definition of money and includes
currency in circulation as well as demand deposits and
checking account balances.

nomics 7(4): 33–66.

References
Bernanke, Ben S. (2015), “Mundell-Flemming Lecture:
Federal Reserve Policy in an International Context,” (speech
delivered at the 16th Jacques Polak Annual Research
Conference, Nov. 5–6, 2015).
Bowman, David, Juan M. Londono and Horacio Sapriza
(2014), “U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies,” International Finance
Discussion Paper no. 1109 (Washington, D.C., Federal
Reserve Board, June).
Calvo, Guillermo A., and Carmen M. Reinhart (2002),
“Fear of Floating,” Quarterly Journal of Economics 117(2):
379–408.

Ilzetzki, Ethan O., Carmen M. Reinhart and Kenneth S.
Rogoff (2008), “Exchange Rate Arrangements Entering the
21st Century: Which Anchor Will Hold?” (mimeo).
Klein, Michael W. (2012), “Capital Controls: Gates vs.
Walls,” NBER Working Paper no. 18526 (Cambridge,
Massachusetts, National Bureau of Economic Research,
November).
Klein, Michael W., and Jay C. Shambaugh (2015), “Rounding the Corners of the Policy Trilemma: Sources of Monetary
Policy Autonomy,” American Economic Journal: Macroeco-

Rey, Hélène (2013), “Dilemma Not Trilemma: The Global
Financial Cycle and Monetary Policy Independence,” (paper
prepared for the Jackson Hole Symposium, Aug. 23–25,
2013).

10 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Navigating the Structure of the
Global Economy
By Michael Sposi

he Globalization and Monetary

activities, 14 percent in industry and 24 per-

Policy Institute’s primary focus

cent in services; see also Sposi and Grossman

is developing a better under-

(2014). As the country developed, workers

standing of how the process

moved out of agriculture and into the indus-

of deepening economic integration among

trial and service sectors. By 1965, the share

countries of the world, or globalization, alters

of employment in industry peaked at 32

the environment in which U.S. monetary

percent and has since declined to 15 percent.

policy decisions are made. In this article, I

Agriculture’s share has continued to fall from

discuss how my research contributes to this

more than 60 percent and now accounts for

mission. I emphasize the interaction between

less than 1 percent of the workforce; services’

increased globalization and the changing

share has steadily increased from roughly 25

structure of economic activity, and how

percent to its current 85 percent (Chart 1).

these phenomena affect the ways economists

This structural transformation is not unique

evaluate key economic trade-offs.

to the U.S. and has been experienced by
almost every advanced economy.

Structural Changes in the Economy
The composition of economic activity

There are many reasons why economists
would like to understand what drives struc-

in the U.S. has changed markedly since the

tural change. To begin with, in spite of the

Industrial Revolution. In 1850, 62 percent of

massive shift in the composition of economic

the workforce was engaged in agricultural

activity, U.S. real gross domestic product
(GDP) per capita has consistently grown by
roughly 2 percent per annum since 1850.

Chart 1
U.S. Composition of Employment Changes,
Real GDP Per Capita Grows at Roughly Constant Rate
Percent of labor force
90

Researchers taking a historical and international perspective may better understand the

Log of 1990 U.S. dollars
11.0

Services’ share
80

10.5

Industry’s share

composition of economic activity.
Citizens and policymakers have
expressed concern over the decline of the

70
Agriculture’s share

GDP per capita

10.0

9.5

50
40

9.0

industrial sector as well. In absolute terms,
the total number of U.S. workers engaged
in manufacturing—the largest component
of the industrial sector—has decreased 37
percent, from a peak of 19.4 million workers

8.5

20
8.0

10
0
1850

engines of economic growth based on the

in 1979 to 12.2 million workers by the end of
2014. During the same period, U.S. nonfarm
employment grew 54 percent. To date, the

7.5
1870

1890

1910

1930

1950

1970

1990

2010

SOURCES: International Historical Statistics (2013); Organization for Economic Cooperation and Development; “Market Services Productivity Across Europe and the U.S. [with
Discussion]” by Robert Inklaar, Marcel P. Timmer, Bart van Ark, Wendy Carlin and Jonathan Temple, Economic Policy, vol. 23, no. 53, 2008, pp. 139–94; “The First Update of the
Maddison Project; Re-estimating Growth Before 1820,” by Jutta Bolt and Jan Luiten van
Zanden (2013), Maddison Project Working Paper no. 4 (The Maddison Project, Groningen,
Netherlands, January); author’s calculations.

decline in manufacturing employment has
been attributed to globalization, outsourcing and automation of routine production
tasks. Some analysts also consider structural
change to be closely linked to rising income
inequality; as such, heated political debate

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 11

and arguments for trade protection have
occurred. Nonetheless, manufacturinglabor productivity growth increased from 2
percent pre-1980 to 3.1 percent post-1980. In
addition, value added in the manufacturing
sector shifted more toward the production of
high-tech equipment; the share of high tech
was 40 percent in 2012 compared with 30
percent in 1977.
From the perspective of monetary
policy, structural change matters as well.
The Fed’s dual mandate is price stability and
maximum employment. To achieve this, the
Fed currently targets an inflation rate of 2
percent in the personal consumption expenditures (PCE) index. From a pure measurement perspective, weights in the PCE are
based on expenditure shares across many

Chart 2
U.S. Consumption Expenditures Shift Toward Services
Percent of expenditures
80
Services
70
60
50
40

Industry

30
20
10
Agriculture
0
1947

1956

1965

1974

1983

1992

2001

2010

SOURCES: Bureau of Economic Analysis; “Two Perspectives on Preferences and Structural
Transformation,” by Berthold Herrendorf, Richard Rogerson and Ákos Valentinyi, American
Economic Review, vol. 103, no. 7, 2013, pp. 2,752–89; author’s calculations.

goods and services. To the extent that expenditure shares change over time, the dynamics

in the composition of employment can be

fects, comparative advantage and sectoral

of PCE inflation will respond very differently

either growth reducing or growth enhancing,

linkages.1

to otherwise similar underlying shocks. Since

depending on whether resources shift toward

the Fed aims to stabilize long-term inflation,

sectors with higher or lower productivity.

the long-run evolution of the composition

Finally, Stefanski (2014) argues that the size

of expenditures is worthy of consideration.

of the industrial sector in large economies

first articulated by 19th-century economist

Volatility in aggregate employment depends

plays a critical role in determining commod-

Ernst Engel, in which income elasticities

on the composition of employment. Manu-

ity prices; thus, structural change affects rates

of demand for each good differ from one

facturing employment is more volatile over

of inflation at the global level.

another (e.g., Laitner, 2000; Kongsamut,

the business cycle than services employment.

Uncovering the forces behind struc-

Income Effects
The first mechanism is income effects,

Rebelo and Xie, 2001). That is, as households

tural change requires the use of general

become wealthier, a smaller share of income

underlying economic causes and conse-

equilibrium models. General equilibrium

is allocated toward food and agricultural

quences of structural change are of cen-

models are mathematical constructs that

products. However, higher income and

tral importance. In particular, prices and

study the interaction between various eco-

longer life expectancy are associated with

employment in the manufacturing sector

nomic agents, including firms, households

increased demand for services such as health

may be more susceptible to conditions in

and governments. They essentially act as

care, education and entertainment (Chart 2).

foreign economies than those in other sec-

mini-laboratories for studying how certain

tors since manufactured goods are highly

types of shocks affect market outcomes

traded. Moreover, understanding the forces

by accounting for how economic agents

behind the changes in the composition of

respond to the shocks. There has been a

fects, in which the elasticity of substitution

economic activity is crucial to determining

great deal of recent research along these

between goods is less than one (e.g., Baumol,

the effectiveness of policy and the shaping of

lines. The literature has highlighted four

1967; Ngai and Pissarides, 2007). This means

price and employment dynamics. Changes

key mechanisms: income effects, price ef-

that if the relative price of one good increases

Aside from measurement issues, the

Price Effects
The second mechanism is price ef-

12 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Comparative Advantage
The third mechanism is changes in com-

Chart 3
Services Prices in the U.S. Grow Faster than Agricultural
and Industrial Prices

parative advantage in an open economy (Uy,
Yi and Zhang, 2013). As emerging economies
become increasingly integrated into the glob-

Index, 1947 = 1
12

al economy, they often realize productivity
gains in the manufacturing sector. Thus, the

Services

global allocation of manufacturing production shifts toward these countries. Interna-

tional trade has been particularly important
for the economic growth and development of

East Asian economies.

Industry

In 1950, Japan accounted for 1 percent
4

of U.S. imports, primarily involving lowtech goods—textiles, rubber and plastic. By

1985, Japan accounted for 20 percent of U.S.

Agriculture

imports. Japan’s exports initially relied on
1947

1956

1965

1974

1983

1992

2001

2010

cheap labor and access to industrial goods
from more-advanced economies such as the
U.S. The proportion of labor employed in the
industrial sector in Japan increased from 29
percent in 1950 to 36 percent in 1985, while
that share of labor in the U.S. fell from 32

by 1 percent, the reduction in the quantity
demanded of that good is less than 1 percent.

percent to 29 percent.
As the Japanese economy grew, wages

That is, total expenditures on the good in-

rose and its competitive edge in exporting

crease after an increase in that good’s price.

low-tech goods diminished as other emerg-

This has far-reaching implications in the long

ing Asian economies began to industrialize.

run. Consider a technological improvement

During the 1980s, Japan focused its produc-

in manufacturing processes that reduces

tion and exports on more high-tech goods

the relative cost of producing manufactured

(semiconductors and computer chips) and

goods. Then the share of expenditures allo-

investment goods (automobiles and medi-

cated toward manufacturing will fall, reduc-

cal equipment). Simultaneously, the share

ing the number of workers employed in that

of labor in Japan’s industrial sector fell from

sector.

36 percent to 26 percent. Japan’s real GDP

Chart 3 illustrates the long-run change
in relative prices in the U.S. The real (inflation-adjusted) price of services has increased

growth began to taper to rates more similar to
those of the U.S.
As the Japanese economy slowed down,

12-fold since 1947, while the real price of

industrialization and rapid growth began

industrial products has increased six-fold,

to take off in the Asian Tiger economies

and the real price of agricultural products,

(Hong Kong, Singapore, South Korea and

less than two-fold. This reflects asymme-

Taiwan). These economies took on much of

tries in productivity growth. Productivity

the low-tech production and exporting Japan

grew fastest in agriculture via increased use

previously performed. As a result, Japan

of sophisticated equipment and improved

accounted for a declining share of U.S. im-

fertilizing techniques. Industrial productivity

ports—from 20 percent in 1985 to 6 percent

growth was next; advancements came from

in 2013 (Chart 4A). The Tigers experienced a

automation software. Productivity growth

rise in industry’s share of employment, which

was slowest in the services sector.

peaked in the mid-1990s and coincided with

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 13

a rise in the Tiger’s share of world imports

In the past, the U.S. and other advanced

(Chart 4B). After the mid-1990s, these shares

economies have altered their trade shares in

began to fall as did real GDP growth. During

response to structural change in the rest of

the decline, the Tigers reallocated produc-

the world. It is unclear whether the Chinese

tion toward more high-tech goods including

transition should be any different. However,

semiconductors and automobiles. China

China is substantially larger today than Japan

began absorbing the low-tech work. China

was in 1990, and the U.S. is more integrated

industrialized quickly, and economic growth

with the rest of the world today than it was

was very high. China’s share of world imports

25 years ago. Therefore, it is important to

picked up rapidly: Its share of U.S. imports in-

ask how the slowdown in emerging econo-

creased from 6 percent in 1995 to 20 percent

mies today impacts economic conditions

in 2013.

across the world. Sposi (2015a) explores

In recent years, real GDP growth in

“Each of the previous
Asian growth
miracles grew at
unprecedented
rates as they
industrialized.”

how changes in foreign productivity propa-

China fell from double-digit rates to less than

gate throughout the world and impact the

7 percent per annum. Whether the current

composition of employment. He finds that

slowdown in China should be perceived as

foreign productivity shocks have relatively

a threat to growth in the U.S. is, of course,

little impact on the share of employment in

debatable. However, this is not the first case

the industrial sector in advanced economies,

in which an important U.S. trading partner

and domestic productivity shocks are far

experienced a growth slowdown. Each of

more important for generating employment

the previous Asian growth miracles grew at

composition changes.

unprecedented rates as they industrialized.
Sectoral Linkages

However, after peaking, these economies’
growth rates slowed as the “low-hanging fruit

The fourth mechanism, which has

had already been picked,” and each country

received far less attention, is sectoral linkages

shifted from adapting foreign technology

in production. In the presence of sectoral

and producing low-tech goods to building a

linkages, 1) a productivity shock in one sector

service sector and developing technologies

affects intermediate-goods prices and, hence,

for producing high-tech goods.

impacts relative prices of output across all

Chart 4
Import Expansion Reflects Industrial Cycles
A. Japan Employment Precedes Higher Import Share in U.S.

B. Tigers Industrial Growth Propels Greater Import Shares

Percent of labor force
42

Percent of labor force
40

Percent of imports
25

Industrial employment
share in Japan

Japan’s share
of U.S. imports

Percent of imports
10

Industrial employment
share in Tigers

8
30
7

36
15

34
20
32

30
28

24
1948

1961

1974

1987

2000

0
2013

15
Tigers’ share of
U.S. imports

10
5

0
1960

Tigers’ share of
Japan’s imports

1973

1986

1999

2012

SOURCES: Haver Analytics; International Historical Statistics, 2013; International Monetary Fund’s Direction of Trade Statistics; “A Cross-Country Database for Sectoral Employment
and Productivity in Asia and Latin America, 1950–2005,” by Marcel P. Timmer and Gaaitzen J. de Vries, Groningen Growth and Development Center, Research Memorandum GD-98,
2007; author’s calculations.

14 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

sectors by different proportions depend-

is, as final demand grows, more and more

ing on the extent of the linkages, and 2) the

resources are employed in the service sector

extent that the composition of value added

in order to deliver the intermediate inputs

and employment responds to changes in the

necessary for final goods production, leading

composition of final demand depends exclu-

to a tapering of industrial employment.

sively on the sectoral linkages. Using a partial

Sposi (2015b) also investigates the

equilibrium framework, Berlingieri (2014)

importance of sectoral linkages in explaining

shows that accounting for the intermediate

how prices respond to isolated productiv-

use of “professional and business services”

ity shocks. The nature of the global supply

is important for explaining increased service

chains determines the channels through

sector employment in the U.S.

which shocks get transmitted. For example,

Chart 5 depicts the change in the com-

consider technological advances in the

position of intermediate inputs employed by

manufacturing sector. If both the U.S. and

U.S. firms. In 1947, industrial inputs account-

emerging economies improve their tech-

ed for more than 50 percent of intermediate-

nology, relative prices will adjust by differ-

input expenditures, and services amounted

ent magnitudes. Specifically, the price of

to less than 30 percent. By 2012, services

services will decrease by a larger magnitude

accounted for more than 60 percent.

in emerging economies than in the U.S., since

Sposi (2015b) argues that differences in

in emerging economies, services production

sectoral linkages in production are crucial to

uses manufacturing inputs more intensively.

accounting for the hump shape in industry’s

The implication is that otherwise-identical

share of employment. Much of the decline

shocks in various locations can have asym-

in industry’s share of employment at higher

metric impacts on aggregate price levels.

levels of development can be accounted for

Sectoral linkages are also important

by changes in the structure of production.

for understanding the sources of sectoral

Services are increasingly more important

productivity growth. For instance, advances

in production in advanced economies. That

in manufacturing productivity were brought
about by inputs from the service sector, such
as research and development and information technology.

Chart 5
U.S. Firms Increase Service-Based Intermediate
Input Expenditures

Bridgman, Duernecker and Herrendorf (2015) are currently exploring another
channel. Their work examines factors that

Percent of expenditures
70

influence labor-force participation and the

Services

substitution from home-produced services to

market-produced services.

Economic Integration, Prices and
40

Real Exchange Rates

Industry

The degree of economic integration
30

determines how developments in foreign
economies impact prices and production

at home. It also determines how domestic
conditions and domestic policy propagate

throughout the economy. The first challenge

Agriculture

0
1947

1956

1965

1974

1983

1992

2001

2010

in quantifying the effects of globalization is
constructing measures of the extent of integration between countries.
I focus on goods market integration via

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 15

international trade.
To measure goods market integration,

which economies are integrated. One of the
oldest theories in international economics

one may directly measure tariffs and trans-

is purchasing power parity (PPP). It states

port costs. However, these account for only a

that if there are no costs to trading goods,

small portion of the overall impediments to

then the price index constructed with similar

trade. Moreover, there are literally thou-

goods should be the same everywhere when

sands of goods, and each good potentially

quoted in a common currency, usually U.S.

has its own tariff schedule. Beyond tariffs,

dollars—that is, the real exchange rate should

countries also impose quotas. One is then

be one. If prices are different across borders,

confronted with the challenge of summariz-

entrepreneurial individuals can arbitrage

ing very different policies—that is, tariffs and

these opportunities for profit, eventually

quotas—into a single statistic, as attempted

pushing prices toward parity. Economists

by Anderson and Neary (1994). Aside from

have applied the reverse of this logic to infer

trade policy barriers, there are geographical

trade barriers from prices. For instance, in

and economic barriers to trade.

the literature on economic development,

Most international trade is in intermedi-

observed dispersion in aggregate prices has

ate goods and, therefore, requires coordina-

been used to study differences in cross-

tion for production processes and quality

country income and investment rates (see

control to ensure components coming from

Restuccia and Urrutia, 2001; Hsieh and Kle-

various sources can be assembled cor-

now, 2007; Armenter and Lahiri, 2012). In the

rectly in a timely manner into the final good.

international trade literature, the dispersion

Whether firms in different countries are able

in prices is used to measure departures from

or willing to adhere to such standards poses

“one world price,” and these departures are

one type of barrier. Another type of barrier,

presumed to reflect trade barriers (see, for

particularly in less-developed countries, is

instance, Anderson and van Wincoop, 2004).

corruption and noncompetitive behavior

Hence, price equalization across countries

among government officials and businesses.

has led to the inference that trade barriers

Such behavior can deter foreigners from

are absent. Mutreja, Ravikumar, Riezman

selling output in a country. Yet another factor

and Sposi (2014) and Mutreja, Ravikumar,

is cultural similarities: Goods that U.S. firms

Riezman and Sposi (2015) show that such an

produce and sell in the U.S. may possess

inference may not be correct in the context of

characteristics that U.S. consumers desire.

aggregate prices.

The same characteristics may be less desir-

In particular, Mutreja, Ravikumar, Riez-

able in other countries, so U.S. firms may

man and Sposi (2015) employ a model to

not export their products to such locations.

argue that price equalization does not imply

In addition, different countries have differ-

free trade. They show that there are many

ent standards for goods, such as automobile

equilibria with price index equalization, even

emissions, health standards for processed

if there is not free trade. That is, multiple

foods and safety features of manufactured

combinations of trade barriers exist that are

devices, making it costly for firms to tailor

consistent with equal prices; however, each

their products specifically to each location.

combination has a different implication for

These constitute just some of the potential

trade flows. Hence, price equalization by

barriers to trade that limit the extent of eco-

itself does not guarantee zero trade barri-

nomic integration. Each is extremely difficult,

ers. Instead, information on trade flows is

if not impossible, to directly measure with

necessary to determine whether there are no

any reasonable degree of accuracy.

barriers to trade.

To circumvent the complexities in

Mutreja, Ravikumar, Riezman and

measuring trade barriers, many economists

Sposi (2014) show that the result is more

use price differentials to gauge the extent to

than a theoretical one. The authors use data

“Price equalization
by itself does not
guarantee zero trade
barriers. Instead,
information on trade
flows is necessary to
determine whether
there are no barriers
to trade.”

16 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

on capital goods prices and capital goods

trade barriers affect the prices of nontrad-

trade across 88 countries. Prices of capital

able services more than the prices of tradable

goods are roughly similar across countries,

goods. This conclusion may appear counter-

which has led Hsieh and Klenow (2007) and

intuitive at first.

Armenter and Lahiri (2012) to infer small

“The extent
of economic
integration has
direct implications
for relative
prices, aggregate
productivity
and capital
accumulation.”

The effect of trade barriers on relative

barriers in capital goods trade. Using a gen-

prices has immediate implications for invest-

eral equilibrium model, Mutreja, Ravikumar,

ment rates since trade barriers distort the

Riezman and Sposi (2014) find that trade bar-

trade-off between investment and consump-

riers in capital goods must be substantial to

tion. Most consumption goods are nontrad-

reconcile the observed volume of trade; yet,

able services, while a large share of invest-

their model predicts prices that are quantita-

ment is in traded durable goods. Hsieh and

tively consistent with the data.

Klenow (2007) and Restuccia and Urrutia

There is one more popular metric for

(2001) show that almost all of the variation in

measuring integration: the ratio of total trade

real investment rates can be accounted for by

(imports plus exports) to GDP. Interpret-

variation in the relative prices of investment

ing this measure requires care. For one, the

goods.

composition of trade is different from that of

Mutreja, Ravikumar and Sposi (2014)

GDP. Services are traded very little, yet ac-

study the effects of trade distortions in the

count for the lion’s share of GDP in advanced

investment-goods sector and in the nonin-

countries. Second, imports and exports are

vestment-goods sector. While the U.S. runs

measured in gross terms, while GDP is a

an aggregate trade deficit, the U.S. has a large

value-added concept. Global supply chains

comparative advantage in producing invest-

have become ever more prevalent, and

ment goods. Reducing trade barriers further

intermediate goods may cross many borders

would allow the U.S. to further specialize in

before being assembled into a final good. In

producing investment goods. The increased

the past couple of years, substantial progress

capital stock would account for about 80 per-

has been made in getting around the second

cent of the overall gains in terms of per capita

issue. It is even more crucial to distinguish

income, while increases in productivity from

between these concepts when one evaluates

improved specialization would account for

bilateral trade linkages. Sposi and Koech

the remaining 20 percent.

(2013) argue that the trade deficit between
the U.S. and China is up to 50 percent larger
when measured in gross terms than when
measured in value-added terms.

Future Directions
Given the surge in available data on
international trade and the structure of
production across countries and industries,

Relative Prices, Investment Rates

many new facts about the nature of structural

and Productivity

change and the factors driving it have been

The extent of economic integration has

documented and explored empirically. How-

direct implications for relative prices, aggre-

ever, there is still a lot to learn about what

gate productivity and capital accumulation.

the driving forces are and the quantitative

Sposi (2015c) argues that productiv-

importance of various underlying mecha-

ity in the tradable-goods sector depends

nisms with regard to understanding eco-

crucially on the magnitude of trade barri-

nomic growth and development. Much of the

ers. Specifically, trade barriers result in a

challenge of answering complex questions

misallocation of resources in which countries

involving economic growth involves a lack of

end up producing goods for which they are

mathematical tools. Specifically, researchers

comparatively inefficient. This reduces ag-

confront the “curse of dimensionality” when

gregate wages and also leads to a lower price

exploring economic questions that involve

of nontraded services. The article argues that

both spatial and dynamic aspects—essen-

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 17

tially, the economic models are “too large”
for existing software. As a result, researchers
are working on developing new algorithms
that can reduce the models’ dimensionality.
One area of particular interest is linking
international trade across countries to the dy-

Armenter, Roc, and Amartya Lahiri (2012), “Accounting
for Development Through Investment Prices,” Journal of
Monetary Economics 59 (6): 550–64.
Baumol, William J. (1967), “The Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” American
Economic Review 57 (3): 415–26.

namics of capital accumulation and growth.
Until now, two-country models have been
the limit. It is well known that two-country
models can yield misleading results since
there is no possibility of trade diversion.
Aside from trade linkages, another very
important feature of globalization is financial linkages. The two are not independent.
For instance, trade imbalances account for
almost all of the current account deficit in the
U.S. Any deficit in the current account must
be offset by an equal surplus in the capital

Berlingieri, Giuseppe (2014), “Outsourcing and the Rise
in Services,” CEP Discussion Paper no. 1199 (London,
UK, Centre for Economic Performance, London School of
Economics).
Betts, Caroline M., Rahul Giri and Rubina Verma (2013),
“Trade, Reform and Structural Transformation in South
Korea,” Munich Personal RePEc Archive Paper no. 49540
(Munich, Germany, University Library of Munich, Germany).

Mutreja, Piyusha, B. Ravikumar and Michael Sposi (2014),
“Capital Goods Trade and Economic Development,” Globalization and Monetary Policy Institute Working Paper no. 183
(Federal Reserve Bank of Dallas, May).
Ngai, Rachel L., and Christopher A. Pissarides (2007),
“Structural Change in a Multisector Model of Growth,”
American Economic Review 97 (1): 429–43.
Restuccia, Diego, and Carlos Urrutia (2001), “Relative Prices
and Investment Rates,” Journal of Monetary Economics 47
(1): 93–121.
Sposi, Michael (2012), “Evolving Comparative Advantage,
Structural Change and the Composition of Trade” (University
of Iowa, manuscript).

Boppart, Timo (2014), “Structural Change and the Kaldor
Facts in a Growth Model with Relative Price Effects and NonGorman Preferences,” Econometrica 82 (6): 2167–96.

Sposi, Michael (2015a), “Evolving Comparative Advantage,
Sectoral Linkages and Structural Change,” Globalization and
Monetary Policy Institute Working Paper no. 231 (Federal
Reserve Bank of Dallas, May).

Bridgman, Benjamin, Georg Duernecker and Berthold Herrendorf (2015), “Structural Transformation, Marketization
and Household Production Around the World,” manuscript.

Sposi, Michael (2015b), “Evolving Comparative Advantage,
Sectoral Linkages and Structural Change” (Federal Reserve
Bank of Dallas, manuscript).

Comin, Diego, Danial Lashkari and Martí Mestieri (2015),
“Structural Change with Long-Run Income and Price
Effects,” NBER Working Paper no. 21595 (Cambridge,
Massachusetts, National Bureau of Economic Research,
September).

Sposi, Michael (2015c), “Trade Barriers and the Relative
Price of Tradables,” Journal of International Economics 96
(2): 398–411.

account—the U.S. must borrow resources
to consume more than it produces, e.g., to
finance its trade deficit. Citizens and the media often view the trade deficit in a negative
light. However, there is no reason to assume,
ex ante, that it is detrimental to the economy.
Going forward, developing new tools to study
the connection between international trade
and the dynamics of the current account can
offer quantitative insight to such debates.
Monetary policy also has a strong influence
on the directions of capital flows and the
terms of trade. Therefore, economists need
models that can untangle the forces that
drive changes in the current account in order
to prescribe appropriate policy.
Note
There is a strand of literature that attempts to decompose
the relative importance of each of the above mechanisms
including Sposi (2012); Teignier (2012); Betts, Giri and
Verma (2013); Herrendorf, Rogerson and Valentinyi (2013);
Uy, Yi and Zhang (2013); Boppart (2014); Swiecki (2014);
Comin, Lashkari and Mestieri (2015).
1

References
Anderson, James E., and Peter Neary (1994), “Measuring
the Restrictiveness of Trade Policy,” World Bank Economic
Review 8 (2): 151–69.
Anderson, James E., and Eric van Wincoop (2004), “Trade
Costs,” Journal of Economic Literature 42 (3): 691–751.

Herrendorf, Berthold, Richard Rogerson and Ákos Valentinyi
(2013), “Two Perspectives on Preferences and Structural
Transformation,” American Economic Review 103 (7):
2752–89.
Hsieh, Chang-Tai, and Peter J. Klenow (2007), “Relative
Prices and Relative Prosperity,” American Economic Review
97 (3): 562–85.
Kongsamut, Piyabha, Sergio Rebelo and Danyang Xie
(2001), “Beyond Balanced Growth,” Review of Economic
Studies 68 (4): 869–82.
Laitner, John, 2000, “Structural Change and Economic
Growth,” Review of Economic Studies 67 (3): 545–61.
Mutreja, Piyusha, B. Ravikumar, Raymond Riezman and
Michael Sposi (2014), “Price Equalization, Trade Flows
and Barriers to Trade,” European Economic Review 70 (C):
383–98.
Mutreja, Piyusha, B. Ravikumar, Raymond Riezman and
Michael Sposi (2015), “Price Equalization Does Not Imply
Free Trade,” Federal Reserve Bank of St. Louis Review 97
(4): 323–39.

Sposi, Michael, and Valerie Grossman (2014), “Deindustrialization Redeploys Workers to Growing Service Sector,”
Federal Reserve Bank of Dallas Economic Letter, no. 11.
Sposi, Michael, and Janet Koech (2013), “Value-Added Data
Recast the U.S.–China Trade Deficit,” Federal Reserve Bank
of Dallas Economic Letter, no. 5.
Stefanski, Radoslaw (2014), “Structural Transformation
and the Oil Price,” Review of Economic Dynamics 17 (3):
484–504.
Swiecki, Tomasz (2014), “Determinants of Structural
Change”(Vancouver School of Economics, University of
British Columbia, mimeo).
Teignier, Marc (2012), “The Role of Trade in Structural
Transformation,” University of Barcelona (manuscript).
Uy, Timothy, Kei-Mu Yi and Jing Zhang (2013), “Structural
Change in an Open Economy,” Journal of Monetary Economics 60 (6): 667–82.

18 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Summary of Activities 2015

t
The institute
hosted two major
conferences, revived
its public lecture
series and continued
to publish research
in top peer-reviewed
journals.

he Globalization and Monetary

• Journal of Macroeconomics: Davis’ “The

Policy Institute logged a number

Macroeconomic Effects of Debt- and

of achievements in 2015. The

Equity-Based Capital Inflows,” and Enrique

institute hosted two major

Martínez-García’s “A Contribution to

conferences, revived its public lecture series

the Chronology of Turning Points in Global

and continued to publish research in top

Economic Activity (1980–2012)” (co-au-

peer-reviewed journals.
By year-end, the institute had added

thored with Grossman and Mack).
• Economics Letters: Davis’ “The Asymmetric

39 new papers to its working paper series,

Effects of Deflation on Consumption

bringing the total to 259. This was slightly

Spending: Evidence from the Great

below the bumper number of papers (53)

Depression,” and Martínez-García’s “On the

circulated in the series in 2014. Of the 39 new

Sustainability of Exchange Rate Target

papers, permanent staff in Dallas contributed

Zones with Central Parity Realignments.”
• Journal of Real Estate Finance and

11, with the remainder coming from institute
research associates.

Economics: Martínez-García’s “Episodes
of Exuberance in Housing Markets: In

Academic Research
Journal acceptances ran at almost twice
the 2014 rate, making 2015 the best year to
date on this front. Thirteen papers were accepted for publication:
• International Economic Review: Alexander

Search of the Smoking Gun” (co-authored
with Grossman, Mack, Efthymios Pavlidis,
Ivan Paya, David Peel and Alisa Yusupova).
• Journal of International Economics:
Michael Sposi’s “Trade Barriers and
the Relative Price of Tradables,” and Jian

Chudik’s “Size, Openness, and Macroeco-

Wang’s “Benefits of Foreign Ownership:

nomic Interdependence” (co-authored

Evidence from Foreign Direct Investment

with Roland Straub).

in China” (co-authored with Xiao Wang)

• Review of Economics and Statistics:

and “The Effects of Surprise and

Chudik’s “Is There a Debt-Threshold Effect

Anticipated Technology Changes on

on Output Growth?” (co-authored with

International Relative Prices and Trade”

Kamiar Mohaddes, M. Hashem Pesaran

(co-authored with Deokwoo Nam).

and Mehdi Raissi).
• Advances in Econometrics: Chudik’s “Long-

In addition, Martínez-García’s paper,
“The Global Component of Local Inflation:

Run Effects in Large Heterogeneous Panel

Revisiting the Empirical Content of the

Data Models with Cross-Sectionally Cor-

Global Slack Hypothesis with Bayesian Meth-

related Errors” (co-authored with

ods,” was published in the volume Monetary

Mohaddes, Pesaran and Raissi).

Policy in the Context of Financial Crisis: New

• Journal of International Money and Fi-

Challenges and Lessons, edited by William

nance: J. Scott Davis’ “Credit Booms, Bank-

Barnett and Fredj Jawadi and published by

ing Crises, and the Current Account” (co-

Emerald Group Publishing. Sposi’s paper

authored with Adrienne Mack, Wesley

“Price Equalization Does Not Imply Free

Phoa and Anne Vandenabeele).
• Journal of Econometrics: Chudik and

Trade” (co-authored with Piyusha Mutreja,
B. Ravikumar and Raymond Riezman) was

Valerie M. Grossman’s “A Multi-Country

published in the Federal Reserve Bank of

Approach to Forecasting Output Growth

St. Louis Review. Finally, Mark A. Wynne’s

Using PMIs” (co-authored with Pesaran).

presentation on Federal Reserve policy in

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 19

the postcrisis period, delivered as a keynote
address at the Western Hemispheric Trade
Conference at Texas A&M International University, was published in the International
Trade Journal.
At year-end, staff had papers under review at the Journal of International Economics, Journal of Monetary Economics, Journal of
Applied Econometrics and European Economic
Review.
Conferences
The institute organized two major research conferences in 2015—one with Swiss
National Bank (SNB), the Bank for International Settlements (BIS) and the Center for
Economic Policy Research (CEPR), and the
other with the Hong Kong Monetary Author-

Participants from across the globe listen to presentations at the “Diverging Monetary Policies, Global Capital Flows and
Financial Stability” conference in Hong Kong. The event, co-sponsored by the Dallas Fed, was held in October 2015.

ity (HKMA), the European Central Bank
(ECB) and the Board of Governors of the
Federal Reserve System.
The conference with SNB, BIS and CEPR,
“Spillovers of Conventional and Unconventional Monetary Policy: The Role of Real and
Financial Linkages,” was held July 9–10 in
Zurich. This was the fourth conference the
institute had co-organized with SNB since
the launch of the Bank’s research program
on globalization and monetary policy. The
conference featured presentations from
researchers at the Board of Governors,
University of British Columbia, SNB, ECB,
University of Wisconsin–Madison, University
of Montreal and Graduate Institute, Geneva.
A full conference summary is provided on
page 22.
The conference with HKMA, ECB and
the Board of Governors, “Diverging Monetary
Policies, Global Capital Flows and Financial
Stability,” was held Oct. 15–16 in Hong Kong.
Peter Pang, deputy chief executive of HKMA,
delivered opening remarks, and ECB Vice
President Vítor Constâncio gave the keynote
address. Stephen Cecchetti, international

The institute organized two major research
conferences in 2015—one with Swiss
National Bank, the Bank for International
Settlements and the Center for Economic
Policy Research, and the other with
the Hong Kong Monetary Authority, the
European Central Bank and the Board of
Governors of the Federal Reserve System.

20 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

economics professor at Brandeis University,

Ahead Inflation meeting; and Australasian

gave the luncheon keynote address. The

Finance and Banking Conference.

event featured presentations by researchers

Staff gave seminar presentations at the

from the University of Virginia, SNB, HKMA,

Boston Fed, Federal Reserve Bank of San

Seoul National University, Dallas Fed, Board

Francisco, Keio University, University of

of Governors, Federal Reserve Bank of Bos-

Tokyo, Vanderbilt University, University of

ton and ECB. A full conference summary is

Nebraska–Omaha and DePaul University.

provided on page 28.
Staff also presented work at high-profile
conferences and at university seminars. These
included the 2015 International Associa-

Bank Publications
Institute staff contributed seven articles
to the Bank’s Economic Letter publication:

tion for Applied Econometrics conference in

“Current Account Surplus May Damp the Ef-

Thessaloniki, Greece; Hong Kong Institute

fects of China’s Credit Boom,” by Davis, Mack,

for Monetary Research Conference on the

Phoa and Vandenabeele; “International

Chinese Economy; Research Institute for De-

Migration Remains the Last Frontier of Glo-

velopment, Growth and Economics (RIDGE)

balization,” by Wynne; “External Debt Sheds

Workshop on Trade and Firm Dynamics;

Light on Drivers of Exchange Rate Fluc-

the Federal Reserve System Committee on

tuations,” by Davis; “Investment Enhances

International Economic Analysis; Midwest

Emerging Economies’ Living Standards,” by

Trade meetings; Midwest Macroeconomics

Martínez-García; “A Real Appreciation for

meetings; University of British Columbia

Recent Exchange-Rate Movements,” by Kuhu

Winter Finance Conference 2015; Southern

Parasrampuria and Sposi; “Foreign Direct

Economic Association meetings; System

Investment: Financial Benefits Could Surpass

Committee on Macroeconomics and Day-

Gains in Technology,” by Wang, Janet Koech
and Xiao Wang; and “Cheaper Crude Oil Affects Consumer Prices Unevenly,” by Chudik
and Koech. Economic Letter is designed to
disseminate research to a broad, nontechnical audience.
Public Lectures
Some years ago, the institute launched
a public lecture series with a talk on the euro
crisis by Jürgen Stark, then a member of the
ECB’s executive board. The institute revived
the series in 2015 with public events featuring Danish global economist and author Lars
Christensen and American financial journalist Roger Lowenstein. Christensen spoke on
the topic “China May Never Be the World’s
Largest Economy,” and Lowenstein discussed
his recent book, America’s Bank: The Epic
Struggle to Create the Federal Reserve.
Both events attracted capacity crowds.
Christensen’s talk resonated with his audience as signs of slower growth in China
increased in 2015, with potentially adverse

Author Lars Christensen, a Danish economist, speaks before a capacity crowd at the Dallas Fed on the timely topic “China May
Never Be the World’s Largest Economy.” He gave his remarks as part of the institute’s newly revived public lecture series.

implications for growth in the Asia–Pacific
region and the rest of the world in 2016. The

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 21

Roger Lowenstein, author of a book on the founding of the Federal Reserve, shares highlights of his work during one of the
institute’s public lecture series events in 2015.

thesis that China may never be the world’s

and Kelvinder Virdi joined in July as a re-

largest economy contradicts recent Interna-

search assistant. Hinojosa is a recent gradu-

tional Monetary Fund (IMF) estimates that

ate of the University of Texas (MA, 2015) and

China is already the world’s biggest economy,

the University of Arkansas (BA, 2014). Virdi is

at least when measured on a purchasing

a recent graduate of the University of Califor-

power parity basis, which attempts to control

nia, San Diego (BA, 2015). Hinojosa and Virdi

for price differences between rich and poor

replaced Bradley Graves and Parasrampuria,

countries. Either way, China looms increas-

who left to attend medical school and law

ingly large in global economic developments.

school, respectively.

Lowenstein’s book on the founding of

Máximo Camacho (Universidad de

the Fed might seem an unusual topic for a

Murcia), Michele Ca’Zorzi (ECB), Jaime

globalization institute event, but as he points

Martínez-Martín (Bank of Spain), Kamiar

out in the book, one argument of U.S. central

Mohaddes (Cambridge University), Mehdi

bank advocates in the early 20th century

Raissi (IMF), Joaquin Vespignani (University

was promotion of an international role for

of Tasmania) and Ariel Weinberger (Uni-

the dollar. As noted by many speakers at the

versity of Oklahoma) joined the institute’s

institute’s centennial conference in 2014,

network of research associates.

the hopes of the Fed’s founders have been
realized on a scale that they could not have

Note

imagined, and the Fed is in many ways the

The proceedings of that conference were published in
spring 2016 as The Federal Reserve’s Role in the Global
Economy: A Historical Perspective, ed. Michael D. Bordo
and Mark A. Wynne, Cambridge, U.K.: Cambridge University
Press.

world’s de facto central bank.

People
Everett Grant, a recent PhD from the
University of Virginia, joined the institute as
a research economist in July 2015. Arthur Hinojosa arrived in June as a research assistant,

The institute revived
its public lecture
series in 2015 with
events featuring
Danish global
economist and author
Lars Christensen and
American financial
journalist Roger
Lowenstein.

22 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Spillovers of Conventional and
Unconventional Monetary Policy:
The Role of Real and Financial Linkages
By Mark A. Wynne

entral banks around the world

Monetary Policy Institute, together with

launched extraordinary mon-

the Swiss National Bank (SNB), the Bank

etary policy responses to the

for International Settlements (BIS) and the

global financial crisis of 2007–09

Center for Economic Policy Research (CEPR),

and the European debt crises that began

organized a one-and-a-half-day conference

in 2010. Some were coordinated; all were

in Zurich, Switzerland, on July 9–10, 2015.

directed at fulfilling domestic mandates for

The conference was the latest in a series that

price and financial stability and supporting

the institute and the SNB have held to discuss

real economic activity.

monetary policy in an international context

Fears that the dramatic expansion of
and Julieta Yung

central bank balance sheets (Chart 1)—a

speech from Thomas Jordan, chairman of the

the policy response—would lead to higher

SNB governing board. Jordan noted the cen-

inflation at the consumer level have so far

trality of the issues to be discussed to mon-

proven unfounded, whether due to still

etary policy deliberations in a small open

abundant slack in many countries or to well-

economy like Switzerland. The safe-haven

anchored inflation expectations.

status of the Swiss franc makes Switzerland
even more susceptible to international spill-

period of ultra-easy monetary policy is mani-

overs in times of economic stress. Unconven-

festing itself in excessive risk taking, bubbles

tional monetary policy in Switzerland took

in certain asset classes and price pressures in

the form of a floor on the Swiss franc-euro

countries that are recipients of internation-

exchange rate (at 1.20 CHF per euro), which

ally mobile capital. This capital, in search of

was abandoned in early 2015 when it proved

higher yields, could ultimately lead to higher

unsustainable. The deflation at the consumer

inflation globally.

level that Switzerland has experienced since

The experience of recent years has chal-

When: July 9–10

The conference opened with a keynote

concomitant of the unconventional part of

But it has been argued that an extended

2015 Conference Summary

since 2011.

the onset of the crisis is undesirable from a

lenged our understanding of the transmis-

central bank perspective and is only sustain-

sion of monetary policy across national bor-

able as long as inflation expectations are

ders as well as the implications of financial

anchored. The SNB would prefer a situation

Where: Swiss National Bank, Zurich

interconnections and the global financial

where the value of the Swiss franc was better

Sponsors: Federal Reserve Bank of Dallas

cycle for inflation spillovers and monetary

aligned with economic fundamentals.

Globalization and Monetary Policy Institute,
Swiss National Bank, Bank for International

control. Moreover, it has prompted us to
reconsider the short- and long-run tradeoffs
between structural reforms and monetary

The New Normal
Having set the stage for the conference

Settlements, Center for Economic Policy

policy during international crises and the

deliberations, Menzie D. Chinn, from Univer-

Research

global implications of policy responses to the

sity of Wisconsin–Madison, opened the con-

financial crisis.

ference by presenting joint work with Joshua

To discuss these topics, the Federal
Reserve Bank of Dallas Globalization and

Aizenman (University of Southern California)
and Hiro Ito (Portland State University),

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 23

“Monetary Policy Spillovers and the Trilemma
in the New Normal: Periphery Country Sensitivity to Core Country Conditions.”
Monetary policy makers in countries
around the globe routinely track developments
in the major economies. In mid-2015, attention

Chart 1
Central Bank Assets as a Percent of Gross Domestic Product
Percent of GDP
100

tion of monetary policy in the United States, or

“liftoff.” Small open economies are particularly

major global “economic centers.”
The extent of their sensitivity to core
economies’ conditions, however, differs
across policy regimes and also varies with
economic structures. The main question
Chinn and his co-authors addressed is how
sensitivity to core economies’ conditions differs across countries and changes over time

Federal Reserve Bank
Bank of England

as the U.S., the euro area, Japan and China, the

European Central Bank

was focused on the long-awaited normaliza-

sensitive to policy changes in countries such

Bank of Japan

40
30
20
10
0

Projections

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

NOTES: Shaded bar indicates global recession. Dashed lines represent projections based on
current purchase programs.
SOURCES: National central banks; Organisation for Economic Cooperation and Development;
Haver Analytics; authors’ calculations.

for different types of financial variables. More
importantly, does the exchange rate regime
play a significant role in determining the
extent to which a country is linked to center

Chart 2
How Nations Align Along Trilemma of International Finance

economies?

Floating exchange rate regime
e.g., Japan, Canada

Central to all of international macroeconomics is the idea of the “trilemma” or “impossible trinity,” which states that it is impos-

de
nc
nd
ep
en

yi
ne
tar
Mo

s
es

Chart 2 illustrates the concept and how some

policy. One of the three must be sacrificed.

e
op

ment of capital and an independent monetary

l
cia
an

rate, no controls on the cross-border move-

Fin

sible to simultaneously have a fixed exchange

countries have positioned themselves.
However, a widely cited paper by Hélène
Rey (2015) argued that the global financial
cycle in capital flows, asset prices and credit
growth reduces the trilemma to a dilemma:
Only by actively managing the capital account can periphery countries pursue a

Financially closed system
e.g., Bretton Woods;
China in the 1980s

Exchange rate stability

Monetary union/currency board
e.g., euro, gold standard,
Hong Kong

24 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

genuinely independent monetary policy.
As Chinn and participants said at the

“A debate is ongoing
regarding whether,
with free capital
mobility, flexible
exchange rates are
sufficient to protect
countries from
external monetary
and financial
shocks.”

Ryan Banerjee and Giovanni Lombardo from
the BIS, also studied the increasing impor-

conference, there is at least some evidence

tance of spillovers from advanced economies

that sensitivity of policy interest rates in pe-

(particularly the U.S.) to emerging markets in

riphery countries to a center country’s interest

their paper, “Self-Oriented Monetary Policy,

rate depends on: 1) the exchange rate regime,

Global Financial Markets and Excess Volatil-

2) the degree of financial openness and 3) the

ity of International Capital Flows.”

level of financial development of the periph-

In his presentation, Devereux used

ery country. This is consistent with what we

estimates of U.S. monetary policy shocks as

would expect based on the trilemma.

identified by Romer and Romer (2004) and

In the last two decades, for most finan-

updated by Coibion (2012) to quantify the

cial variables in periphery (developing and

spillovers of U.S. monetary policy to a panel

emerging-market) countries, the strength

of emerging-market economies (such as

of the links with the center economies has

Brazil, China, Indonesia, India, Malaysia,

been the dominant factor. While certain

Mexico, Russia and South Africa) using the

macroeconomic and institutional variables

local projection methods of Jordà (2005).

are important, Chinn and his co-authors con- Devereux showed that a U.S. monetary policy
clude that the arrangement of open-economy

shock tends to depreciate the exchange rate,

macro policies such as the exchange rate

decrease gross domestic product, boost con-

regime and the degree of financial open-

sumer price inflation and subsequently lower

ness also directly influence the sensitivity of

it in the long run, increase policy and long-

financial conditions in periphery countries

term rates, and lower portfolio debt inflows

to economic developments in the center

and outflows.

economies. An economy that pursues greater

Devereux then sketched out a two-

exchange rate stability and has greater finan-

country New Keynesian model augmented

cial openness faces a stronger link with the

to include financial frictions and financial

center economies.

linkages to explain the patterns in the data

Michael Devereux from University of
British Columbia, along with co-authors

and to examine potential policy responses.
Devereux showed that in the context of his
model, an optimal cooperative monetary
policy can greatly reduce effects of financial
shocks and reduce most spillovers to emerging markets from shocks in advanced economies. However, even in an environment
with multiple frictions in global financial
intermediation, a self-oriented, discretionary monetary policy may be a reasonable
arrangement for the international monetary
system as well.
Given the increased volatility associated
with the U.S. monetary policy stance, a debate is ongoing regarding whether, with free
capital mobility, flexible exchange rates are
sufficient to protect countries from external
monetary and financial shocks.
Structural reforms have become a crucial component of the policy menu at a time

Mark A. Wynne, director of the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas,
discusses the presentation, “If the Fed Sneezes, Who Catches a Cold?” by the European Central Bank’s Livio Stracca.

when the conventional tools of demand-side
macroeconomic policy are constrained, and

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 25

unconventional tools are being deployed
without certainty of their effectiveness. (As
former Fed Chairman Ben Bernanke noted
in early 2014, referring to the quantitative
easing programs that the Federal Open
Market Committee implemented as part of its
unconventional policy toolkit, “The problem
with QE is that it works in practice, but not in
theory.”) This was another topic of discussion, in which Matteo Cacciatore from HEC
Montréal presented “Short-Term Pain for
Long-Term Gain: Market Deregulation and
Monetary Policy in Small Open Economies,”
jointly with Romain Duval from the International Monetary Fund, Giuseppe Fiori from
North Carolina State University and Fabio
Ghironi from the University of Washington.
Cacciatore and his co-authors show

Georgios Georgiadis of the European Central Bank gives his presentation on “Trilemma, Not Dilemma: Financial Globalisation and Monetary Policy Effectiveness.”

that in the context of a New Keynesian small
open-economy model, it takes time for reforms to pay off, typically at least a couple of
years. This is because the benefits of reforms
in their model materialize through firm

The Role of Banks
Recent research stresses the impact on

currency funding, including monetary policy,
exchange rate movements, risk and deposits

entry and increased hiring, both of which are

funding conditions in periphery or non-

gradual processes that take time, while lay-

center countries resulting from monetary

offs associated with reforms tend to happen

and financial shocks in so-called monetary

nants vary across currencies as well as coun-

immediately. All reforms considered in their

center countries, whose currencies are used

tries. Swiss franc use in emerging European

work (individual reforms and simultaneous

in international lending. While the U.S. dollar

countries is affected by the exchange rate

deregulation in product and labor markets)

clearly plays a central role in the interna-

and lending volumes in the Swiss franc—in

stimulate growth even in the short run,

tional monetary system, banks also make

line with the predictions of a simple model.

though some—such as reductions in employ-

substantial use of other foreign currencies

By comparison, risk-related considerations,

ment protection—increase unemployment

in their lending and funding. The euro and

such as co-movements between various

temporarily.

the Swiss franc notably play important roles

exchange rates, matter for financial centers in

in foreign currencies.
Their work suggests that these determi-

in the activity of banks in Europe. This raises

the euro area, while funding costs play a role

a broad set of labor market reforms and

the question of how monetary and finan-

for other euro-area countries.

product market reforms simultaneously

cial shocks in the home countries of those

helps minimize these transition costs. But, if

currencies are transmitted across borders

Swiss franc is also affected by exchange

monetary policy is constrained by the zero

through bank balance sheets and whether

rates and lending activity among emerging

lower bound, comprehensive reforms may be

this transmission depends on the specific

economies, but overall displays less sensitiv-

less appealing to policymakers if they have

foreign currency used in bank funding.

ity than Swiss franc funding to movements in

Overall, it seems that implementing

significant deflationary effects. Cacciatore

Cédric Tille from the Graduate Institute,

Funding in currencies other than the

the various factors.

and his co-authors show that in the context

Geneva, presented work on the role of banks

of the model with which they work, reforms

as a channel for transmission of foreign and

financial crisis, international currency swap

generally do not have significant deflationary

exchange rate shocks to domestic banking

lines between central banks of advanced

effects. Thus, being up against the zero lower

and the impact on financial stability and

economies and their counterparts in emerg-

bound or being a member of a monetary

macroeconomic performance. His paper,

ing-market economies were introduced as

union (without the possibility of setting a

“What Drives the Funding Currency Mix

a coordinated policy initiative. Swiss franc

nationally oriented monetary policy) should

of Banks?,” jointly with Signe Krogstrup of

and other foreign currency loans to the

not be an obstacle to adopting reforms.

SNB, assesses the determinants of foreign

nonbanking sector were extremely popular

Additionally, in response to the global

26 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

in Central and Eastern Europe before the

the National Bank of Poland and the Central

This new environment has led to a renewed

financial crisis.

Bank of Hungary. This allowed the authors

interest in the role of monetary policy actions

to examine the importance of bank charac-

in the dynamics of asset prices, particularly

borrowed in a lower-yielding foreign cur-

teristics, such as foreign currency exposure,

interest rates and exchange rates and their

rency to finance their mortgages or business

funding structure, ownership and capital

global implications for financial contagion.

investments. As the financial crisis escalated,

structure, in response to liquidity provision.

Households and small firms increasingly

so did funding tensions in Swiss francs. In

Among the key results, Yesin suggested

By affecting exchange rates and foreign
interest rates, monetary policy shifts are a po-

this context, the SNB entered into temporary

that stock prices of Central and Eastern

tential source of unintended spillovers onto

swap line agreements with several central

European banks responded strongly to Swiss

other countries. Chart 3 shows how a U.S.

banks between 2008 and 2010. Their objec-

franc swap lines provided by the SNB during

monetary policy announcement can have

tive was to improve the Swiss franc’s global li-

the crisis. Moreover, banks with different

significant cross-country effects through the

quidity. This unconventional form of liquidity

characteristics responded differently to swap

exchange rate channel. The episode depicted

aid affected a broad array of financial assets,

lines, since the effectiveness of swap lines

was part of the so-called “taper tantrum,”

involving interest-rate spreads, credit default

is partially dependent on the structure of

where the suggestion that the Federal Open

swap rates and exchange rates.

the banking system. The authors argue that

Market Committee (FOMC) would at some

their findings are consistent with the view

point begin to taper its asset purchases pre-

work with Alin Marius Andries from the Alex-

Pinar Yesin from the SNB presented her

that swap lines not only enhanced market

cipitated large swings in asset prices.

andru Ioan Cuza University of Iasi (Romania)

liquidity, as intended, but also reduced risks

and Andreas Fischer of the SNB, “The Impact

associated with micro-prudential issues.

Federal Reserve Board and Jonathan H.

Global Effects

plored the international effects of U.S. mon-

of International Swap Lines on Stock Returns
of Banks in Emerging Markets.” The authors

John Rogers and Chiara Scotti of the
Wright from Johns Hopkins University ex-

In the wake of the financial crisis, some

studied the response of stock prices of banks

etary policy shocks at the zero lower bound

in 15 Central and Eastern European countries

of the world’s largest central banks set their

on U.S. and foreign interest rates at different

to the presence of international swap lines

policy rates near zero and adopted uncon-

horizons, exchange rates (Japanese yen, euro,

between the SNB and other central banks,

ventional monetary policies, such as forward

British pound), financial market and foreign

paying particular attention to swap lines with

guidance and large-scale asset purchases.

exchange risk premia, and a generalized
carry-trade return (involving a portfolio that
goes long on a foreign bond and short on a

Chart 3
Dollar Exchange Rates Respond to U.S. Monetary Policy News

U.S. bond of the same maturity).
In their paper, “Unconventional Mon-

Normalized foreign exchange rates per U.S. dollar
103.5
Time of release of June 2013 Federal Open Market Committee

etary Policy and International Risk Premia,”

103.0

that lower five-year U.S. Treasury futures

statement and Bernanke’s press conference (2:15 p.m. EST)

the authors capture monetary policy shocks
prices around a monetary policy announce-

102.5

ment. Rogers suggested that U.S. monetary

102.0

policy easing shocks lower domestic and

101.5

foreign bond premia, lower interest rates
globally and lead to dollar depreciation.

101.0

This was also a topic of discussion during
Canada

100.5
100.0
99.5
0000

Livio Stracca’s presentation, “If the Fed Sneez-

Japan

0600 1200
June 19

1800

0000

0600 1200
June 20
U.S. EST

Euro area

es, Who Catches a Cold?” Stracca and Luca

Great Britain

Dedola of the European Central Bank (ECB)

1800

0000

0600 1200
June 21

SOURCES: Discussion by Mark A. Wynne of the presentation,“If the Fed Sneezes, Who
Catches a Cold?”; authors’ calculations.

and Giulia Rivolta from the University of
Brescia find that U.S. monetary policy shocks,
assumed to have standard domestic effects,
impact advanced and emerging economies
differently. In particular, U.S. monetary policy
tightening brings about a contraction in economic activity and an increase in unemploy-

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 27

ment in both advanced and emerging coun-

and in emerging markets since the 1990s.

References

tries. But only in emerging economies does

In particular, while the traditional interest

this also result in capital outflows, a domestic

rate channel might lose significance due to

credit crunch and falling housing prices.

the increasing influence of global financial

Coibion, Olivier (2012), “Are the Effects of Monetary Policy
Shocks Big or Small?” American Economic Journal: Macroeconomics 4 (2): 1–32.

This situation relates to the monetary pol-

markets on domestic financial conditions,

icy trilemma discussed throughout the confer-

the exchange rate channel may gain impor-

ence. Emerging economies with more flexible

tance due to growing net foreign currency

exchange rates and lower capital mobility are

exposures of economies’ external balance

better insulated from some financial repercus-

sheets. As a result, the exchange rate channel

sions of U.S. monetary policy. A dollar peg

matters not only because of its relevance

resulting in low capital mobility or a floating

for import/export prices and quantities but

regime with high capital mobility are not as

increasingly because of wealth effects.

helpful. This lends further support to the idea
that for emerging economies, the dilemma

Further Research and New

suggested by Rey (2015) may be more relevant

Challenges

than the classic trilemma, at least when it
comes to spillovers of U.S. monetary policy.
The final presentation of the conference

This latest in the series of conferences
that the Dallas Fed’s Globalization and Monetary Policy Institute has held with the SNB

focused on the effectiveness of monetary

highlighted themes that will continue to be at

policy relative to global financial cycle effects

the fore of policy discussions. There is abun-

and net foreign exchange exposure effects.

dant evidence that monetary policy actions

Global financial cycle effects are at the heart

in advanced economies have spillover effects

of the trilemma since they reduce control of

on emerging and developing economies.

domestic interest rates. Net foreign exchange

This seems to be true of both conventional

exposures have been rising across countries

and unconventional policy actions. In recent

by holding foreign assets in foreign currency

years, the conventional wisdom, based on the

and issuing foreign liabilities in domestic

classic trilemma of international finance that

currency. This can strengthen the impact

a flexible exchange rate regime can insulate a

of monetary policy due to valuation effects.

country from monetary policy shocks beyond

If the domestic currency appreciates after

its borders, has been challenged. Since the

monetary policy tightening, the domestic

global financial crisis of 2007–09, the stance

value of foreign assets falls while the value of

of monetary policy in all of the advanced

foreign liabilities remains unchanged, creat-

economies has been uniformly accommoda-

ing negative wealth effects on the external

tive. But, the potential for diverging monetary

balance sheet.

policies between some of the world’s most

Georgios Georgiadis of the European
Central Bank (ECB) presented “Trilemma,
Not Dilemma: Financial Globalisation
and Monetary Policy Effectiveness,” joint
work with his ECB colleague Arnaud Mehl,
focusing on how financial globalization has
affected monetary policy effectiveness differently in emerging markets and advanced
economies.
The authors find evidence for global
financial cycle and net foreign exchange
exposure effects, with financial globalization
having noticeably strengthened monetary
policy effectiveness in advanced economies

important central banks will likely create new
challenges for the global monetary system.

Jordà, Òscar (2005), “Estimation and Inference of Impulse
Responses by Local Projections,” American Economic
Review 95 (1): 161–82.
Rey, Hélène (2015), “Dilemma Not Trilemma: The Global
Financial Cycle and Monetary Policy Independence,” NBER
Working Paper no. 21162 (Cambridge, Massachusetts,
National Bureau of Economic Research, May).
Romer, Christina D., and David H. Romer (2004), “A New
Measure of Monetary Shocks: Derivation and Implications,”
American Economic Review 94 (4): 1055–84.

28 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Diverging Monetary Policies, Global
Capital Flows and Financial Stability
By J. Scott Davis

and Mark A. Wynne

he Globalization and Monetary

paths of Fed and ECB shadow policy rates in

Policy Institute co-sponsored a

2015 (Chart 1).

conference, “Diverging Monetary Policies, Global Capital

When: Oct. 15–16
Where: Hong Kong Monetary Authority,
Hong Kong
Sponsors: Federal Reserve Bank of Dallas

Dora Xia, of the University of Chicago Booth

Flows and Financial Stability,” jointly with the

School of Business and Merrill Lynch, respec-

Hong Kong Monetary Authority (HKMA), the

tively, estimate a short-term shadow policy

European Central Bank (ECB) and the Board

rate using a term structure model that takes

of Governors of the Federal Reserve System

into account longer-term interest rates. Thus,

Oct. 15–16. Papers were selected by an orga-

this shadow rate can be used as an indicator of

nizing committee consisting of Stephen Cec-

monetary policy when the actual short-term

chetti (Brandeis University), Hongyi Chen

rate is constrained by the zero lower bound.

(HKMA), Luca Dedola (ECB), John Rogers

The goal of many nonconventional monetary

(Board of Governors) and Mark A. Wynne

policy actions, such as forward guidance

(Federal Reserve Bank of Dallas).

and the bond-buying quantitative easing

Peter Pang, deputy chief executive of

2015 Conference Summary

Researchers Jing Cynthia Wu and Fan

measures in recent years, has been to lower

the HKMA, delivered the opening remarks,

longer-term interest rates. By lowering these

noting the timeliness of the conference as

long-term rates, the central bank engages in

the Fed was poised to raise rates (which it

monetary easing that could be represented

subsequently did in December), and the ECB

by a reduction in the shadow policy rate. The

and Bank of Japan were very much in accom-

chart shows that over the course of 2015,

modative mode. While normalization in the

the shadow federal funds rate went from -3

United States was signaled well in advance,

percent to 0 percent, coinciding with the Fed’s

he said the concern in many emerging-

interest rate increase in December. At the

market economies was macroeconomic

same time, the ECB began a quantitative eas-

imbalances that had developed in those

ing policy, and during 2015, the ECB’s shadow

economies in the exceptionally low-interest-

policy rate went from 0 percent to -4 percent.

rate environment that has prevailed since the

Pang’s remarks were followed by the

end of 2008. How those imbalances would be

opening keynote address, delivered by ECB

resolved was also worrisome.

Vice President Vítor Constâncio. Constân-

Stronger fundamentals and limited cur-

cio focused on monetary policy spillovers,

rency and maturity mismatch in foreign li-

specifically the medium-term impact of such

abilities should make Asian emerging-market

spillovers, which he noted were not well

Globalization and Monetary Policy Insti-

economies better able to deal with a reversal

understood. Spillovers from U.S. monetary

tute, Hong Kong Monetary Authority, the

of capital flows. But the weaker global econ-

policy are relatively large, he argued, due to

omy and the slowdown in China will present

the dominant role of the dollar in the global

challenges, as will the greater globalization of

financial system.

European Central Bank and the Board of
Governors of the Federal Reserve System

the region’s financial markets.
The sharp divergence in developedworld monetary policies is best shown in the

Central banks have domestic mandates
for price and financial stability, but they also
have a role to play in stabilizing the global

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 29

financial system. While there is substantial literature that finds that by focusing on
domestic mandates in a rules-based manner, central banks can best achieve global
stability, Constâncio argued that simply
keeping their own houses in order is no
longer enough to ensure stability in our new,
globalized world. He concluded by arguing
that global challenges require both domestic
and global responses and cautioned against

Chart 1
Shadow Fed Funds Rate and Shadow European Central Bank
Policy Rate Sharply Diverge in 2015
Percent
2

European Central Bank

complacency.
–1

Expanding Capital Flows
Central to all stories about the spillovers

–2

of monetary policy are international capital
flows that have grown at an extraordinary

Federal Reserve Bank

–3

rate with the onset of financial globalization.
In the first paper presentation of the confer-

–4
1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15

ence, “The Two Components of International Portfolio Flows,” Frank Warnock of the

SOURCE: Wu and Xia (2014).

University of Virginia, along with co-authors
Shaghil Ahmed and Stephanie E. Curcuru
from the Board of Governors and Andrei

Viewing the active and passive compo-

Zlate from the Federal Reserve Bank of Bos-

nents together would suggest that emerging-

ton, showed that when it comes to interna-

market economies’ (EMEs’) capital flows

tional portfolio flows, there are two parts that

massively increased after the global financial

must be distinguished: an active component

crisis of 2007–09; thus, the share of U.S. for-

and a passive component.

eign portfolio investment in EMEs increased.

The active component is the one that

However, when Warnock and his co-

reflects decisions made in the present, while

authors isolate the active component of flows,

the passive is capital flowing to destinations

this shift isn’t apparent. They then use simple

based on decisions made in the past. For ex-

reduced-form regressions to examine the

ample, the active component of a capital flow

drivers of the two components of flows. They

occurs when an investor actively sells one

find that the Chicago Board Options Exchange

asset to purchase another. An example would

(CBOE) Volatility Index, or VIX, matters for

be a U.S. investor selling Brazilian equities

both types of flows but is less significant for

and using the proceeds to purchase Mexican

portfolio reallocations, suggesting that the

equities. The passive component of capital

VIX is mainly capturing an income effect.

flows is the new savings that are allocated

They also find that capital controls (or capital

based on preexisting portfolio weights. An

flow management measures) are sometimes

example would be an investor who saves a

significant when considering total flows but

given percentage of his income each month

are never significant when considering active

and allocates a fixed percentage of those sav-

flows, suggesting that capital controls do not

ings to Brazilian and Mexican equities.

affect active portfolio decisions but instead

Warnock and his co-authors propose
a measure to distinguish between the two

work through valuation changes.
During discussion of the paper, it was

components, the so-called normalized relative

noted that a potential caveat accompanying the

weight. They use this measure to see if the dis-

analysis is an implicit assumption that passive

tinction between the two types of flows matters.

flows are completely on autopilot. While that

30 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

may be true to an extent, investors at least make

a country’s gross foreign asset position has

a rational decision not to rebalance their port-

a strong effect, particularly on gross foreign

folios. Thus, passive flows may be directed by

portfolio assets.

decisions made in the past but are only passive

If a country has a large stock of foreign

because of a decision made now not to change

portfolio assets, its GRR is higher. Based on

previous allocation decisions.

their findings, Krogstrup and Goldberg argue

The second paper in the capital flows

that capital flows by residents and changes

session, “Capital Flows and Domestic Fi-

in domestic financial market structures may

nancial Market Structure,” was presented by

play a more important role in a country’s

Signe Krogstrup of the Swiss National Bank

capital flow response to a global risk shock

and co-authored with Linda Goldberg of the

than previously thought. However, as noted

Federal Reserve Bank of New York. Krogstrup

in the discussion of the paper, their findings

and Goldberg pose a pair of questions in

rest on an empirical analysis of what happens

their paper: How do capital flows respond

with asset positions. A more complete picture

to global risk, and what determines this

would incorporate the response of interna-

response?

tional liabilities as well.

To answer those questions, they construct a Global Risk Response (GRR) index
that measures the correlation between a

Global Liquidity and the Dollar
The second session addressed the issue

country’s exchange rate pressure index (a

of global liquidity. There has been a dramatic

weighted average of exchange rate deprecia-

increase in U.S. dollar liquidity in the global

tion and change in reserves over a period)

financial system since the financial crisis, and

and the VIX. A positive GRR means that a

there is keen interest in understanding what

country’s currency appreciated during times

will happen to dollar credit as the Fed begins

of high risk and was the recipient of safe-

to remove monetary policy accommodation.

haven capital flows. They then look at what

Eric Wong of HKMA, along with co-authors

factors drive a country’s GRR and find that

Dong He of the International Monetary Fund
(IMF) and Andrew Tsang and Kelvin Ho of
HKMA, asked in their paper, “Asynchronous
Monetary Policies and International Dollar

Chart 2
Fed Balance Sheet Stabilizes as ECB’s, Bank of Japan’s Expand
Percent of gross domestic product
120

Credit,” how a divergence of unconventional
monetary policies in the U.S. relative to the
euro area and Japan affected the supply of
international dollar credit.
The sizes of central-bank balance sheets

100

since the crisis—measured as a percentage of
80

gross domestic product (GDP)—are shown

Bank of Japan

in Chart 2. The Fed’s balance sheet stabilized
in 2014. Meanwhile, the Bank of Japan’s

balance sheet has increased rapidly since
2013, coinciding with the adoption of its new

quantitative easing policy; the ECB’s balance
sheet has been expanding since the begin-

European
Central Bank

Federal Reserve Bank

ning of 2015. The chart presents the forecasts
for balance sheet expansion through March

0
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

NOTE: Dashed lines indicate projected balance sheet positions.
SOURCE: National central banks; Organisation for Economic Cooperation and Development;
Haver Analytics; authors’ calculations.

2017, assuming that current quantitative easing policies by the ECB and the Bank of Japan
remain unchanged.1
Wong and his co-authors note that much

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 31

of the international lending in dollars is actu-

More importantly, the researchers find

ally intermediated by European and Japanese

that bond issuance response has changed

banks. So while the Fed could tighten, if

over time. Splitting their sample into precrisis

the ECB and the Bank of Japan continue to

(2000–06) and postcrisis (2010–14) periods,

loosen, European and Japanese banks would

they find that a U.S. credit shock had a posi-

be more likely to lend, mitigating some of the

tive effect on onshore bond issuance in the

effect of Fed tightening on U.S.-dollar credit.

precrisis period and no effect on offshore

They show in their empirical work that while

issuance. In the postcrisis period, the same

the Fed’s expansionary monetary policy was

shock had no effect on onshore issuance and

the primary driver of dollar credit growth in

a positive effect on offshore issuance. While

Japan and Europe in 2013, by 2015, the Fed’s

the onshore/offshore distinction sheds some

balance sheet alone should have led to a de-

light on potential vulnerabilities, it does not

cline of international dollar credit. However,

get to the crucial question of the currency of

because of continued balance sheet expan-

denomination.

sion by the ECB and the Bank of Japan, dollar
credit actually increased.
Foreign-currency-denominated bond

Before the global financial crisis, conventional wisdom on capital controls was that
they were largely detrimental and ought to be

issuance by corporations in EMEs surged

avoided if at all possible. In the aftermath of

in the wake of the global financial crisis as

the crisis, there has been a rethinking of the

firms sought to take advantage of low interest

usefulness of capital controls, with the IMF

rates in advanced economies. The scale of

noting that “… in certain circumstances, capi-

the bond issuance has given rise to concerns

tal flow management measures can be useful.”

that these liabilities may become a source

Furthermore, in a widely cited paper,

of problems for EMEs as monetary policy

Hélène Rey (2015) argued that the classic tri-

accommodation is removed. Two of the

lemma of international finance had morphed

biggest issuers of foreign-currency-denom-

into a dilemma, and that in an era of financial

inated bonds are Brazilian energy company

globalization, “…independent monetary

Petrobras and Russian natural gas producer

policies are possible if and only if the capital

Gazprom. Both encountered difficulties in

account is managed.”

2015. However, these problems were not

In their paper, “Capital Controls and

due to a currency mismatch between their

Monetary Policy Autonomy in a Small Open

liabilities and revenues, as both companies

Economy,” Scott Davis of the Dallas Fed and

were perfectly hedged in terms of their dollar

Ignacio Presno of the Universidad de Monte-

exposure. Rather, they encountered difficul-

video ask how the use of capital controls af-

ties due to the energy price collapse.

fects the conduct of optimal monetary policy

Soyoung Kim of Seoul National Univer-

in a small open economy that is subject to

sity and Hyun Song Shin of the Bank for In-

surges in capital inflows. In recent years,

ternational Settlements examined how global

many EMEs, including many with formally

liquidity is transmitted to EMEs in their

floating currencies, have used monetary

paper, “Offshore EME Bond Issuance and the

policy to manage the capital account. Davis

Transmission Channels of Global Liquidity.”

and Presno study optimal monetary policy

They argue that we are seeing possible shifts

in a standard small open-economy dynamic

in these transmission channels. According to

stochastic general equilibrium (DSGE)

their analysis, a U.S. credit shock has a posi-

model and show that using the domestic

tive effect on EME GDP and a negative effect

monetary policy instrument to manage the

on interest rates. This is consistent with what

capital account can even be optimal under

many others have found. They also find that

certain circumstances.

the same shock has a positive effect on bond
issuance in EMEs.

Measures to restrict capital flows
(whether optimal or not) significantly im-

“Before the global
financial crisis,
conventional wisdom
on capital controls
was that they were
largely detrimental
and ought to be
avoided if at all
possible.”

32 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

“Cross-border
investment positions
have grown steadily
over the past 15
years and did not
diminish in any
meaningful sense
in the aftermath of
the global financial
crisis.”

prove the ability of the central bank to use

Stebunovs from the Board of Governors,

its monetary policy instrument to satisfy

co-authored with Seung Jung Lee from the

domestic objectives, knowing that these

Board and Lucy Q. Liu from the IMF. The idea

capital controls limit the effect of destabiliz-

of a risk-taking channel for monetary policy

ing capital flows.2 In his presentation, Davis

has gained currency in recent years as central

was careful to note that the analysis in his

banks pushed interest rates to their effective

paper is a positive, not normative analysis.

lower bound.

The question is how using capital controls af-

The idea behind this channel is that as

fects the conduct of optimal monetary policy,

the Fed cuts rates, banks have an incentive

not whether capital controls are optimal or

to make riskier loans in search of yield. Ste-

not. In the discussion that followed, several

bunovs and his co-authors argue that there

important avenues for future research were

are really two risk-taking channels—one that

identified. For example, are capital controls

operates through a short-term cost of funds

simply addressing a symptom of a problem

channel and the other that operates through

rather than the fundamental issue itself,

a returns-on-safe-assets channel. They are

which in the Davis–Presno model is a credit

primarily interested in how active a channel

constraint? A related question is why some

is internationally. When the Fed cuts rates, is

small open economies are more comfortable

there riskier lending to non-U.S. borrowers?

than others with letting the exchange rate

If so, this means that a non-U.S. central bank

handle the adjustment to capital flows.

may have limited controls on the credit cycle

The final paper for the first day was
“International Capital Flows and Unconven-

in its own country.
To capture the riskiness of lending, they

tional Monetary Policy,” by Curcuru, Chiara

proxy for average borrower riskiness by using

Scotti and Aaron Rosenblum of the Board

the average lending spread over Libor (the

of Governors. It was presented by Curcuru.

London interbank offered rate). They then

Most studies of the effects of unconven-

regress this spread on the federal funds rate

tional monetary policy examine the impact

as well as the 10-year Treasury bond rate to

on asset prices, while relatively few focus

quantify the two channels. In the 1995–2007

on the effects on capital flows. Curcuru and

period, they find that increases in the federal

her co-authors use an event study approach

funds rate had a negative effect on the risk

to document the response of international

spread for syndicated loans to non-U.S. bor-

capital flows to an announcement of an

rowers (evidence that this risk-taking channel

unconventional monetary policy action such

is active internationally), but changes in the

as a large-scale asset purchase program. An

10-year Treasury rate had no effect. In the

important innovation in the paper is the use

post-2008 period, increases in the 10-year

of high-frequency data on capital flows from

Treasury rate had a negative effect on spreads,

Emerging Portfolio Fund Research (EPFR).

evidence of the safe-returns risk-taking

The primary finding is that unconventional

channel. Of course, the risk-taking channel is

monetary policy actions by advanced-

potentially operative for the actions of central

economy central banks do not seem to result

banks other than the Fed, and the authors

in excess capital flows to emerging-market

noted that in ongoing work, they are looking to

economies.

document the effect in other currencies.
The penultimate paper of the program,

Transmission Channels and

“International Financial Spillovers to Emerg-

the Trilemma

ing Market Economies: How Important Are

The second day of the conference began

Economic Fundamentals?” by Ahmed and

with a presentation of “Risk Taking and

Brahima Coulibaly of the Board and Zlate

Interest Rates: Evidence from Decades in the

of the Federal Reserve Bank of Boston, was

Global Syndicated Loan Markets,” by Viktors

presented by Zlate. It is widely believed that

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 33

EMEs with stronger fundamentals (low debt,
strong growth and sustainable public financ-

relative strength of the two effects.
To assess the strength of the monetary

es) are better placed to deal with financial

transmission mechanism, they estimate im-

market volatility in times of economic stress.

pulse response functions. They then regress

Zlate and his co-authors ask whether the dif-

the trough response of GDP to a monetary

fering economic fundamentals of EMEs can

policy shock on net foreign exchange

explain their heterogeneous responses to the

exposure and gross external assets and li-

global financial crisis.

abilities as a share of GDP and show that the

They construct a vulnerability index

two variables are significant and with the

(which includes current account, external

expected signs. They calculate the strength

liabilities and foreign exchange reserves) and

of these two channels in the euro area, other

show that this index had an effect on financial

advanced economies and EMEs and argue

performance during the 2013 taper-tantrum

that the net effect is around zero in the euro

episode—the period of rapid Treasury yield

area—perhaps some evidence that financial

increases that followed indications the Fed

globalization has weakened the monetary

would end quantitative easing. Simply put,

transmission mechanism—but the effect

EMEs with better fundamentals saw less of a

has led to a stronger monetary transmission

deterioration in their financial markets during

mechanism in both other advanced econo-

this episode. They also found some evidence

mies and EMEs.

of a similar effect during earlier episodes. One
caveat to their findings: They are based on a
very small number of observations.
The conference concluded with a

Conclusions
Cross-border investment positions have
grown steadily over the past 15 years and

presentation of “Trilemma, Not Dilemma:

did not diminish in any meaningful sense in

Financial Globalisation and Monetary

the aftermath of the global financial crisis.

Policy Effectiveness,” by Georgios Georgia-

Flows to EMEs increased after the crisis as

dis, co-authored with Arnaud Mehl, both of

policy rates were reduced to their effective

the ECB. Georgiadis and Mehl revisit the

lower bound in the advanced economies and

question posed by Rey (2015)—namely, does

investors reached for yield. U.S. monetary

increasing financial globalization reduce the

policy, in particular, spills over to EMEs, with

ability of a central bank to conduct monetary

potential implications for macroeconomic

policy targeted at domestic objectives? Put

and financial stability in those countries as

differently, does financial globalization mean

U.S. policy normalizes.

that a central bank no longer has control of

As Stephen Cecchetti noted in his con-

long-term interest rates and that long rates

ference lunch remarks, the world effectively

are driven by global factors?

has two dollar-based financial systems—

They point out that while monetary

one based in the U.S. that is backed by the

transmission is weakened by “global financial

Fed, and another outside the U.S. that has

cycle effects,” it is simultaneously strength-

effectively no central-bank backing. Cec-

ened by net foreign currency exposure effects

chetti argued that global financial stability

(the Fed tightens to cool the U.S. economy;

will require a global U.S. dollar safety net,

the dollar appreciates; U.S. households with

and the semi-permanent swap lines that five

net positive foreign currency exposure in

foreign central banks have with the Fed go

their assets are poorer, which creates a wealth some of the way toward providing that safety
effect that will reduce consumption spend-

net.5 How well those swap lines will work in

ing in the U.S.).4 They find evidence that

practice remains an open question.

both these effects are active, so the impact
of financial globalization on the monetary
transmission mechanism will depend on the

Notes
Specifically, for the forecasts of the size of the balance
sheet past 2015, we assume that the ECB will continue
to expand the size of its balance sheet by 60 billion euros
per month through March 2017, which is the stated end of
the ECB’s quantitative easing measures. This is a balance
sheet expansion of about 7 percent of GDP per year. The
Bank of Japan will continue to expand its balance sheet by
80 trillion yen per month through at least March 2017. This
is a balance sheet expansion of about 16 percent of GDP
per year.
2
Davis’ essay “The Trilemma in Practice: Monetary Policy
Autonomy in an Economy with a Floating Exchange Rate,”
which is on page 2 in this annual report, addresses this very
same topic, especially the fact that in recent years, there
is evidence that EME central banks with a floating currency
still tend to use their domestic monetary policy to manage
the capital account.
1

This paper was also presented at the conference that the
institute co-sponsored with the Swiss National Bank in
Zurich in July 2015, summarized elsewhere in this report.
4
For a formal model of this channel, see Meier (2013).
5
For more detail on the role of the swap lines during the
global financial crisis, see the contributions by Stephen
Cecchetti and Donald Kohn to the Bordo and Wynne (2016)
volume.
3

References
Bordo, Michael D., and Mark A. Wynne (2016), The Federal
Reserve’s Role in the Global Economy: A Historical Perspective (Cambridge, U.K.: Cambridge University Press).
Meier, Simone (2013), “Financial Globalization and
Monetary Transmission,” Globalization and Monetary Policy
Institute Working Paper no. 145 (Federal Reserve Bank of
Dallas, April).
Rey, Hélène (2015), “Dilemma Not Trilemma: The Global
Financial Cycle and Monetary Policy Independence,” NBER
Working Paper no. 21162 (Cambridge, Massachusetts,
National Bureau of Economic Research, May).
Wu, Jing Cynthia and Fan Dora Xia (2014), “Measuring
the Macroeconomic Impact of Monetary Policy at the Zero
Lower Bound,” NBER Working Paper no. 20117 (Cambridge,
Massachusetts, National Bureau of Economic Research,
May).

34 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Institute Working Papers Issued in 2015
Working papers can be found online at
www.dallasfed.org/institute/wpapers/index.cfm.

No. 221
Housing Demand, Savings Gluts and
Current Account Dynamics
Pedro Gete
No. 222
Trilemma, Not Dilemma: Financial
Globalisation and Monetary Policy
Effectiveness
Georgios Georgiadis and Arnaud Mehl
No. 223
Long-Run Effects in Large Heterogenous
Panel Data Models with CrossSectionally Correlated Errors
Alexander Chudik, Kamiar Mohaddes,
M. Hashem Pesaran and Mehdi Raissi

No. 229
Real Exchange Rate Forecasting and
PPP: This Time the Random Walk Loses
Michele Ca’ Zorzi, Jakub Muck and Michal
Rubaszek

No. 237
Financial Frictions and Policy
Cooperation: A Case with Monopolistic
Banking and Staggered Loan Contracts
Ippei Fujiwara and Yuki Teranishi

No. 230
Do Bank Loans and Local Amenities
Explain Chinese Urban House Prices?
Daisy J. Huang, Charles K. Leung and Baozhi Qu

No. 238
Private News and Monetary Policy
Forward Guidance or (The Expected
Virtue of Ignorance)
Ippei Fujiwara and Yuichiro Waki

No. 231
Evolving Comparative Advantage,
Sectoral Linkages, and Structural
Change
Michael Sposi

No. 224
Pegging the Exchange Rate to Gain
Monetary Policy Credibility
J. Scott Davis and Ippei Fujiwara

No. 232
Global Financial Market Impact of the
Announcement of the ECB’s Extended
Asset Purchase Programme
Georgios Georgiadis and Johannes Gräb

No. 225
The Global Component of Local
Inflation: Revisiting the Empirical
Content of the Global Slack Hypothesis
with Bayesian Methods
Enrique Martínez-García

No. 233
Policy Regime Change Against Chronic
Deflation? Policy Option Under a LongTerm Liquidity Trap
Ippei Fujiwara, Yoshiyuki Nakazono and
Kozo Ueda

No. 226
The Asymmetric Effects of Deflation on
Consumption Spending: Evidence from
the Great Depression
J. Scott Davis

No. 234
Sustainable International Monetary
Policy Cooperation
Ippei Fujiwara, Timothy Kam and Takeki
Sunakawa

No. 227
Bank and Sovereign Risk Feedback
Loops
Aitor Erce

No. 235
Forecasting Local Inflation with Global
Inflation: When Economic Theory Meets
the Facts
Roberto Duncan and Enrique Martínez-García

No. 228
Monitoring the World Business Cycle
Máximo Camacho and Jaime Martínez-Martín

No. 236
Cross-Border Resolution of Global Banks
Ester Faia and Beatrice Weder di Mauro

No. 239
Fair Weather or Foul? The
Macroeconomic Effects of El Niño
Paul Cashin, Kamiar Mohaddes and
Mehdi Raissi
No. 240
Monetary Policy Expectations and
Economic Fluctuations at the Zero
Lower Bound
Rachel Doehr and Enrique Martínez-García
No. 241
What Drives the Global Interest Rate
Ronald A. Ratti and Joaquin L. Vespignani
No. 242
Country-Specific Oil Supply Shocks and
the Global Economy: A Counterfactual
Analysis
Kamiar Mohaddes and M. Hashem Pesaran
No. 243
On the Sustainability of Exchange
Rate Target Zones with Central Parity
Realignments
Enrique Martínez-García
No. 244
A New Monthly Indicator of Global Real
Economic Activity
Francesco Ravazzolo and Joaquin L. Vespignani

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 35

No. 245
Is There a Debt-Threshold Effect on
Output Growth?
Alexander Chudik, Kamiar Mohaddes, M.
Hashem Pesaran and Mehdi Raissi

No. 253
Does the U.S. Current Account Show a
Symmetric Behavior over the Business
Cycle?
Roberto Duncan

No. 246
Testing for a Housing Bubble at the
National and Regional Level: The Case
of Israel
Itamar Caspi

No. 254
Catalytic IMF? A Gross Flows Approach
Aitor Erce and Daniel Riera-Crichton

No. 247
The Cyclicality of (Bilateral) Capital
Inflows and Outflows
J. Scott Davis
No. 248
Multinational Firms’ Entry and
Productivity: Some Aggregate
Implications of Firm-Level Heterogeneity
Silvio Contessi
No. 249
The Impact of Oil Price Shocks on the
U.S. Stock Market: A Note on the Roles
of U.S. and Non-U.S. Oil Production
Wensheng Kang, Ronald A. Ratti
and Joaquin L. Vespignani
No. 250
How False Beliefs About Exchange Rate
Systems Threaten Global Growth and
the Existence of the Eurozone
William R. White
No. 251
Markups and Misallocation with Trade
and Heterogeneous Firms
Ariel Weinberger
No. 252
Simple Models to Understand and
Teach Business Cycle Macroeconomics
for Emerging Market and Developing
Economies
Roberto Duncan

No. 255
Effects of U.S. Quantitative Easing on
Emerging Market Economies
Saroj Bhattarai, Arpita Chatterjee
and Woong Yong Park
No. 256
To Bi, or Not to Bi? Differences in
Spillover Estimates from Bilateral and
Multilateral Multi-Country Models
Georgios Georgiadis
No. 257
Beggar Thy Neighbor or Beggar Thy
Domestic Firms? Evidence from 20002011 Chinese Customs Data
Rasmus Fatum, Runjuan Liu, Jiadong Tong,
Jiayun Xu
No. 258
Risk Sharing in a World Economy with
Uncertainty Shocks
Robert Kollmann
No. 259
Lottery-Related Anomalies: The Role of
Reference-Dependent Preferences
Li An, Huijun Wang, Jian Wang, Jianfeng Yu

36 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Institute Staff, Advisory Board
and Senior Fellows
Institute Director

Board of Advisors

Mark A. Wynne
Vice President and
Associate Director of Research,
Federal Reserve Bank of Dallas

John B. Taylor, Chairman
Senior Fellow, Hoover Institution
Mary and Robert Raymond Professor of
Economics, Stanford University
Undersecretary of the Treasury for
International Affairs, 2001–05

Staff
Alexander Chudik
Senior Research Economist and Advisor
Jian Wang
Senior Research Economist and Advisor
Scott Davis
Senior Research Economist
Enrique Martínez-García
Senior Research Economist
Everett Grant
Research Economist
Michael J. Sposi
Research Economist
Julieta Yung
Research Economist
Janet Koech
Assistant Economist
Valerie Grossman
Research Analyst
Arthur Hinojosa
Research Assistant
Kelvinder Virdi
Research Assistant

Charles R. Bean
Deputy Governor, Bank of England, 2008–14
Executive Director and Chief Economist,
Bank of England, 2000–08
Martin Feldstein
George F. Baker Professor of Economics,
Harvard University
President Emeritus, National Bureau of
Economic Research
Heng Swee Keat
Minister for Education, Parliament of
Singapore
Managing Director, Monetary Authority of
Singapore, 2005–11
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

Horst Köhler
President, Federal Republic of Germany,
2004–10
Managing Director, International Monetary
Fund, 2000–04
Finn Kydland
Jeff Henley Professor of Economics,
University of California, Santa Barbara
Recipient, 2004 Nobel Memorial Prize in
Economic Sciences
Guillermo Ortiz
Governor, Bank of Mexico, 1998–2009
Kenneth S. Rogoff
Thomas D. Cabot Professor of Public Policy,
Harvard University
Director of Research, International Monetary
Fund, 2001–03
Masaaki Shirakawa
Director and Vice Chairman, Bank for
International Settlements
Governor, Bank of Japan, 2008–13
Professor, School of Government, Kyoto
University, 2006–08
William White
Head of the Monetary and Economic
Department, Bank for International
Settlements, 1995–2008

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 37

Senior Fellows

New Staff at the Institute

Michael Bordo
Professor of Economics, Rutgers University
Research Associate, National Bureau of
Economic Research

Everett Grant
Research Economist
Grant joined the Globalization and Monetary Policy Institute of the Federal Re-

Mario Crucini
Professor of Economics,
Vanderbilt University
Research Associate, National Bureau of
Economic Research
Michael B. Devereux
Professor of Economics,
University of British Columbia
Visiting Scholar, International Monetary
Fund

serve Bank of Dallas in 2015. His research
interests include international economics, macroeconomics, economic crises,
finance and computational economics.
His recent research has focused on crosscountry economic crisis contagion, the drivers of exchange rates
and the evolution of the wage premium paid to financial sector
workers. Before joining the Bank, Grant spent six years working
at Bridgewater Associates, a hedge fund focused on global-macro
investment strategies. He has a BA in mathematics and economics
from Colgate University and an MA and a PhD in economics from

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

the University of Virginia.
Arthur Hinojosa
Research Assistant
Hinojosa has been a research assistant for

Karen Lewis
Joseph and Ida Sondheimer Professor of
International Economics and Finance,
Wharton School, University of Pennsylvania
Codirector, Weiss Center for International
Financial Research, 2005–11
Francis E. Warnock
James C. Wheat Jr. Professor of Business
Administration, Darden Graduate School
of Business, University of Virginia
Research Associate, National Bureau of
Economic Research
Research Associate, Institute for International
Integration Studies, Trinity College Dublin

the Globalization and Monetary Policy
Institute since June 2015. Hinojosa served
four years’ active duty in the United
States Marine Corps. He graduated from
the University of Arkansas in 2014 with a
BSBA in business economics with minors
in finance and mathematics. Hinojosa received an MA in economics in 2015 from the University of Texas at Austin.
Kelvinder Virdi
Research Assistant
Virdi has been a research assistant for the
Globalization and Monetary Policy Institute since July 2015. He graduated from
the University of California, San Diego, in
2015 with a BA in economics. He is originally from Santa Clara, California.

38 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2015 Annual Report

Research Associates
Raphael Auer
Swiss National Bank

Richard Dennis
University of Glasgow

Simone Auer
Swiss National Bank

Roberto Duncan
Ohio University

Chikako Baba
International Monetary Fund

Peter Egger
Eidgenössische Technische Hochschule
Zürich

Pierpaolo Benigno
LUISS Guido Carli
Martin Berka
University of Auckland Business School

Aitor Erce
Bank of Spain and European Stability
Mechanism

Saroj Bhattarai
University of Texas at Austin

Ester Faia
Goethe University Frankfurt

Javier Bianchi
Federal Reserve Bank of Minneapolis

Rasmus Fatum
University of Alberta School of Business

Claudio Borio
Bank for International Settlements

Andrew Filardo
Bank for International Settlements

Hafedh Bouakez
HEC Montréal

Andreas Fischer
Swiss National Bank

Matthieu Bussière
Banque de France

Marcel Fratzscher
German Institute for Economic Research

Matteo Cacciatore
HEC Montréal

Ippei Fujiwara
Australian National University

Alessandro Calza
European Central Bank

Pedro Gete
Georgetown University

Máximo Camacho*
Universidad de Murcia

Bill Gruben
Texas A&M International University

Michele Ca’Zorzi*
European Central Bank

Sophie Guilloux-Nefussi
Bank of France

Bo Chen
Shanghai University of Finance and
Economics

Ping He
Tsinghua University

Hongyi Chen
Hong Kong Institute for Monetary Research
Yin-Wong Cheung
University of California, Santa Cruz/
City University of Hong Kong

Gee Hee Hong
International Monetary Fund
Yi Huang
The Graduate Institute, Geneva
Erasmus Kersting
Villanova University

C.Y. Choi
University of Texas at Arlington

Enisse Kharroubi
Bank for International Settlements

Silvio Contessi*
Monash Business School

Mina Kim
Bureau of Labor Statistics

Dudley Cooke
University of Exeter Business School

Robert Kollmann
European Centre for Advanced Research in
Economics and Statistics

Globalization and Monetary Policy Institute 2015 Annual Report • FEDERAL RESERVE BANK OF DALLAS 39

Charles Ka Yui Leung
City University of Hong Kong

Katheryn Russ
University of California, Davis

Tomasz Wieladek
Bank of England

Nan Li
International Monetary Fund

Filipa Sá
King’s College London

Hakan Yilmazkuday
Florida International University

Shu Lin
Fudan University

Raphael Schoenle
Brandeis University

Jianfeng Yu
University of Minnesota

Tuan Anh Luong
Shanghai University of Finance and
Economics

Giulia Sestieri
Banque de France

Zhi Yu
Shanghai University of Finance and
Economics

Julien Martin
Université du Québec à Montréal
Jaime Martínez-Martín*
Bank of Spain
Césaire Meh
Bank of Canada
Arnaud Mehl
European Central Bank
Fabio Milani
University of California, Irvine
Kamiar Mohaddes*
University of Cambridge
Philippe Moutot
European Central Bank
Daniel Murphy
University of Virginia
Piyusha Mutreja
Syracuse University
Deokwoo Nam
Hanyang University
Jair Ojeda*
Banco de la República (Colombia’s Central
Bank)
Dimitra Petropoulou
University of Sussex
Vincenzo Quadrini
University of Southern California
Mehdi Raissi*
International Monetary Fund
Attila Rátfai
Central European University
Kim Ruhl
NYU Stern School of Business

Etsuro Shioji
Hitotsubashi University
Shigenori Shiratsuka
Bank of Japan
Ina Simonovska
University of California, Davis
L. Vanessa Smith
University of York
Jens Søndergaard
Capital Strategy Research
Bent E. Sorensen
University of Houston
Heiwai Tang
Johns Hopkins University
Cédric Tille
The Graduate Institute, Geneva
Ben A.R. Tomlin
Bank of Canada
Kozo Ueda
Waseda University, Tokyo
Eric van Wincoop
University of Virginia
Joaquin Vespignani*
University of Tasmania
Giovanni Vitale
European Central Bank
Xiao Wang
University of North Dakota
Yong Wang
Hong Kong University of Science and
Technology
Ariel Weinberger*
University of Oklahoma

Yu Yuan
University of Iowa
*New to the institute in 2015.

Full text of Annual Report of the Globalization and Monetary Policy Institute : 2015 Annual Report

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