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Globalization and
Monetary Policy Institute

Federal Reserve
Bank of Dallas

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 1

Letter from the President


Oil-Rich Venezuela Tips Toward Hyperinflation


Q&A with Robert Kaplan and Lord Mervyn King


The Potential Impact of Decentralized Virtual
Currency on Monetary Policy


Interactions Between Exchange Rates and
Import Prices: What Have We Learned?


Conference on International Economics


Summary of Activities 2016


Institute Working Papers Issued in 2016


Institute Staff and Senior Fellows


Research Associates


Published by the Federal Reserve Bank of Dallas, April 2017. 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, 2200 N. Pearl St., Dallas, TX 75201. This
publication is available online at

2 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Letter from the President


n last year’s letter, I wrote about
the complexities of being a central banker at this point in our
history. Developments over the

course of 2016 reinforced that this is, indeed,
a complex time.
At the beginning of last year, Federal
Open Market Committee (FOMC) participants (including me), on average, expected
that we would raise interest rates four times
during 2016. However, unexpected financial
turmoil in China in the first quarter led to
a rapid tightening in financial conditions
globally that threatened to materially slow
the U.S. economy. First- and second-quarter
GDP readings were weak due to the financial
turmoil as well as a deceleration in inventory
builds by U.S. companies. The surprising June
U.K. referendum result on Brexit also had an
impact on the Fed’s risk-management stance.
As a result, FOMC participants revised down
their outlook for rate increases, and the Fed
ultimately raised rates once in 2016.
Due to the underlying strength of the
U.S. consumer, U.S. gross domestic product
(GDP) growth rebounded in the second half
of 2016. Our economists at the Dallas Fed are
currently forecasting in excess of 2 percent
GDP growth in 2017. This is sluggish growth

Due to the underlying strength of the U.S.
consumer, U.S. gross domestic product
(GDP) growth rebounded in the second
half of 2016.

by historical standards, but it should be sufficient to allow for further removal of labor
market slack and steady progress in achieving the Fed’s 2 percent inflation goal.
International Focus
In 2016, I made a number of foreign trips
to better understand some of the key issues
confronting the global economy. I visited
London in April and met with business and
government leaders to get a better read on
the Brexit debate. In August, I spent a week
in China meeting with officials and business
leaders to deepen my understanding of the
transition that is underway there and the

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 3

challenges that Chinese policymakers are

to do research that deepens our understand-


ing of the linkages between the U.S., Texas

China is the world’s second-largest

and Mexico.

economy and has, in recent years, accounted
for about a third of global growth. The coun-

The Globalization Institute

try is challenged by high levels of overcapaci-

The Globalization Institute plays a key role

ty in state-owned enterprises, high and rising

in advancing our understanding of inter-

levels of debt, and a growing issue of capital

national economies and global economic

outflows despite very strong capital controls.

relationships. The core business product of

As a result, our team at the Dallas Fed contin-

the institute is its working paper series. These

ues to closely monitor Chinese conditions. It

papers are intended for eventual publication

is our view that the world will have to become in peer-reviewed journals, which is a key
accustomed to lower levels of Chinese GDP
growth in the years ahead and that China’s

metric of research success.
The institute also has an important

challenges will create increased vulnerability

public outreach mission. Through our Global

to financial turmoil, which could, in turn,

Perspectives speaker series, the Dallas Fed

have an impact on global financial condi-

hosted a Trilateral Conference in February


that featured Governor Agustín Carstens

We had several visits during the year

of Banco de México and Governor Ste-

with senior officials of the Banco de México

phen Poloz of the Bank of Canada. We also

as well as other senior government officials

hosted former U.S. Treasury secretaries Hank

and business leaders. There has long existed

Paulson, Robert Rubin and Larry Summers,

a very strong relationship between the Banco

Harvard Business School Dean Nitin Nohria

de México and the Federal Reserve Bank of

and former Bank of England Governor Lord

Dallas. The Eleventh District—Texas, north-

Mervyn King. The Global Perspectives series

ern Louisiana and southern New Mexico—

will be a key part of our outreach initiative at

has deep cultural and economic ties with

the Dallas Fed in the coming years.

Mexico is Texas’ top trading partner.

The world’s economies and financial
markets are more interconnected than ever

In 2016, Texas exports to Mexico were $92.7

before. The Federal Reserve Bank of Dallas’

billion, and it is estimated that these exports

Globalization Institute will continue to do

supported approximately 1 million jobs in

comprehensive research that explores these

Texas. Dallas Fed economists believe that

linkages. Our thought leadership and public

the trading relationship with Mexico has

outreach efforts are intended to provide valu-

helped various industries in Texas and the

able insight for policymakers and business

U.S. gain global competitiveness, and this

and community leaders as well as the general

relationship has helped create jobs in the


U.S. In addition, Texas border cities have
benefited tremendously from the increasing
U.S.–Mexico economic integration—leading
to job gains, primarily in service sectors, that
have resulted in higher wages and improved
standards of living for many Texans. The Dallas Fed’s Globalization Institute will continue

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

Dallas Fed
economists believe
that the trading
relationship with
Mexico has helped
various industries
in Texas and the
U.S. gain global
competitiveness, and
this relationship has
helped create jobs in
the U.S.

4 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Oil-Rich Venezuela Tips Toward Hyperinflation


By Janet Koech

enezuela, once the wealthi-

the Organization of the Petroleum Exporting

est nation in Latin America, is

Countries (OPEC).2 These foreign exchange

suffering a dramatic reversal of

earnings are, in turn, used to finance imports.

fortunes and the worst eco-

Venezuela imports more than 70 percent of

nomic crisis in its history. Though the nation

its food, and dwindling foreign exchange

has crude oil reserves of close to 300 billion

earnings are creating severe shortages. Eco-

barrels—the world’s largest such holdings—

nomic output declined on a year-over-year

many Venezuelans go without the most basic

basis for eight consecutive quarters through

goods in an economy plagued by chronic

the end of 2015, the latest year for which data


are available (Chart 1). Growth and infla-


The economic collapse—the product
of falling oil prices, currency and capital
controls, and mismanagement that includes

tion outlooks continue deteriorating as the
economic crisis deepens.
Venezuela’s inflation is the highest in

printing money to finance government op-

the world. The International Monetary Fund

erations—has brought Venezuela to the brink

(IMF) anticipated a 476 percent annual price

of hyperinflation.

increase in 2016 and forecasts inflation of

Oil accounts for more than 90 percent of

1,660 percent in 2017. Official government

export income in Venezuela and is the largest

data show a 12-month inflation rate of 180

source of government revenue, according to

percent in December 2015 (Chart 2).3
The country’s economic and monetary
developments evoke memories of Zimbabwe
at the start of its hyperinflation and subse-

Chart 1
Venezuela's Economy on the Decline Since 2014

quent collapse in 2007–09 as well as periods

Percent, year/year

of persistently high inflation in Latin America
in the 1990s. This persistently high inflation

Real GDP growth

morphed into hyperinflation—defined as


inflation exceeding 50 percent per month—in

Argentina, Bolivia, Brazil, Nicaragua and
Peru. Other countries—Mexico and Chile—


managed to avoid hyperinflation.4
Venezuela’s central bank published


economic statistics in January 2016 for the
first time in a year, confirming that annual


inflation had reached triple-digit levels, with

anecdotal evidence suggesting that prices
have substantially increased since then. The










’09 ’10

SOURCES: Banco Central de Venezuela; Haver Analytics.






government has increasingly relied on its
central bank to print money to finance its
spending and fill the fiscal gap created by

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 5

Chart 2
Venezuela's Inflation Skyrockets

diminished oil revenues. Rates in the black
market, through which much of the economy

Percent, year/year

operates, indicate much steeper currency




Lifeblood of Oil


Venezuela’s 352,144 square miles on


South America’s northern coast—wedged

Consumer price inflation


between Colombia, Brazil and Guyana—is


roughly twice the size of California. The
country has a population of 30 million and


is rich in natural resources, including gold,


minerals and crude oil.


The discovery of oil in 1914 transformed


Venezuela’s agriculture-dependent economy.

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

By the mid-1920s, oil revenue supplied twothirds of the state’s income and was respon-

SOURCES: Banco Central de Venezuela; International Monetary Fund World Economic
Outlook; Haver Analytics.

sible for more than 90 percent of exports. Oil
wealth made it possible for the government
to build a network of roads and infrastructure
and expand its agricultural and manufacturing sectors. As the world struggled with the

ing Venezuela, formed OPEC in 1960.
The oil embargo of 1973 drove up world

Great Depression in the 1930s, the Venezu-

energy prices again. Venezuelan govern-

elan bolivar appreciated nearly 70 percent

ment revenue quadrupled from 1972 to 1974,

against the U.S. dollar as oil revenue flowed

spawning a splurge of public and private


consumption.6 The government increased


The strong bolivar made coffee and

spending and nationalized the oil and steel

cocoa exports more expensive and less com-

industries. When oil prices began to slip

petitive, impacting the nation’s agricultural

after 1977, Venezuela’s growth slowed as

sector. At the same time, it was a boon for

interest rates soared, ballooning the nation’s

Venezuelan consumers, who could suddenly

external debt to 61 percent of GDP in 1985

afford to import just about everything from

from 13 percent in 1976. Oil revenue could

food to clothes and electronics. Imported

no longer sustain a range of government

goods became commonplace. The strong

subsidies, price controls and public institu-

currency was politically popular, setting off a

tions. Moreover, widespread corruption and

national spending spree.

political patronage flourished at the expense

Good times didn’t last. World War II

of economic development. These problems

disrupted global trade, bringing product

intensified when oil prices declined further

shortages and economic disarray. Venezu-

in the mid-1980s, leading to slow growth,

ela’s economy has since largely mirrored

high inflation and a diminished standard of

oil-price volatility; robust postwar growth


boosted global demand for oil, lifting prices

Expanding energy demand from emerg-

higher. Geopolitical conflicts in the Middle

ing economies, particularly China, drove an

East in the early 1950s further supported oil

oil-price recovery in the early 2000s. Ven-

prices, diverting more funds to Venezuela. By

ezuela’s oil revenue rose to levels not seen

the late 1950s, however, oil prices had drifted

in two decades. The government channeled

lower as Middle East production surged. To

the proceeds to expand social-spending

combat production and price swings, the

programs, often at the expense of reinvest-

world’s main oil-exporting countries, includ-

ment in exploration and production by the

As the world
struggled with the
Great Depression
in the 1930s, the
Venezuelan bolivar
appreciated nearly
70 percent against
the U.S. dollar as oil
revenue flowed in.

6 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

state-owned oil and gas company, Petróleos

ised to make 21st century socialism possible

de Venezuela.

through government spending. From 1999
to 2014, the government earned more than

Volatile Political History

$1.36 trillion from oil—more than 13 times

Venezuela’s political history has a recur-

economic crisis is
marked by a chronic
lack of currency,
food and other
basics, exacerbated
by long-standing
price and foreignexchange controls.

the amount of the (inflation-adjusted) infu-

ring pattern: government overspending when

sion of aid under the Marshall Plan, which

oil prices are high with little saving for lean

allowed Europe to recover from World War

times. During the 1950s, dictator Marcos

II. Venezuela’s expenditures briefly aided the

Pérez Jiménez promised to modernize the

poor until the economy collapsed yet again

country. His government instead became so

when oil prices fell in mid-2014.10
Current President Nicolás Maduro took

corrupt and wasteful that one of his infrastructure projects—a nine-mile road linking

over following Chávez’s death in 2013. Mad-

the capital, Caracas, to the coast—cost $5.6

uro has struggled to maintain his mentor’s

million per mile (or $53 million per mile in

charisma and popular support amid mount-

2015 dollars) and was referred to as the “cost-

ing frustration over widespread shortages.

liest freeway in the world.”


Price Controls and Shortages

In the 1970s, President Carlos Andrés
Pérez also promised to transform Venezuela

Venezuela’s economic crisis is marked

into a developed nation. However, at the

by a chronic lack of currency, food and other

height of the oil boom, in 1974, he ordered

basics, exacerbated by long-standing price

the hiring of attendants and operators for

and foreign-exchange controls. These restric-

every bathroom and elevator in government

tions and the lack of investment in basic

buildings. The country ended up broke and

infrastructure have eroded Venezuela’s pro-

indebted when oil prices fell a decade later.


Hugo Chávez, the nation’s 64th presi-

ductive capacity, making the country overly
dependent on imports for its consumption.

dent and leader of Venezuela’s socialist

Yet, foreign currency controls have hindered

movement, the Bolivarian Revolution, prom-

the ability to pay for imports. Making matters
worse, U.S. dollars have been in short supply,
the result of an oil-price collapse, which saw

Chart 3
Scarcity Index Shows Venezuela Running Low
on Store Supplies

prices fall from $100 per barrel in mid-2014
to as low as $30 in early 2016 before moving

Scarcity index

Percent, year/year

CPI inflation


permarket shelves in January 2014, according


to the “scarcity index,” a since-discontinued


central bank measure of the share of absent










pers’ daily struggle is evident in the long lines
to purchase limited quantities of hard-tofind necessities. Government-imposed price


controls make it difficult to produce and earn


a profit, so while supermarket shelves are


food and household items (Chart 3). Shop-



Nearly 1 in 3 goods was missing from su-




toward $50 at year-end.


NOTE: The scarcity index measures the percentage of food and household items missing
from store shelves. Venezuela's central bank stopped reporting scarcity index data in
January 2014 and inflation data in December 2015. CPI stands for consumer price index, a
measure of the weighted average prices of a basket of goods and services.
SOURCES: Banco Central de Venezuela; Haver Analytics.

empty, a thriving black market has developed. In March 2016, goods were more than
17 times costlier on the black market than on
the conventional market.11 By August 2016,
some goods, including staples, cost 100 times
the official price. Milk sold for 7,000 bolivars—more than $700 at the official exchange

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 7

Chart 4
Imports to Venezuela Decline in Recent Years

rate—or about $7 if one had U.S. dollars, then
worth a bit more than 1,000 bolivars to the

U.S. dollars (billions)

dollar on the black market. However, many
residents have neither the bolivars to afford


black-market prices nor the U.S. dollars to


exchange at the favorable rates.12
Government-imposed controls restrict


imports by limiting dollars available to


private-sector companies. The value of im-


ported goods fell 27 percent in third quarter


2015 from the prior-year level—and has
declined 47 percent since oil prices peaked


in 2012 (Chart 4). Price controls and subsi-


dies ensured that many products were much


cheaper in Venezuela than in neighboring


Colombia, making smuggling to Colombia a


profitable business and further exacerbating




SOURCES: Banco Central de Venezuela; Haver Analytics.

shortages. More recently, however, the lack of
basic goods combined with rising prices has
driven Venezuelans to illegally smuggle these
products from Colombia.

arbitrage. For instance, at the beginning of
2017, a cup of coffee at a bakery cost 1,100

Capital and Currency Controls
The Venezuelan government has main-

bolivars—equivalent to $110 or $1.63, depending on which of the two exchange rates

tained a system of currency controls and a

was applied. The dollar-denominated price

fixed (but adjustable) official exchange rate

is much cheaper if the black-market rate is

since 2003. The government makes dollars



available at multiple exchange rates, allowing

Venezuela has experienced a series of

some companies and individuals to access

currency devaluations associated with its

dollars at preferential rates.

surging inflation. In 2007, the government

There have been two official exchange

introduced a new currency, the bolivar fuerte

rates since March 2016, when the govern-

(the strong bolivar)—the old bolivar with

ment announced its dual foreign-exchange-

three trailing zeroes removed. Although

rate system. The first rate, known as DIPRO,

the devaluation made everyday transac-

replaced the CENCOEX rate and is set at 10

tions easier, it failed to address the country’s

bolivars per $1. This fixed-but-adjustable rate

underlying lack of economic discipline and

is used for imports of government-authorized

policies that undermined sustainable eco-

priority goods, including food, medicine and

nomic growth.

raw materials for production. The second

The government devalued the currency

rate, DICOM, governs transactions not

in January 2010, from 2.15 bolivars to 2.6

covered by the DIPRO rate and is allowed

bolivars per $1 for an assortment of food and

to “fluctuate according to the country’s

health care imports and to 4.3 bolivars for

economic dynamics.” The rate had an initial

other imports such as cars, petrochemicals

opening of 206.5 bolivars per $1 on March 7,

and electronics. Two years later, the currency

2016, and was priced at 686.6 bolivars per $1

was devalued again, to 4.3 bolivars for both

on Jan. 26, 2017. Venezuela previously had a

classes of goods. Once more, in February

three-tiered official currency-control system.

2013, the bolivar was devalued to 6.3 bolivars

This multiple-exchange-rate arrangement creates numerous opportunities for


amid rising budget deficits. Most recently,
in February 2016, President Maduro cut the




8 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

half of the 20th century accompanied the

Chart 5
Venezuela Currency Depreciates Sharply on Black Market
Bolivar/U.S. dollar

Latin American bouts of rapid currency

Bolivar/U.S. dollar

nine of the most populous countries in the
region shows that inflation averaged nearly


Black-market exchange rate



160 percent per year in the 1980s and 235
percent per year in the first half of the 1990s.17



Some countries experienced hyperinflation. Since the mid-1990s, however, inflation



rates have universally declined, mostly to the
single digits.



Large budget deficits financed by money
creation are characteristic of high-inflation


depreciation. A measure of price changes in

Official exchange rate

episodes. Underlying causes include declining export earnings due to falling commodity


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SOURCES: Federal Reserve Board; DolarToday; Haver Analytics.

prices, government overspending on programs not financed through taxes or borrowing, and a lack of central bank independence
resulting in monetization of debt. Overexpansionary fiscal and monetary policies are

official exchange rate to 10 bolivars per $1.
Chronic shortages have inflated the

economic situation
is increasingly
reminiscent of the
beginning of highinflation episodes
elsewhere in Latin
America and in

generally followed by wage and price controls
that create bottlenecks and shortages, result-

black-market value of the bolivar, which

ing in currency overvaluation, capital flight,

traded upward of 3,600 per $1 in January

declining tax revenues, increasing external

2017—far above official exchange rates

debt and accelerating inflation.

(Chart 5). The largest bill in circulation in

In Argentina, Brazil and Bolivia, hyper-

November 2016—the 100 bolivar note—was

inflation culminated in a lengthy deteriora-

worth $10 at the official exchange rate and

tion in the countries’ fiscal accounts and

pennies at the black-market rate. The bolivar,

increased fragility in the financial system due

its purchasing power evaporating, has left

to a regional debt crisis and a tendency to

Venezuelans carrying increasingly large wads

accept high inflation. Argentina experienced

of cash to purchase everyday items.

repeated cycles of hyperinflation followed

A large cup of coffee, costing 1,100

by attempts at stabilization. Its stabilization

bolivars, required 550 of the lowest, 2-bo-

program and emergence from debt default

livar-denomination currency and 11 of the

included the elimination of the budget

100-bolivar notes at the beginning of the

deficit, privatization and monetary reform

year. Newly denominated currency—includ-

that included a new currency whose value

ing 20,000-bolivar notes—was rolled out in

was rigidly fixed against the U.S. dollar.18 The

mid-January.16 With the IMF forecasting that

government, however, defaulted on its debt

inflation will reach 1,660 percent in 2017 and

during this high-inflation period.

2,880 percent in 2018, purchasing power will
quickly erode further.

In 1994, Brazil implemented its “real
plan” that successfully ended more than
a decade of chronic inflation. The plan

Inflation, Price Stabilization

included the introduction of a new currency,

Venezuela’s economic situation is

the real, combined with fiscal and monetary

increasingly reminiscent of the beginning of

policies that restricted government expenses

high-inflation episodes elsewhere in Latin

and raised interest rates.

America and in Zimbabwe (Chart 6). Periods
of economic and financial crisis in the latter

Bolivia set on the path to hyperinflation
because of an overvalued currency, a large

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 9

fiscal deficit and external debt, and an abrupt

a 1994 constitutional amendment, Banco de

reversal of foreign capital inflows. Mexico

México was granted autonomy under which

and Chile endured periods of high inflation

it has set annual inflation targets since 1996.

before successfully reducing price increases

Average annual inflation fell to the single dig-

that could have led to hyperinflation.

its in 2000, where it has remained. Similarly,

Mexico maintained a regulated floating-

Chile adopted an inflation target in 1990,

rate regime from 1985 to 1991, followed by

which contributed to gradually declining

an exchange rate band until late 1994. That

price increases.

year, the band became unsustainable amid

In Venezuela, the government has

market instability and a speculative attack

printed more currency to finance its spend-

on the Mexican central bank’s international

ing. These factors have produced the highest

reserves. Additionally, a leading presidential

inflation in the world.

candidate was assassinated, a rebel uprising
Dealing with the Economic Crisis

in southern Mexico was renewed and U.S.
interest rates rose.

Venezuela’s economic crisis is most

In response, Mexico’s foreign exchange

directly linked to the mismanagement of its

commission adopted a floating currency—

oil wealth—a combination of corruption, am-

which remains in place—prompting a sharp

bitious social spending and a lack of savings

peso devaluation and financial crisis. Under

or investment in the oil industry. The govern-

Chart 6
How Venezuela's Inflation Compares with Other High-Inflation Countries
Percent, year/year

Percent, year/year






















Percent, year/year














Percent, year/year

Percent, year/year







































Percent, year/year

















NOTES: The charts plot the evolution of consumer price index (CPI) inflation over six years (24 quarters) for a sample of high-inflation countries from the time year-over-year inflation first
exceeded 80 percent. The black solid line is the evolution of Venezuela's inflation in 2015, and the dashed lines are estimates of Venezuela's annual CPI inflation for 2016–20 from the
International Monetary Fund.
SOURCES: National statistical offices; International Monetary Fund; Haver Analytics; author’s calculations.

10 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

ment has been repeatedly caught unprepared

weighing stacks of bills to pay for basic items

when oil prices have collapsed. The quantity

instead of counting them individually before

theory of money indicates that sustained

the government introduced new, higher-

high growth rates of a nation’s money stock

denominated currency in January 2017.

in excess of its production of goods and

To compound the
currency crunch,
the Venezuelan
announced on
Dec. 12, 2016, that
it would withdraw
all 100-bolivar
bank notes from
circulation, giving
Venezuelans 10 days
to exchange the old
bills for new ones at
the central bank.

The larger bills offer only temporal relief,

services eventually produces high and rising

not a solution to the inflationary distortions.

inflation rates. This is what economist Milton

Indeed, other countries encountering a

Friedman referred to when he said, “Infla-

similar situation have found that larger-de-

tion is always and everywhere a monetary

nominated currency often leads to episodes


of even higher inflation or hyperinflation,

Venezuela responded with price

as was the case in Austria, Germany and

controls. Such controls inevitably lead to

Hungary after World War I and Zimbabwe

shortages because they encourage demand

in 2008. The Zimbabwe government issued

at a price lower than what goods would

the world’s greatest denomination, the 100

otherwise cost. Profit margins get squeezed

trillion-dollar bill, shortly before the currency

and shortages worsen when foreign exchange was abandoned in favor of the U.S. dollar in
earnings, used to pay for imports, decline.

To compound the currency crunch, the

Government-imposed currency and capital
controls also limit access to foreign currency

Venezuelan government announced on Dec.

for imports of intermediate goods used in

12, 2016, that it would withdraw all 100-bo-

production, triggering additional shortages.

livar bank notes from circulation, giving

A thriving black market emerges for the

Venezuelans 10 days to exchange the old bills

trade of goods and currency, though at much

for new ones at the central bank. President

higher than officially set rates.

Maduro called the 100-bolivar bills instru-

Consumer prices increased at an

ments of an “economic coup” to destabilize

average annual rate of 40 percent in 2013,

his government and said that the move

climbing to 62 percent in 2014. The pace of

would strike a blow at “international mafias”

increase accelerated through 2015, reaching

that hoarded cash. Colombian shoppers

122 percent. By December 2015, year-over-

and organized criminals were buying up the

year inflation was at 180 percent. Although

100-bolivar bills to go shopping in Venezuela,

the government stopped publishing infla-

he said, worsening the shortages of basic

tion data more than a year ago, evidence is

goods. He ordered the closing of the border

mounting that inflation has worsened.

with Colombia to counter “bolivar smug-

In the absence of official statistics, some

The withdrawal of the nation’s largest-

analysts now track the prices of specific
items to get a sense of price increases. For

denomination note came well before

instance, Bloomberg News’ Bloomberg Café

replacement bills were available. Maduro

Con Leche Inflation Index tracks the price

backtracked on his decision after a lack of

of a cup of coffee at a bakery in Caracas. The

fresh banknotes sparked unrest. The govern-

price soared from 450 bolivars a cup to 1,100

ment rolled out new replacement banknotes

bolivars over a span of 22 weeks ended Jan.

ranging from 500 to 20,000 bolivars in Janu-

18, 2017—an annual inflation rate of 768


One U.S. dollar brought 3,684 bolivars
on the black market on Jan. 25, 2017, up from

Cautionary Tale
Typically, adoption of an independent

960 bolivars 12 months earlier and from

central bank has stabilized chronic inflation

185 bolivars two years before. This steep

episodes. It is part of a strategy that often

devaluation reflects a loss of confidence in

includes an alteration in the fiscal regime

the government. Venezuelans resorted to

and the institution of a credible exchange-

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 11

Chart 7
Money Supply, Inflation Substantially Increase in Tandem

rate stabilization mechanism. The adoption
of the U.S. dollar to replace the local currency

Percent, year/year

immediately ended Zimbabwe’s hyperinflation, while Latin American countries used a

CPI inflation


combination of stabilization programs to rein


in inflation.


So far, Venezuela’s measures to deal with
its economic crisis have been lacking. Apart


from a rise in the price of heavily subsidized


gasoline and a devaluation of the essential-


goods exchange rate (from 6.3 to 10 bolivars


per U.S. dollar in February 2016), the ad-


ministration continues to print money while

M3 money supply growth


maintaining currency and price controls.21


The country’s money supply increased


458 percent from the beginning of 2015 to


January 2017, sending prices sharply higher










NOTES: M3 is the broadest definition of monetary assets available in an economy. CPI
stands for consumer price index, a measure of the weighted average prices of a basket of
goods and services.
SOURCES: Banco Central de Venezuela; Haver Analytics.

(Chart 7). To keep up with the rising prices
and erosion of the currency’s value, Maduro
raised the minimum wage 50 percent in
January 2017, the fifth increase in a year. He
also appointed a political supporter to run
the central bank.
Through the mounting crisis, Venezuela
confronts the difficult task of shoring up its
economy at a time when the conditions that
previously buoyed growth—stronger global
growth and higher commodity prices—are
less supportive. A recent oil-price uptick has
provided little relief. The larger-denominated
currency will ease the difficulty of simple
transactions, but it doesn’t solve the underlying causes of inflation. As the citizens
struggle to make ends meet, they are left to
wonder how much worse economic conditions can get and what kind of future their
resource-rich country faces.
Resolution of Venezuela’s situation
remains elusive, though the crisis is a manifestation of how corruption, mismanagement
and an addiction to oil can quickly erode the
fortunes of a country.
Venezuela is the country with the world’s most proven
crude oil reserves, according to the 2015 Annual Statistical
Bulletin by the Organization of the Petroleum Exporting
Countries (OPEC).
Venezuela’s oil revenues accounted for about 95 percent of
export earnings in 2015. See note 1.

Prior to the January 2016 data release, no data were issued for more than a year.
“The Monetary Dynamics of Hyperinflation,” by Phillip
Cagan, in Studies in the Quantity Theory of Money, Milton
Friedman, ed., Chicago: University of Chicago Press, 1956,
pp. 25–117.
See Crude Nation: How Oil Riches Ruined Venezuela, by
Raúl Gallegos, Lincoln, Neb.: Potomac Books, University of
Nebraska Press, 2016, p. 60.
“Inflation Dynamics in Latin America,” by Carlos Capistrán
and Manuel Ramos-Francia, Contemporary Economic Policy,
vol. 27, no. 3, pp. 349–62.
Venezuela’s annual consumer price inflation reached 100
percent in 1996, and its standard of living declined to 1960
levels—21 percent below its 1977 peak.
See note 5, p. 67.
See note 5, p. 73.
See note 5, p. 15.
“A Day Out at the (Black) Market in Venezuela,” by Scott
Tong, American Public Media, March 23, 2016, www.
“Venezuela: Where Flour, Pasta and Milk Can Cost a
Month’s Pay,” by Flora Charner and Rachel Clarke, CNN,
Aug. 2, 2016,
In 2003, President Hugo Chávez imposed currency controls
to stem capital flight after an oil workers’ strike. At the
time, $1 could fetch 1.6 Venezuelan bolivars. Today, that
same dollar can buy 172 bolivars at the official government
exchange rate, a devaluation of more than 99 percent.

As of Jan. 6, 2017, $1 was worth 10 bolivars at the DIPRO
rate, 675.4 bolivars at the DICOM rate and 3,241 bolivars on
the black market.
Data are from DolarToday,
“2.75 Million New Banknotes Enter into Circulation in Venezuela,” by Jeanette Charles,, Jan.
18, 2017, Since
Jan. 16, 2016, Venezuela has issued banknotes in denominations of 500, 5,000, and 20,000. In all, six new banknotes
will be issued, with 1,000, 2,000 and 10,000 denominations
expected at an as-yet-undisclosed time.
“Inflation in Latin America: A New Era?” speech by Ben
S. Bernanke, Federal Reserve Board of Governors, Feb. 11,
2005. The nine countries are Mexico, Colombia, Venezuela,
Brazil, Bolivia, Uruguay, Peru, Argentina and Chile. Inflation
is weighted by each country’s gross domestic product.
“Stopping Three Big Inflations: Argentina, Brazil, and
Peru,” by Miguel A. Kiguel and Nissan Liviatan in Reform,
Recovery, and Growth: Latin America and the Middle East,
Rudiger Dornbusch and Sebastian Edwards, eds., Chicago:
University of Chicago Press, 1995, pp. 369–414.
See the Venezuelan Café Con Leche Index, Bloomberg,
“Hyperinflation in Zimbabwe,” by Janet Koech, Globalization and Monetary Policy Institute 2011 Annual Report,
Federal Reserve Bank of Dallas, 2012, pp. 2–12.
The government increased the price of gasoline to 6
bolivars a liter from 9.7 centavos in February 2016. This is a
60-fold increase and equivalent to about 11 U.S. cents per
gallon, but prices remain one of the cheapest in the world.

12 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Q&A with Robert Kaplan and
Lord Mervyn King

Robert Kaplan:
Lord King thank you for being here. We
really appreciate it. I will start with this,
why did you become a central banker?
Lord Mervyn King:
By accident. I was an academic and
I had taught in the states. I went back to
London to the London School of Economics
and I was asked to be a nonexecutive director
of the Bank of England, which is a part-time
position and I took that on.
And after six months, the then-chief
economist decided to leave and move on to
something else. So, the governor at the time,
Robin Leigh-Pemberton, had to appoint a
successor and he said, “Oh, do I really have to
have an economist?” He wasn’t very enthusiastic about it, and in light of subsequent
events, you can see why.
But he was told he had to have one. So,
he then thought very hard about it. At the
Bank, there was a family sports day once a
year and as a nonexecutive director, I had
been invited to play in the governor’s tennis
match. And it was the best performance I had
ever put on court to that date and indeed I

I was about to leave again when
the Bank of England was made
independent by the incoming
Labour government in 1997.

regret to say, subsequently.
I hit the ball really hard and the ground
shots went in. So, he was so impressed and
he knew I could play cricket as well, so he
told me if he had to have an economist, he
wanted one who could play cricket and tennis. So, that’s how I was offered the job. I had
no intention of staying. I took it for two to
three years with every intention of going back
to academic life, but each time I tried to go
back, something happened.
The first time we were forced out of the

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 13

exchange rate mechanism and I came up

it would have needed an act of parliament to

we had assumed would be the case. We now

with the idea of inflation targeting, which

change the maximum length of a term, and

face the risk that if we abandon indepen-

we introduced at the beginning of 1993. And

that was too much for anyone. So, I was able

dence of central banks, we will throw out

then I was about to leave again when the

to, at last, leave.

the baby with the bath water, and another

Bank of England was made independent by

decade on, we will find ourselves with high

the incoming Labour government in 1997. So,

Robert Kaplan:

inflation again and then wonder how can we

I had to stay on to make that work.

What’s the importance of a central bank

get it back.

being independent? We are having a lot

And of course one thing we learned

Robert Kaplan:

of conversations in this country about

about inflation was that once you let inflation

Independence in that context meant

central bank independence. Why is it

rise to a higher level, it’s very costly to bring



it back. You need a deep recession to bring

Lord Mervyn King:

Lord Mervyn King:

expectations of inflation right down again.
When we were made independent, it was not

Robert Kaplan:

that point, the level of interest rates had been

so long after the two decades of very high

You were the governor during the lead-

decided by the Chancellor of the Exchequer

and volatile inflation of the '70s and '80s.

up to the crisis and during the crisis.

and, in fact, we didn’t even have regular

Even here in the states, inflation reached 13.5

What are the key lessons you learned in

meetings. You could sit in your office in the

percent. In the U.K., it reached 27 percent,

the aftermath of the crisis?

morning and get a telephone call saying that

but it was all over the place and that led to

the Chancellor would like to discuss interest

volatility, not just of inflation, but of output

rates after lunch.

and employment, too.

It meant deciding interest rates. Up until

Lord Mervyn King:
There are many of them I think. The

And so the financial markets had no idea

So, we were very keen to get away from

when interest rates could change. They could

that. And the way to achieve it was a combi-

my book, is that I think having created this

change at any moment on any day, except of

nation of taking the decision on interest rates

remarkable period of stability of inflation

course when there was an election or there

away from political influence, giving it to a

and output, we rather got carried away and

was some political event where it would be

central bank that genuinely had indepen-

forgot the basic rule, which is you can never

inconvenient to change interest rates.

dence, and secondly, introducing an inflation

forecast the future. The future is inherently

That was completely altered in 1997, so

first and biggest, and the one I talk about in

target, either overtly or implicitly, in which

very uncertain and, therefore, you needed a

much so that when Tony Blair stood down as

the central bank would bring inflation gradu-

system that can be resilient.

the prime minister, it so happened that his

ally back to the target. And everyone knew

announcement that he was standing down

that, so expectations of what would happen

this, but I think that what happened around

as the prime minister coincided to the very

in the future were anchored to confidence

the world was that the evolution of China as

minute with an announcement that we were

in how the central bank would behave and I

a growing and dominant economy injecting

raising interest rates. That could never have

think that was very important.

a lot of savings into the world economy—the

happened under the previous regime.
Then I was asked to be governor so I had

What is fascinating today of course is

There is no point blaming anyone for

phrase that Ben Bernanke used was the

that at the very moment when central banks

savings glut—started to bring interest rates

to stay on for that. Then I was going to leave

are keeping interest rates very low, the politi-

down, especially long-term real interest rates,

after my first term, but we were bang in the

cians around the world are complaining that

and we should have realized that this was

middle of the financial crisis. But come 2013,

they are too low. This is the reverse of what

creating something that was wholly unsus-

14 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

tainable. In a healthy economy, expected

get pushed into doing things, which a central

long-term real interest rates on 10-year

bank shouldn’t do, like take big credit risk

inflation-protected securities ought to be

with its balance sheet. Those are decisions

somewhere in the, I don’t know, 3–5 percent-

which ought to be taken by elected officials.

a-year range.
You can’t find any historical period

It was a real genuine
loss of confidence,
and international
trade started to fall
even faster than it
had in the 1930s.
There was the
prospect of another
Great Depression.

If the central bank says, “Well, no one
else is going to do it, so I will,” the difficulty

where that really was not the case. Over

is that after the crisis has gone away, the

25 years, 10-year real interest rates started

politicians will say, “What was your authority

around 4 percent, and they came down to

for doing that?” And then they use this as an

zero. That cannot be an equilibrium. I think

attack for cutting back the authority of the

economists allow themselves to be so ob-

central bank. And you have seen some of that

sessed with the models that they have created in the debate about Dodd–Frank.
but instead of sitting back and saying there is
something wrong here, they just carried on

Robert Kaplan:

with the traditional view that if you don’t see

In the aftermath of the crisis, there really

enough growth, you cut interest rates.

wasn’t much in the way of fiscal policy

Central banks in the West were cutting

in the Western world and so central

interest rates to boost domestic spending,

banks in the United States, the ECB and

and we were generating current account

the Bank of England took extraordinary

deficits, trade deficits, which meant that we

measures to support growth. Do you

were borrowing from abroad on a scale that

think that central banks went too far, did

could not go on forever. And in the end, it

too much?

didn’t. Much of that borrowing was mediated
through the banking system. So, it was the
banking system that collapsed first. That’s
one lesson.
I think the other big lessons are that we

Lord Mervyn King:
No. I think that in late 2008/early 2009,
what we saw was a collapse of confidence
around the world, not just in the industrial-

took our eye off the ball of leverage in the

ized world where we had experienced the

banking system that grew very rapidly in a

banking crisis. My opposite number in Brazil

period of five years. Nothing went wrong in

would telephone me and say, “Car sales col-

that period of five years, but we should have

lapsed in Brazil but we haven’t got a banking

been more alert to the fact that it was creating

crisis.” In India, steel sales collapsed; they

serious problems.

didn’t have a banking crisis either. And it was

I don’t think we had thought through

a real genuine loss of confidence, and inter-

how we would operate the regime of lender

national trade started to fall even faster than

of last resort. We assumed that what we had

it had in the 1930s. There was the prospect of

all read about in the textbooks was, if we had

another Great Depression.

a crisis, the central bank would act as a lender of last resort, lending through the banking

So, I think central banks had to act pretty
dramatically to head that off. The problem

system. But it turned out the banking system

was pretty much over by late 2009. The bank-

was completely different from the banking

ing crisis in my view ended in May 2009,

system that was described in the textbooks.

when the Federal Reserve and the U.S. Trea-

We can come back to that later.

sury announced the stress test of the banks

I suppose the other lesson I learned is

and said, “Well, either the banks themselves

that when there is a crisis, politicians will

have to raise capital or we will put it in and

do everything they can to avoid blame. And,

take shares in return.”

therefore, central banks were in an exposed

That ended the banking crisis. But I

position, and that’s when it’s very important

think after that, central banks probably made

for a central bank to keep its nerve and not

a mistake in thinking that the cause of weak

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 15

demand continued to be a Keynesian downturn. In my judgment, demand has been

obvious thing.
What the source of demand weakness

weak because people came to realize during

wasn’t, was a temporary headwind, which

the crisis that the level of domestic spending

of course is the language that central banks

in our economies beforehand had been too

have come to use to describe the difficulty of


generating a recovery.

Before the crisis, central banks saw that

I think the big mistake that’s been

our economies were facing a structural trade

made is if you misdiagnose the problem and

deficit. Well, that’s a drag on total demand,

say that the weakness in demand is just a

and if you want to maintain stable inflation

temporary headwind, whereas in fact, it’s a

and stable employment, you have got to get

permanent fall in demand, what you will end

total demand to run in line with supply.

up doing is not just cutting rates and wait un-

If net trade is being a drag on demand,

til you see a recovery and then getting back

you have to boost domestic demand so that

to normal again; you cut rates, that generates

when you subtract the contribution from the

a little bit of a recovery, but that peters out

trade deficit, total demand is equal to supply.

because the fall in demand is permanent.

And central banks were very successful in

So, you have to cut again, and you end

doing it. But of course, what they did was to

up keeping cutting rates until you get to zero.

achieve stability but in an unsustainable way

Once you are up to zero, then only an econo-

because domestic demand can’t run forever

mist can really believe that negative interest

above the level of productive potential.

rates are the way to generate the recovery.

What the crisis did was to bring home

I feel that’s where we are. There are some

to everyone that we all had been spending

very good economists who think that if only

more than we could afford to in the long run.

interest rates could be -5 percent then we

So people cut spending, and that gap had to

would get a recovery. But of course, if you ask

be filled by something; export demand is the

people if Janet Yellen were to announce that

16 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

interest rates—far from rising—would be at

The other is immigration, where the

-5 percent for the next year, most people will

principle of the free movement of people

say, “What the hell are these people in the

within Europe was a fine principle when you

Fed doing?” Nevertheless, the economics

were just thinking of people moving amongst

professionals would cheer and say “Fantastic,

a small number of Western European

you have done the right thing, now we are

countries to other countries. But it came

bound to get a recovery.”

under pressure when the Eastern European
members joined the European Union, and it

Robert Kaplan:

has come under intolerable pressure when

Changing gears somewhat, what’s going

a million or more people want to come from

to happen now, in first the U.K. and then

outside the EU into the EU each year.

in Europe, in the aftermath of the Brexit

De facto the Schengen Area, where there

vote? What do you think the impact of

is a passport-free travel zone within the Eu-

this will be, and you think more coun-

ropean Union, has been abandoned. Those

tries in Europe will follow?

countries have been forced to put up controls
and barriers to prevent illegal immigrants

Lord Mervyn King:
No, I think not. Let’s start with the European Union. The European Union, I think,
faces two existential problems, and they are

being shipped on from the first country they
arrive at to somewhere else in the EU. I think
they have no answer to these questions at all.
But what is not an existential problem

serious. One is the monetary union, where

for the EU is British membership. If you look

I don’t think it’s working. I think it has been

at what happens in Italy or France in their

a disaster, and I don’t think there is any real

upcoming elections, the people who vote for

prospect of having rapid economic growth in

Five Star in Italy or Marine Le Pen in France,

the European Union while monetary union

they don’t go home in the evening and say,

persists. And they have no answer to this at

“You know darling, I was very impressed by


the vote in Britain, and I do wonder whether

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 17

we shouldn’t sort of vote in a similar way

of Europe, including in Germany, once their

here”; they vote according to domestic condi-

elections next autumn are out of the way, and

tions in their own countries.

they will be very much influenced by the fact

So, I don’t think that Britain leaving the
EU will actually have much impact on what

that the U.K. has a very large trade deficit.
Now, there are not many circumstances

happens in the rest of the EU. The EU, I think,

in which having a big trade deficit is a good

has serious problems, but I don’t think they

idea, but it just so happens that negotiating a

are affected one way or another by the U.K.

trade agreement is one of them.

staying in it, which was precisely why the
U.K. was actually not having a lot of influence

Robert Kaplan:

on the rest of Europe.

There has been a lot of discussion in this

Now, in terms of the U.K., I think the

country of late about Dodd–Frank bank

situation in some ways is relatively straight-

regulation. We have been advocating

forward. The prime minister said, and this

here that small- and mid-sized banks

was a fairly obvious thing to do, that there

should get substantial relief because

will be a bill to repeal the European Com-

they are not systemically risky.

munities Act of 1972, which is the act under

But there has been even discussion

which we joined the EU. And then immedi-

or suggestion that maybe even on big

ately pass a short bill to translate all existing

banks there would be a change. What’s

legislation that we adopted as a member of

your view on what’s an appropriate way

the EU directly into U.K. law so that parlia-

for us to think about bank regulation

ment can take its time to decide which of the

here, in the U.K. and in Europe?

legislation we have adopted in recent years
we want to keep, or to get rid of, or to have
another domestic debate about. But it will be
the U.K. parliament that decides that.
When it comes to trade, I think, it’s a lot

Lord Mervyn King:
During and just after the crisis, it seemed
to me pretty clear that what we had to do was
to move to a point where the leverage of the

simpler than some people would suggest. I

banks was a lot lower than it had been before

think there are three groups of countries that

the crisis. And of course banks themselves

matter. The first are countries outside the EU,

were trying to reduce their leverage.

but with which the EU has a trade agreement.

Going forward, I would like to see a rela-

And we go to those countries and say, “Look,

tively tough simple leverage ratio. But I think

when we leave, why don’t we just roll over the

that what we have actually done in practice is

treaty we have got with you already by virtue

try to ensure that if the same thing that hap-

of our membership with the EU and just

pened in 2007–08 happened again, that every

carry it on?”

single detail of that is now closed off.

The second group of countries are coun-

So, what we have done is to create a

tries again outside the EU, but with which the

massively detailed set of regulations that

EU itself does not have a trade agreement, we

would almost certainly be irrelevant for the

go to them and say, “We would like to have a

next crisis, which inevitably will be rather

trade agreement; either we get one, in which

different. I think the only way sensibly to

case fine, we are better off, or we don’t, in

regulate the banking system is not to burden

which case we have got the status quo again.”

it with such detail. In the U.K. and London, I

And the third is obviously the rest of

am amazed now that when you talk to people

the EU, where we will have to negotiate

in banks, they feel they can’t do anything

with them. But there is a good cop and bad

without taking the advice of their compliance

cop routine here; the bad cop will be all the

officer. That is not the definition of healthy

European institutions, people in Brussels; the

regulation. That’s excessive detail.

good cop will be politicians around the rest

One simple example: Several central

I don’t think that
Britain leaving the
EU will actually
have much impact
on what happens in
the rest of the EU.
The EU, I think, has
serious problems, but
I don’t think they are
affected one way or
another by the U.K.

18 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

banks now have to approve the chief execu-

countries in the world could genuinely say

tive and the chairman of a bank. That’s fair

today, “If only the rest of the world was grow-

enough. But then they also insist on approv-

ing normally, we would be fine, but since it

ing a whole raft of people below that level

isn’t, we aren’t,” and so countries are tempted

before they can be appointed.

to say, “So, what can we do on our own to

Well, if you have approved someone to
be a chief executive of a bank, why don’t you
trust him or her to make the right decisions
about the people they want to employ?

get out of this trap, push down the exchange
Well, that’s clearly a zero-sum game.
So, we’ve got to find some way of creating a
positive-sum game at the level of the world.

I am also very
worried about the
impact of the current
level of interest rates
on the viability of
pension funds and
insurance companies
and just as worried
about young people
deciding whether it’s
worth bothering to
put aside money for
pension provision.

Robert Kaplan:

The IMF ought to be able to do it, but I worry

We’ve been calling for broader economic

that it's become so political because of its

policy actions to support economic

relationship with Europe that they would find

activity going forward. What types of

it very hard to do.

policy options would you encourage
other policymakers to be considering?

Robert Kaplan:
What about infrastructure spending?

Lord Mervyn King:
I think there are three sorts of things
that are important. First, greater flexibility in

Lord Mervyn King:
Infrastructure spending is a good idea

exchange rates to prevent the buildup of un-

subject to some caveats. The first one is that

sustainable trade surpluses and deficits. The

some proposals amount to a sort of Keynes-

weakness of the euro area is a problem not

ian injection of demand. The trouble is,

just for Europe but for the world economy.

we don’t face Keynesian unemployment

Second, on the supply side, maybe people

anymore. The unemployment rate is down

will think more imaginatively about the kind

to 5 percent. So, if you have infrastructure

of changes that will be made. They have got

spending, it is going to crowd out some other

to be sensible ones. But tax reform is one,

form of spending.

particularly in the area of savings and investments.
Education is another if we are going to

What is the other form of spending we
think is less deserving? That’s not obvious by
any means, and the second thing is that it re-

deal with the concerns of people who feel

ally ought to be something which is financed

they have been left behind by globalization.

by government because infrastructure

The jobs that they were brought up to do sim-

spending such as turning JFK Airport into

ply don't exist anymore—that’s always going

DFW is not going to be cheap, and is going to

to be the case. But education and retraining

be quite difficult to finance privately, I think.

is a fundamental part of dealing with this

These are projects we need to pursue and


plan, but you can’t just switch it on like that.

I am also very worried about the impact
of the current level of interest rates on the

Robert Kaplan:

viability of pension funds and insurance

But if we could do private financing,

companies, and just as worried about young

would you welcome private-sector

people deciding whether it’s worth bothering

involvement? For example, a lot of these

to put aside money for pension provision. So,

airports have been turned into shopping

I think there is a whole range of things that

malls in effect. If we could find a way

can be done in this area.

to use less government money—more

And the third is, international cooperation, and this is going to be the hardest of all.
I think the problem at present is that most

private money—would you say that was
good or bad?

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 19

Lord Mervyn King:

government bonds to finance it.

Well, there is still a problem. If the an-

The problem facing the public finances

swer is, let’s do lots of investment in infra-

in the United States is not a short-term

structure, it doesn’t matter who is financing

problem, it’s a long-term problem. One thing

it, some other spending gets crowded out,

I think can be explained to people and be un-

and I only favor private-sector providers for

derstood and accepted, is that all our pension

genuinely private-sector projects.

schemes need to be modified to acknowledge

What I am very unhappy about, is what’s

that we are living longer. As life expectancy

being done in the U.K. and elsewhere, called

goes up, we must share the benefits of that

the Private Finance Initiative, in which the

between working life and retirement.

private sector finances a project and the pub-

So, the age at which we qualify for pen-

lic sector then runs it. What’s bizarre about

sion has to keep rising, and this should be

this, is that it’s completely the wrong way

built into our pension schemes, both private

around. The public sector can borrow money

and social security.

much more cheaply than the private sector

That would be one way to make a big

and the private sector can run things better

dent in the prospective future deficits that we

than the government. So, why don’t we do it


the right way around?
Robert Kaplan:
One last question to wrap this up. What
advice would you be giving to the Fed
from here as we watch the next phase of
the recovery unfold?
Lord Mervyn King:
I think if I were to give advice, I think I
would say, central banks should now make
it very clear that they can’t really provide any
more support. We have to be on a path of
gradually trying to remove the stimulus that
we have given in recent years.
The hopes for recovery have to rely on
other policymakers. There are a range of different policies but they need to be thought
through very carefully. It’s easy to say infrastructure is a good thing, and indeed, there is
obviously bipartisan support for infrastructure spending, but as both Martin Feldstein
and Larry Summers have pointed out in
recent weeks, infrastructure spending should
not be carried out simply in order to reduce
unemployment even further below what may
well be a natural rate of unemployment.
And it doesn’t make sense to create
artificial ways of financing infrastructure
investment merely in order to keep debt off
the public-sector balance sheet. If there is a
good argument for infrastructure, then issue

20 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

The Potential Impact of Decentralized
Virtual Currency on Monetary Policy
By G.C. Pieters


ne of the most unexpected

be centralized or decentralized. A centralized

global monetary developments

currency is any currency that is issued and

in the past decade has been

maintained by a central group or organiza-

the emergence of decentral-

tion, while decentralized currencies are

ized virtual currencies. Bitcoin, the largest

not.1 Simulated currencies (also called

and best known of the decentralized virtual

game currencies) are examples of central-

currencies, has well-documented market

ized digital currencies. These currencies are

properties—including its use as an interna-

created to purchase items within a simulated

tional vehicle currency. Decentralized virtual

system, primarily video games, belonging

currencies are of particular interest to central

to a nongovernment company or group.

bankers because eventually they could

For example, the online game Second Life

change administration of monetary policy

(created by Linden Labs) uses an in-game

globally by allowing users to circumvent

currency referred to as Linden dollars. World

capital controls and managed exchange rates.

of Warcraft (WoW) (created by Blizzard
Entertainment) primarily relies on a currency

Electronic money
is a broad term
for any money,
currency or asset
not held in physical
form—it can include
representations of a
sovereign currency
or claims on a realworld good.

Digital Currency? Virtual Currency?

referred to as WoW gold. Eve Online (created


by CCP Games) has a currency called ISK. All

The terminology used when discussing

are designed to be earned through in-game

currencies such as bitcoin is rapidly evolving.

tasks and spent on in-game items within the

Chart 1 is a visualization of the relationship

respective simulated system, ranging from ar-

between the various terminologies, created

mor and clothes to flying pigs and spaceships.

by merging definitions suggested by the Eu-

Some players may choose to buy

ropean Central Bank, Bank of International

Linden dollars, WoW gold or Eve ISK using

Settlements and Bitcoin Magazine.

government-issued currencies on third-party

Electronic money is a broad term for any

exchanges instead of spending time on in-

money, currency or asset not held in physical

game tasks. These exchanges tend to be very

form—it can include representations of a

limited—usually involving only the U.S. dol-

sovereign currency or claims on a real-world

lar, the euro and the British pound—and may

good. The online payment system PayPal dig-

be deemed illegal by some companies. An

itally represents many sovereign currencies,

example of a centralized virtual currency is E-

such as the U.S. dollar, and therefore trades in

gold, founded in 1996. E-gold was a digitally

electronic money. Digital currency is a subset

traded currency backed by gold that could

of electronic money that has no broadly ac-

be traded for sovereign currencies, with the

cepted physical counterpart. Finally, virtual

issuance and trading system managed by the

currency is a subset of digital currency that is

company Gold & Silver Reserve.

intentionally created, or predominately used,

Cryptocurrency refers to any electronic

for purchasing both digital and nondigital

money created using cryptographic technol-

(“real-world,” or tangible) goods.

ogy to regulate its creation and ensure the

Digital and virtual currencies can either

legitimacy of transactions conducted using

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 21

that money. Formally, bitcoin can be described as a decentralized virtual cryptocurrency. However, because all cryptocurrencies
are decentralized virtual currencies, the two
terms are used interchangeably.
Cryptocurrency technology is essential

Chart 1
Definitions Based on Issuer and Intended Scope of Use, Transaction
Verification and Technology

for decentralized digital currencies, which

Electronic Money

face a severe double-spending problem—

Digital Currency

someone could “copy and paste” the digital
monetary unit and spend it over and over

Centralized Currency

again because there is no central authority


to validate the authenticity of a transaction.

Decentralized Currency

Bitcoin’s founder(s) solved this problem with
the invention of blockchain technology—an


accounting system in which a complete his-


tory of transactions of any bitcoin user is both

Virtual Currency

unalterable and publicly viewable to ensure
that no user can spend more bitcoins than


they have acquired. This also means that no
central entity or organization clears transactions, which is why decentralized currencies
are difficult to regulate.2
Table 1 lists the names, U.S. dollar value
of the stock of the currency (market capitalization) on Dec. 27, 2016, and founding date
of the five most highly capitalized cryptocurrencies. As the oldest and largest of them,
bitcoin is frequently studied and is the best
understood. Alternatives to bitcoin are collectively referred to as altcoins.
Bitcoin Markets
Why do people purchase bitcoins? The
reasons are evolving as bitcoin becomes
more established and integrated into the
world economy. Wilson and Yelowitz (2015)
find a correlation between interest in criminal activity and interest in bitcoin. Brière,
Oosterlinck and Szafarz (2015) show that

Table 1
Largest Cryptocurrencies by Market Capitalization, Founding Date
Cryptocurrency name Market capitalization (U.S.$)

Founding date















SOURCE: CoinMarketCap,, accessed December 2016.

22 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

bitcoin can be a useful diversification asset
in a financial portfolio. Bitcoin can also be

Bitcoin is globally
traded, yet there is
no global regulatory
framework for it.
Some countries, such
as Ecuador, have
attempted to ban

Bitcoin-Based Exchange Rates
Chart 2 shows how $1,000 can be

used to buy tangible goods on an increasing

directly exchanged for euros using official

number of websites such as Amazon and

exchange rate markets, at a hypothetical ex-

Overstock or in some physical stores as an

change rate of $1 for €0.97. Alternatively, one

alternative to sovereign currencies.

bitcoin (BTC) can be purchased for $1,000,


There are multiple ways to acquire a bit-

and the bitcoin can then be sold to obtain eu-

coin, but one of the most common is through

ros at a price of 1 BTC for €970. In this second

a bitcoin exchange. It is like any other online

scenario, bitcoin is used as a vehicle cur-

marketplace: Anyone wishing to purchase (or

rency to move from one currency to another.

sell) a bitcoin indicates the amount of bitcoin

This process is simple to implement on any

and pays (or receives) the price in the mon-

exchange that allows the sale and purchase

etary unit they select from those accepted by

in at least two currencies. In Chart 2, both the

the exchange. The available electronic money

official exchange rate and the bitcoin-based

ranges from sovereign currencies such as

exchange rate are the same. However, it is

U.S. dollars, Chinese yuan, or New Zealand

possible that the bitcoin market is too small,

dollars, to other cryptocurrencies such as

or that bitcoin users ignore and are ignored

ethereum or litecoin. Exchanges differ in

by international markets, so that bitcoin-

the range of electronic monies they accept,

based exchange rates are actually uninforma-

their fees, regulatory requirements and other

tive and bear little similarity to the official

properties. The impact of these on the price

exchange rate markets.

of a bitcoin in an exchange is examined in
Pieters and Vivanco (2016).
Bitcoin is globally traded, yet there is

Pieters (2016) examines exchange rates
derived from bitcoin trades and finds that
in the absence of a policy of exchange-rate

no global regulatory framework for it. Some

management, bitcoin-based exchange rates

countries, such as Ecuador, have attempted

reflect official exchange rates. Addition-

to ban bitcoin. Others, such as Cyprus, en-

ally, they also provide information on black

courage its use. Within the U.S., virtual cur-

market exchange rates and capital controls.

rency exchanges are regulated by the Finan-

Chart 3 shows both the official and bitcoin

cial Crimes Enforcement Network (FinCEN).

exchange rate between the U.S. dollar and

It requires that all bitcoin exchanges collect

the British pound, normalized to begin at the

the identification of purchasers. Pieters and

same exchange rate value. These two curren-

Vivanco (2016) test the enforceability of this

cies are highly traded with minimal restric-

ruling by attempting to purchase bitcoins

tions, and movements in bitcoins and official

using U.S. dollars from a location within the

exchange rates are essentially identical.

U.S. While all bitcoin exchanges within the

Argentina, in contrast, had a period of

U.S. collected information, very few outside

financial market restrictions to support a

of the U.S. did, circumventing FinCEN regula-

desired exchange rate, during which a sub-


stantial and well-developed black market for

Chart 2
Two Methods of Converting U.S. Dollars into Euros

trades between the U.S. dollar and Argentine
peso arose. This black market was so well
established that newspapers quoted both the
official (government supported) exchange

U.S. $1,000


rate and the unofficial (black market) rate,
called the dólar blue.
Chart 4 shows the three exchange

1 Bitcoin

rates—the official, bitcoin and unofficial dólar blue rates—both during and after the end
of the Argentinian exchange rate program in

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 23

Chart 3
Official and Bitcoin-Based U.S. Dollar-British Pound Exchange Rate
Relative exchange rates










SOURCES: (bitcoin prices); (official exchange rates); Pieters (2016); author’s calculations.

Chart 4
U.S. Dollar–Argentine Peso Bitcoin-Aided Exchange Rates
Relative exchange rates



Dólar blue






SOURCES: LocalBitcoins exchange, (bitcoin prices); (official exchange rates); Àmbito Financiero (unofficial
exchange rates); Pieters (2016); author’s calculations.

December 2015. The bitcoin exchange rate

bitcoin use is not limited to purchases within

the relative supply or demand of currencies,

does not reflect the official exchange rate

a domestic market; it also facilitates transac-

the exchange rate is managed.

during the period of financial market restric-

tions across currencies on a global scale.

tions. It, however, mirrors the movement of
the unofficial exchange rate. This suggests
that the bitcoin market was used as a chan-

The trilemma of international finance,
illustrated in Chart 5, is a restriction on

Trilemma of International Finance
The relative value of any two curren-

government policy that follows immediately from the interaction of exchange rates,

nel to circumvent restrictions on currency

cies—the exchange rate—is determined

monetary policy and international capital

trades. After capital controls ended, bitcoin

through their sale and purchase on the global

flows. The trilemma states that any coun-

and official exchange rates became similar.

foreign exchange market. If government

try can have only two of the following: (1)

These two examples provide evidence that

policy interferes with this market by changing unrestricted international capital markets, (2)

24 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

a managed exchange rate or (3) an indepen-

is fully backed by a foreign currency (as in

dent monetary policy.

the case of Hong Kong). In such a situation,

If the government wants a managed

monetary policy can no longer be used for

exchange rate but does not want to interfere

domestic purposes (it is no longer indepen-

with international capital flows, it must use

dent). If a country wishes to maintain control

monetary policy to accommodate changes

over monetary policy—to reduce domestic

in the demand for its currency in order to

unemployment or inflation, for example—it

stabilize the exchange rate. In the extreme,

must limit trades of its currency in the inter-

this would take the form of a currency board

national capital market (it no longer has free

arrangement, where the domestic currency

international capital markets). A country that
chooses to have both unrestricted international capital flows and an independent

Chart 5
Depiction of the Trilemma of International Finance

monetary policy can no longer influence its
exchange rate and, therefore, cannot have a
managed exchange rate.
The U.S. has chosen (1) and (3): It allows unrestricted international movement
of capital and has an independent monetary
policy and, as a result, must accept a marketdetermined exchange rate. Hong Kong maintains a (2) fixed exchange rate and allows (1)
unrestricted capital flows, with its monetary



















Capital Markets


exchange rate. Prior to 2016, Argentina had a






Exchange Rate

policy dedicated solely to maintaining its




Choose any two

Must have: Restricted Financial Flows


(2) managed exchange rate and (3) independent monetary policy and imposed restrictions on international capital flows.
Bitcoin creates a problem for Argentina
and similar countries; it makes circumventing capital controls easier. As demonstrated

Chart 6
Bitcoin Market Capitalization from July 1, 2010, to Dec. 28, 2016
U.S. dollar value (millions)

U.S. dollar value (log)
Log (value)





Value (millions)









SOURCES:; author’s calculations.






Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 25

attempts to regulate the globally accessible

Chart 7
Bitcoin’s Monthly Share of Cryptocurrency Market Capitalization Declines

bitcoin markets are generally unsuccessful,


in Pieters and Vivanco (2016), government

and, as shown in Pieters (2016) and Chart
4, bitcoin exchange rates tend to reflect the


market, not official exchange rates. Should
the flows allowed by bitcoin become big


enough, all countries will have, by default,
unrestricted international capital markets.


Thus, with bitcoin, (1) unrestricted
international capital markets is chosen by


default. Therefore, the only remaining policy
choice is between (2) managed exchange


rates or (3) independent monetary policy. If
the country chooses (1) and (2), it must use


reactive monetary policy to achieve the managed exchange rate. If the country chooses
(1) and (3), it must have a floating exchange









SOURCE: CoinMarketCap,

rate because it has no remaining tools with
which to maintain a managed exchange rate.
Ali et al. (2014), the European Central

decisions in an environment in which con-

Bank (2015) and the Bank for International

sumers can opt to use a globally traded and

Settlements (2015) all concur that cryptocur-

unregulated alternative currency.

rencies may eventually undermine monetary
policy, but at the time of their writing, all


found that the small size of cryptocurrency

While not represented on Chart 1, any electronic money
that is not a digital currency is centralized. This is because
it must, by definition, have a physical representation, which
in turn requires implied approval (or disapproval) by an
agency (such as a central bank).
For an explainer on blockchain technology, see Koch and
Pieters (forthcoming).
Websites such as coinmap ( or usebitcoins ( maintain lists of businesses
that accept bitcoins.
Pieters and Vivanco also show that persistent price deviations arise based on the extent of information gathering
by a given exchange. Exchanges that require users to
provide identification to open an account had prices that
did not significantly deviate from the prices of the largest
exchange. Those that required ID to transfer a sovereign
currency posted slight price deviations over short intervals,
while those that required no identification could post large
and persistent deviations.

markets did not represent any tangible restrictions. However, the market capitalization
of bitcoin is growing rapidly, doubling from
$7 billion on Jan. 2, 2016, to nearly $14 billion
by Dec. 28, 2016 (Chart 6).
Additionally, despite bitcoin’s rapid
growth, data show that bitcoin’s share of
the cryptocurrency market has fallen from
a dominating 95 percent to as low as 80 percent (Chart 7). While Table 1 shows that no
individual altcoin has a market size comparable to bitcoin, the altcoins are collectively
becoming more important. They achieved a
combined $2 billion market capitalization on
Dec. 28, 2016, for a collective cryptocurrency
like the much larger foreign exchange market,


there is high liquidity between currencies.

Ali, R., J. Barrdear, R. Clews and J. Southgate (2014), "The
Economics of Digital Currencies," Quarterly Bulletin, Bank of
England, Third Quarter.

ues growing, the size of cryptocurrency flows
relative to international financial markets will
increase and central banks in economies of
all sizes will have to make monetary policy

European Central Bank (2015), "Virtual Currency Schemes—
a Further Analysis" (Frankfurt, Germany: February).


market capitalization of $17 billion—and un-

If adoption of cryptocurrencies contin-

Committee on Payments and Market Infrastructures (2015),
"Digital Currencies" (Basel, Switzerland: Bank for International Settlements, November).

Brière, M., K. Oosterlinck and A. Szafarz (2015), "Virtual
Currency, Tangible Return: Portfolio Diversification with
Bitcoins," Journal of Asset Management 16 (6).

Koch, C., and G. Pieters (forthcoming), "Decentralization and
Democratization of the Ledger? Blockchains as a Disruptive
Technology," Federal Reserve Bank of Dallas Financial
Pieters, G. (2016), "Does Bitcoin Reveal New Information
About Exchange Rates and Financial Integration?" Globalization and Monetary Policy Institute Working Paper no. 292
(Federal Reserve Bank of Dallas, December).
Pieters, G. and S. Vivanco (2016), "Financial Regulations and
Price Inconsistencies Across Bitcoin Markets," Globalization and Monetary Policy Institute Working Paper no. 293
(Federal Reserve Bank of Dallas, December).
Wilson, M., and A. Yelowitz (2015), "Characteristics of
Bitcoin Users: An Analysis of Google Search Data," Applied
Economics Letters 22 (13), 1030–36.

26 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Interactions Between Exchange Rates and
Import Prices: What Have We Learned?


By Mina Kim

lobalization has deepened eco-

in GDP growth, reflected in export growth

nomic interdependence among

rates of the same OECD countries (Chart 2).1

countries as firms seek to take
advantage of international trade

As the global financial crisis illustrates,
this interdependence has serious implica-

to source production where it is cheapest,

tions for the international transmission of

and investors look to global financial markets

shocks and the ability of monetary policy to

to diversify their portfolios. One need only

stabilize national economies. Consequently,

look at the global financial crisis of 2007–08

policymakers are being forced to take greater

and the associated global recession to grasp

account of the global economic landscape

the extent of globalization.

when formulating policy.

During the Great Recession, almost all

Exchange rates are at the center of the

advanced economies and some developing

international transmission of shocks via trade

economies experienced a drop in gross do-

linkages. Given the United States’ growing

mestic product (GDP) growth. Chart 1 shows

reliance on imports, the potential impact

the synchronous decline in GDP growth

of exchange rate movements has become

rates for selected Organization for Economic

more important (Chart 3). These movements

Cooperation and Development (OECD)

directly affect the competitiveness of U.S.

countries that trade frequently with each

firms in the global market and at home and,

other. Simultaneously, the world experienced

therefore, affect firms’ production, employ-

a trade collapse that was worse than the drop

ment and earnings, and, in turn, consumer
prices. Indirectly, exchange rate movements
also induce expenditure switching toward

Chart 1
GDP Growth Rates for Selected OECD Countries Synchronously Fall

countries with cheaper goods, affecting
consumer prices. This essay focuses on these

Real gross domestic product growth (percent), year/year

interactions between exchange rates and


Exchange Rates, Trade Prices


There is evidence that firms are sensitive

to exchange rate changes when setting export
prices. Given the U.S.’ increasing reliance on


imports, the extent to which exchange rate

changes are passed through to import prices



(also known as exchange rate pass-through)

United States

has critical implications for domestic infla-



tion and the appropriate response of mon-


etary policy.







NOTE: OECD stands for Organization for Economic Cooperation and Development.
SOURCE: International Monetary Fund World Economic Outlook.






More specifically, exchange rate passthrough is most commonly defined as “the

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 27

percent change in import (or export) prices
for a percent change in the exchange rate”
(Chinn, 2006). For example, suppose that
an exchange rate (defined as the number
of units of the domestic currency needed
to purchase a unit of foreign currency)
increases 10 percent. If the exchange rate
pass-through is 1, then the price of imports
will increase by 10 percent. If exchange rate
pass-through is 0.5, then the price of imported goods will increase by only 5 percent. If
pass-through is 0, then the price of imported
goods will be unchanged.
The academic literature on exchange
rate pass-through is expansive, and there is
wide variation in the empirical estimates of
exchange rate pass-through across countries,
goods and time periods.2 The empirical

Chart 2
Export Growth Rates Simultaneously Drop for Selected OECD Countries
Export growth (percent), year/year





United States














NOTE: OECD stands for Organization for Economic Cooperation and Development.
SOURCE: International Monetary Fund World Economic Outlook.

evidence for the U.S. shows that pass-through
is incomplete and low. In the aggregate data,
the long-run pass-through estimate is around
0.4 (Campa and Goldberg, 2005); in productlevel data, the estimate is similar (Gopinath

Chart 3
Share of Imports in U.S. GDP Rises
Share of gross domestic product (percent)

and Itskhoki, 2010). The empirical evidence


also shows that exchange rate pass-through


in the U.S. has been declining since at least
the 1980s.3 These empirical regularities can


be explained by understanding the price set-


ting behavior of firms.


Exporter Response to Exchange
Rate Fluctuations
The literature outlines many factors


affecting how exporters respond to exchange


rate changes, of which four are highlighted:


• Menu costs
• Desired pass-through
• Market structure
• Policy environment

’29 ’32 ’35 ’38 ’41 ’44 ’47 ’50 ’53 ’56 ’59 ’62 ’65 ’68 ’71 ’74 ’77 ’80 ’83 ’86 ’89 ’92 ’95 ’98 ’01 ’04 ’07 ’10 ’13

SOURCE: Bureau of Economic Analysis.

28 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

China’s hard peg to the U.S. dollar in 2005 can

First, the cost of adjusting prices, or
menu costs, matters (Blinder et al., 1998;

be used to study how firms change import

Schoenle, forthcoming; Fabiani et al., 2006).

and export prices in response to changed

Small exchange rate movements may not

exchange rate policy. The switch in exchange

warrant incurring the cost of adjusting prices.

rate policy from a hard peg to a managed

Instead, the exchange rate change is ab-

float resulted in gradual appreciation of the

sorbed in firms’ margins. However, firms may

Chinese yuan against the dollar (Chart 4).
The degree of price stickiness in U.S.–

be unable to keep prices fixed when move-

When prices are
sticky and cannot
be adjusted
instantaneously, the
currency of invoicing
determines the
amount of exchange
rate fluctuation
that can be passed

ments are large. Menu costs result in prices

China trade prices is examined using goods-

that exhibit infrequent change, what econo-

level data on trade prices from the Bureau of

mists commonly refer to as “sticky” prices.

Labor Statistics (BLS). The duration of U.S.–
China trade prices, based on the frequency of

When prices are sticky and cannot be
adjusted instantaneously, the currency of in-

price changes in each month (the frequency-

voicing determines the amount of exchange

implied duration), appears to have declined

rate fluctuation that can be passed through.

almost 30 percent since China abandoned its

Exporters desiring low exchange rate pass-

hard peg to the U.S. dollar.
We extend a menu-cost model to reflect

through in the short run will choose to
invoice in the local currency, or the currency

this stylized fact and find that the change

of the destination country (Gopinath, 2015).

in exchange rate policy can explain about

However, exporters desiring high exchange

60 percent of the decline in price stickiness.

rate pass-through in the short run will choose

In our model, exchange rate fluctuations

to invoice in their own (or the producer’s)

influence price-setting behavior through ag-

currency, the currency of the origin country.

gregate demand. The appreciation of the Chi-

One explanation is that exporters facing more

nese yuan leads to an increase in aggregate

competition in the destination market may

demand for U.S. exports to China, inducing

desire to keep prices stable relative to their

U.S. exporters to raise their prices.
Our results are complementary to those

competitors. Exporters can better maintain
stable prices by pricing in the local currency.


Third, market structure can affect how

found in Floden and Wilander (2006). They
present a menu-cost model in which firms

firms set prices (Campa and Goldberg, 2005).

adjust prices in response to exogenous ex-

In competitive sectors, firms are less able

change rate fluctuations. In their model, large

to absorb any losses from exchange rate

exchange rate changes raise the opportunity

changes and must thus adjust prices quickly.

cost of holding prices fixed, so firms change

This is not the case for firms in differentiated

prices more frequently, and exchange rate

goods sectors. Relatedly, firms with market

pass-through is dependent on the size of

power are better able to absorb exchange

the exchange rate change. Furthermore, the

rate shocks and are less likely to adjust prices

Floden and Wilander model generates asym-

(Atkeson and Burstein, 2008).

metric responses to exchange rate changes

Lastly, the policy environment can be

based on the direction of the change. They

important for exporters’ pricing decisions.

find that appreciation of the exporter’s cur-

For example, in countries that have credible

rency leads to higher exchange rate pass-

inflation-targeting monetary policy, there

through than depreciations, especially during

is less inclination for firms to change prices

periods of inflation.

when exchange rates change since they have
confidence that the shocks are temporary

Asymmetric and Nonlinear Reponses

(Taylor, 2000, and Gagnon and Ihrig, 2004).

Evidence of asymmetric and nonlinear

Kim et al. (2013) argue that the pricing

responses to exchange rate fluctuations has

behavior of firms also depends on a country’s

important consequences for monetary policy

exchange rate policy. The abandonment of

and suggests that policymakers and forecast-

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 29

ers at least reconsider the effectiveness of
the “rule of thumb” used to estimate how
currency movements will affect inflation.5
The appropriate policy response to dollar appreciation may be different than that for de-

Chart 4
Monthly Chinese Yuan/U.S. Dollar Exchange Rate Falls After Unpegging
Chinese yuan/U.S. dollar

preciation if the price responses are different.
Likewise, the appropriate policy response
to a large change in exchange rates may not


be the same as the one for a small change if
nonlinearities are present.


The asymmetries and nonlinearities
described in Floden and Wilander (2006)
primarily point to menu costs and strategic


choice of invoicing currency as the mechanisms generating those price responses.


Aside from Floden and Wilander (2006),
there are several other theories as to why
asymmetries in exchange rate pass-through
might exist. These mechanisms include:
• Competition for market share







SOURCE: Board of Governors of the Federal Reserve System.

• Production switching
• Binding quantity constraints
When exporters are concerned about

importer’s currency depreciates, marginal

market share, they adjust markups to in-

revenue and marginal cost both decrease,

crease their future profits. When the im-

and the firm does not change output or price,

porter’s currency appreciates, the exporter

resulting in zero pass-through.

updates prices, but only to increase market

In both of these cases, appreciation of

share. When the importer’s currency depreci-

the importer’s currency results in greater

ates, the exporter will instead absorb some

pass-through than during depreciation. That

of the exchange rate change in order to hold

direction of asymmetry will not hold when

market share. Under this strategy, exchange

exporters face binding quantity constraints.

rate pass-through is greater when the im-

These binding quantity constraints occur

porter’s currency appreciates than when it

when firms have limited ability to increase


production when the importer’s currency

Alternatively, the mechanism through

appreciates. Instead, the exporter will raise

which asymmetries can arise is through pro-

markups to hold prices fixed and increase

duction switching (Ware and Winter, 1988).

profits. On the other hand, when the im-

Exporters may switch between domestic

porter’s currency decreases, the exporter may

inputs and foreign inputs in response to ex-

reduce markups, but will still increase prices

change rate changes as a means of reducing

somewhat to offset increased costs. Thus,

cost. Assuming the extreme case in which a

appreciation of the importer’s currency will

firm can use either the domestic or foreign

instead produce lower pass-through than

input, the firm switches to the cheaper


domestic input when the importer’s cur-

Recent empirical evidence on nonlin-

rency appreciates. Since the marginal cost is

earities or asymmetries in exchange rate

unaffected, the price of the final good drops

pass-through is limited, especially involving

as output increases with the marginal rev-

the U.S. Older studies focused on how price

enue increase. On the other hand, when the

responses differed between appreciations







30 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

economists have
little understanding
as to why exchange
rate pass-through
varies along these
different dimensions.

and depreciations. The results have been

asymmetries and nonlinearities in exchange

mixed, with no clear evidence whether

rate pass-through to U.S. import prices. Un-

appreciation or depreciation is associated

like Pollard and Coughlin (2004), the authors

with higher pass-through. Mann (1986) used

use goods-level transaction price data from

aggregate U.S. data and found that exchange

the BLS and match it with country-level

rate pass-through was higher in periods of

data on exchange rates and consumer price

appreciation than depreciation. However,

indexes to better understand the importance

the difference was not statistically significant.

of asymmetries and nonlinearities to U.S.

Kadiyali (1997) and Goldberg (1995) focused


on a single industry and found the opposite

Throughout the period considered, the

outcome. Other industry studies found that

U.S. experienced episodes of appreciation

the direction of asymmetry depended on the

and depreciation of varying degrees. Chart 5

industry (for example, Mahdavi, 2002, and

shows a histogram of the average monthly

Olivei, 2002).

exchange rate change seen in the data, where

Pollard and Coughlin (2004) consider

exchange rate is defined as foreign currency

both asymmetries and nonlinearities in

per dollar. The distribution is bell-shaped and

exchange rate pass-through to U.S. import

roughly centered around zero, suggesting

prices. They use industry-level exchange

that asymmetries and nonlinearities might

rate changes and find no clear direction of

be masked in aggregate data.

asymmetry across industries, as in the previ-

Unlike Pollard and Coughlin (2004), we

ous literature. They find nonlinearities such

find no economically significant evidence of

that larger exchange rate fluctuations are

nonlinearities, even when the data is disag-

generally associated with higher exchange

gregated by sector. However, we find that

rate pass-through, even when accounting for

asymmetries in exchange rate pass-through


exist to varying degrees across different ag-

Kim et al. (2017) incorporate more

gregations of the data, with depreciations

recent time periods in their examination of

tending to pass through faster than appreciations. Stickiness in nominal prices does not
seem to drive our results, as these asymmetries persist even when we restrict our analy-

Chart 5
Frequency of Depreciations and Appreciations in U.S. Exchange Rates Roughly Symmetric

sis to goods that experience at least one price
change. On the other hand, nominal price

Relative frequency

stickiness can explain why we see significant
asymmetries disappear in the long run.
It may be that the asymmetries found are


a result of firms exiting because of currency
depreciation. No asymmetries were found


when examining the probability of a good
exiting the dataset because of exchange rate


These preliminary findings suggest that
the nature of competition and price setting


is important when determining the extent of
pass-through. Menu costs may reconcile the









NOTE: Exchange rate is quoted as U.S. dollar/foreign currency.
SOURCES: International Monetary Fund International Financial Statistics; Bureau of Labor Statistics; author’s calculations.



short-run and long-run results on exchange
rate pass-through, but that mechanism
alone cannot explain the strong asymmetries

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 31

Extent of Pass-Through
The academic literature has made great
strides in understanding how exchange rate
movements affect inflation. There is little disagreement that exchange rate pass-through is
incomplete, and economists have some understanding of why that might be occurring.

Burstein, A. and Gopinath, G. (2014), “International Prices
and Exchange Rates,” Handbook of International Economics Vol. 4 (Gita Gopinath, Elhanan Helpman and Kenneth
Rogoff, eds.): 391–451.

Kadiyali, Vrinda (1997), “Exchange Rate Pass-Through for
Strategic Pricing and Advertising: An Empirical Analysis of
the U.S. Photographic Film Industry,” Journal of International Economics, 43 (3–4): 437–61.

Bussiere, M., C. Lopez and C. Tille (2015), “Exchange Rate
Appreciations and Growth: The Drivers Matter,” Center for
Economic and Policy Research, Aug. 7.

Kim, Mina, Logan Lewis and Robert Vigfusson (2017),
“Asymmetries and Non-linearities in Exchange Rate PassThrough,” Mimeo.

Campa, Jose and Linda S. Goldberg (2005), “Exchange Rate
Pass-Through into Import Prices,” Review of Economics and
Statistics 87 (4): 679–90.

Kim, Mina, Deokwoo Nam, Jian Wang and Jason Wu
(2013), “International Trade Price Stickiness and Exchange
Rate Pass-Through in Micro Data: A Case Study on U.S.–
China Trade,” Globalization and Monetary Policy Institute
Working Paper no. 135 (Federal Reserve Bank of Dallas,

There is less agreement on the extent of
pass-through. It seems to vary across time
and across industries. It also seems to vary
depending on the direction of the exchange
rate shock and sometimes the magnitude
of the exchange rate shock. Unfortunately,

Chinn, Menzie (2006), “Exchange Rate Pass-Through and
Dollar Decline,” Econbrowser, May 23.

economists have little understanding as
to why exchange rate pass-through varies
along these different dimensions. As a result,
there has been little success predicting how
exchange rate changes will affect inflation.
More recent studies, such as Forbes et al.
(2015), Bussiere et al. (2015) and this author’s
work, suggest that the mechanisms behind
the exchange rate change could matter. The
degree of exchange rate pass-through could
depend on whether a supply, demand or
nominal shock drives the exchange rate fluctuation, for example. Further investigation
can help policymakers effectively respond to
exchange rate movements.
See Eichengreen and O’Rourke (2010) for more details
about the global financial crisis and a comparison to the
Great Depression.
See Burstein and Gopinath (2014) for a more extensive
review of the academic literature on exchange rate passthrough.
See, for example, the figures in Marazzi et al. (2005) for
an illustration of the decline in exchange rate pass-through
into U.S. import prices.
Other possible mechanisms are described in Gopinath (2015).
According to Forbes et al. (2015), the "rule of thumb" commonly used for the U.S. is a pass-through rate of 5 percent
into domestic prices.

Atkeson, A. and A. Burstein (2008), “Trade Costs, Pricingto-Market, and International Relative Prices,” American
Economic Review 98 (5): 1998–2031.
Blinder, A. S , E. R. D. Canetti, D. E. Lebow and J. B.
Rudd (1998), Asking About Prices: A New Approach to
Understanding Price Stickiness (New York: Russell Sage

Eichengreen B. and K.H. O’Rourke (2010), “What Do
the New Data Tell Us?” Center for Economic and Policy
Research, March 8.
Fabiani, Silvia, Martine Druant, Ignacio Hernando, Claudia
Kwapil, Bettina Landau, Claire Loupias, Fernando Martins,
Thomas Mathä, Roberto Sabbatini, Harald Stahl and Ad
Stokman (2006), “What Firms’ Surveys Tell Us about PriceSetting Behavior in the Euro Area,” International Journal of
Central Banking 2 (3): 3–47.
Floden, Martin and Fredrik Wilander (2006), “State
Dependent Pricing, Invoicing Currency and Exchange Rate
Pass-Through,” Journal of International Economics, 70 (1):
Forbes, Kristin, Ida Hjortsoe and Tsvetelina Nenova (2015),
"The Shocks Matter: Improving Our Estimates of Exchange
Rate Pass-Through," Bank of England External MPC Unit
Discussion Paper no. 43.
Gagnon, Etienne (2009), “Price Setting During Low and
High Inflation: Evidence from Mexico,” Quarterly Journal of
Economics, 124 (3): 1221–63.
Gagnon, Joseph and Jane Ihrig (2004), “Monetary Policy
and Exchange Rate Pass-Through,” International Journal of
Finance & Economics, 9 (4): 315–38.
Goldberg, Pinelopi K. (1995), “Product Differentiation and
Oligopoly in International Markets: The Case of the U.S.
Automobile Industry,” Econometrica 63 (4), 891–951.
Gopinath, G. (2015), “The International Price System,”
Federal Reserve Bank of Kansas City Economic Symposium,
Jackson Hole.
Gopinath, Gita and Oleg Itskhoki (2010), “Frequency of
Price Adjustment and Pass-Through,” Quarterly Journal of
Economics, 125 (2): 675–727.

Mahdavi, Saeid (2002), “The Response of the U.S. Export
Prices to Changes in the Dollar’s Effective Exchange Rate:
Further Evidence from Industry Level Data,” Applied Economics, 34 (17): 2115–2125.
Mann, Catherine L. (1986), “Prices, Profit Margins and
Exchange Rates,” Federal Reserve Bulletin 72 (6): 366–79.
Marazzi, Mario, Nathan Sheets, Robert Vigfusson, Jon
Faust, Joseph Gagnon, Jaime Marquez, Robert Martin,
Trevor Reeve and John Rogers (2005), “Exchange Rate
Pass-Through to U.S. Import Prices: Some New Evidence,”
International Finance Discussion Papers no. 833, Board of
Governors of the Federal Reserve System (U.S.).
Olivei, Giovanni P. (2002), “Exchange Rates and the Prices of
Manufacturing Products Imported into the United States,”
New England Economic Review, First Quarter, 3–18.
Pollard, P.S., and C.C. Coughlin (2004), “Size Matters:
Asymmetric Exchange Rate Pass-Through at the Industry
Level,” Working Paper no. 2003–029 (Federal Reserve Bank
of St. Louis).
Schoenle, Raphael (forthcoming), “International Menu Costs
and Price Dynamics,” Review of International Economics.
Taylor, John (2000), “Low Inflation, Pass-Through and the
Pricing Power of Firms,” European Economic Review, 44 (7):
Ware, Roger and Ralph Winter (1988), “Forward Markets,
Currency Options and the Hedging of Foreign Exchange
Risk,” Journal of International Economics, 25 (3–4):

32 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Conference on International Economics

By Michael Sposi


lobalization has led to increased

fundamental level.

integration across countries in

Current methods of constructing price

goods markets and financial

indexes and measures of welfare rely on three

markets and has changed the

distinct approaches: 1) macroeconomic price

environment in which policy operates. As a

indexes based on time-invariant prefer-

result, researchers in the various subfields

ences,1 2) microeconomic demand-system

have developed new methods to study and

estimation with time-varying demand curves

measure the consequences of globalization.

and 3) actual price data constructed using

To better understand these develop-

formulas that differ from those implied by

ments, the Federal Reserve Bank of Dallas’

macro and micro approaches but that embed

Globalization Institute and the University

intuitive properties researchers want to ex-

of Houston brought together researchers

The micro and macro approaches are

from academic institutions and the Federal
Reserve System for a conference focusing on

mutually inconsistent with each other, and

international trade and prices and on inter-

neither is consistent with the approaches

national finance and sovereign debt.

used by statistical agencies, the authors point

The goal was to foster a cross-pollination
of ideas across these subfields of international economics.

The authors develop a unified estimation approach to reconcile the discrepancies
between micro prices, macro prices and

International Trade, Prices

practice. In particular, they provide condi-

Understanding the welfare implications of

tions under which the aggregate utility

globalization—or of policy, for that matter—

function can be characterized by a constant

is of the utmost importance to economists.

aggregate demand parameter, in spite of

From a practitioner’s perspective, the mea-

demand for each good changing over time.

surement of welfare is challenging. A central

Additionally, the estimation approach in-

2016 Conference Summary

difficulty involves constructing indexes that

corporates the properties of the approaches

When: Oct. 7–8

accurately quantify changes in price levels

statistical agencies use most.

Where: Federal Reserve Bank of Dallas

and the cost of living across both time and

The authors demonstrate a new source

space. Any reasonable price index must be

of estimation bias that arises when one

consistent with some notion of consumer

ignores changes in demand over time. They

Federal Reserve Bank of Dallas;

preferences, or consumer utility, and must be

show empirically that this bias implicitly

University of Houston

constructed to use real-world data. Stephen

overstates cost-of-living changes by an aver-

Redding of Princeton University presented

age of 2.8 percentage points per year between

the paper “A Unified Approach to Estimat-

2000 and 2014. This bias is roughly as large

ing Demand and Welfare” (co-authored with

as the bias that would arise if one failed to

David Weinstein of Columbia University),

account for changes in the varieties of goods

which explores a new approach to bridg-

and services over time.

Sponsors: Globalization Institute,

ing price-index theory and data at the most

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 33

Expectations and Export Decisions
Not only is accounting for changes in

information about what the firm’s expectations actually were when making the deci-

varieties important for measuring economic

sion. So if a researcher incorrectly specifies

well-being, it is also important for under-

the expectations on which firms are acting,

standing fluctuations in trade volumes. That

the estimated fixed costs of exporting will be

is, much of the variation in trade volume is

biased. This is an important empirical issue

due to an extensive margin, reflecting firms

given that many questions involve quanti-

entering and exiting export markets. Eduardo

fying the response of exports to trade cost

Morales of Princeton University presented


“What Do Exporters Know” (co-authored

To mitigate this bias, the authors

with Michael Dickstein of New York Univer-

introduce a new econometric technique

sity), which examines firms’ export decisions.

that allows the researcher to measure firms’

Existing theories of export decisions in-

expectations using a few pieces of avail-

volve firms balancing a fixed cost of accessing

able data, such as lagged aggregate exports,

foreign markets with future profits that can

lagged domestic sales and distance. The

be earned from selling into those markets.

authors apply their methodology to Chilean

Uncertainty surrounding profits includes the

exporters and find that, after accounting

firms’ relative competitiveness, local demand

for the information available to firms at the

conditions and the local policy environment

time of the export decision, the estimated

in the foreign market. As such, if a researcher

parameters for the fixed cost of exporting are

observes that a particular firm did not export

at least 70 percent lower. One key implica-

to a market, it is inferred that either the fixed

tion is that, relative to a model in which firms

cost is too large or the expected profits are

have complete information, firms increase

too small.

their exports substantially more in response

However, the researcher has very little

Existing theories
of export decisions
involve firms
balancing a fixed
cost of accessing
foreign markets with
future profits that
can be earned from
selling into those

34 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

to otherwise equal reductions in trade costs.
In addition to the decision of whether

Trade costs are
clearly an important
determinant of the
magnitude and
direction of trade

Pol Antràs of Harvard University presented
“On the Geography of Global Value Chains”

to export, firms are faced with the challenge

(co-authored with Alonso de Gortari of Har-

of managing complex global supply chains,

vard), which develops a model to character-

from initial design to sourcing of inputs,

ize the best location for each stage of produc-

assembly and final distribution. That is, inter-

tion in a global value chain. Key trade-offs

national trade involves vertical linkages and

include: 1) minimizing the transport costs

trade in intermediate goods. To understand

between each stage, and 2) assigning each

how spillovers occur across countries, one

stage of production to the location that has

must first develop a framework that accounts

a comparative advantage at that stage (i.e.,

for the specific types of linkages. Chart 1

labor-intensive activities to countries with

depicts a typical supply chain for an arbitrary

low wages and high productivity at that stage)

electronic device.

in order to minimize the final consumer cost.

Previously, researchers incorporated

Between each stage of production, trade

trade in intermediate goods, but there were

costs are incurred, including transportation,

very few attempts to explicitly incorporate

storage and potentially tariff costs. After each

the sequential nature of the global value

stage of production, trade costs accumulate

chain, in which various stages of production

and further raise the value of the good. Trade

specifically make use of output from previous

costs tend to be roughly proportional to the


value of the good—for example, a tax rate
incurring high trade costs at the end of the

Challenges to Supply Chain

supply chain carries a greater impact than


at the beginning of the chain. Therefore, it

From a modeling perspective, many

is generally more efficient to incur propor-

complications arise, making modeling an

tionately smaller trade costs at the end of the

optimal supply chain technically challenging.

supply chain by, for instance, being closer to

Chart 1
Global Value Chain for Electronics Industry


Fab and Packaging

SOURCE: IDC Manufacturing Insights (courtesy

Components and


Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 35

a large market.
This feature guides the main finding of

tions create additional current demand for
international borrowing, driving up the real

the model: More upstream or basic activities

interest rate. In turn, current imbalances

should generally be performed at locations

are smaller than they otherwise would have

that are less central in the global economy,

been, and future imbalances are larger than

such as Singapore and Indonesia, while more

they otherwise would have been. That is,

downstream activities should be performed

trade imbalances are postponed to a future

at more central locations, such as China.

time when they are less costly to finance. As

Between the beginning and final stages, each

a result, the expectation of future trade-cost

step of production should occur at locations

declines generates an upward “tilt” in the

that are geographically close to the previous

magnitude of global imbalances over time.

stage, such as Thailand. These predictions are
broadly consistent with the data.

International trade in goods is not independent of financial considerations. For one,

Trade costs are clearly an important

a country’s balance of trade must be recon-

determinant of the magnitude and direction

ciled with the balance of payments so that a

of trade flows. Additionally, trade costs are

trade deficit is accompanied by net foreign

important for determining the balance of

borrowing, or a trade surplus is accompa-

trade. That is, in order for a country to run a

nied by net foreign lending. For another, the

trade deficit, it must borrow resources from

exchange rate, which is intimately linked to

the rest of the world. Ricardo Reyes-Heroles

the current account and capital flows, has

of the Federal Reserve Board presented his

important implications for firms that buy and

paper “The Role of Trade Costs in the Surge

sell goods across the world. The next set of

of Trade Imbalances,” in which he argues that

papers explores international capital markets

the decline in trade costs since 1970 accounts

more closely.

for 69 percent of the rise in global imbalances
during the period.
He identifies two channels through
which trade costs affect imbalances. First,

International Finance
and Sovereign Debt
Distortions that generate suboptimal

trade costs drive a wedge between the real

investment rates come with costly implica-

“effective” interest rate (i.e., the real interest

tions for economic performance. Liliana

rate converted into units of consumption)

Varela of the University of Houston presented

paid by the borrower and the real effective

“Reallocation, Competition and Productiv-

rate received by the lender on capital flows

ity: Evidence from a Financial Liberalization

used to finance the imbalances. During the

Episode.” The paper shows that distortions in

times when the borrowing country borrows,

international capital markets do, in fact, have

its consumption basket will be loaded with

consequences for the allocation of resources

high-cost imported goods, but when that

and aggregate productivity within a country.

country subsequently repays the loans, its

She develops a model with heterogeneous

consumption basket will contain relatively

firms that use capital for production and for

low-cost domestic goods. This composition

research and development, which affects

effect means that the overall gains to borrow-

future productivity and competitiveness. She

ing are diminished and, hence, there is less

uses the model as a framework to examine

incentive to borrow in the first place. As trade

the consequences of a financial liberalization

costs decline over time, the gap between real

episode in Hungary.

effective borrowing and lending rates nar-

Before 2001, foreign firms in Hun-

rows and it becomes less costly to run trade

gary were allowed access to international


credit markets, but domestic firms were not.

The second channel involves expectations of declining trade costs. Such expecta-

Growth rates for domestic firms were quite
similar to those of international firms. After

36 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

2001, capital controls were removed for all

dollar, Swiss franc, Danish krone, euro, Brit-


ish pound, Japanese yen, Norwegian krone,

Following the financial liberalization, domestic firms grew much faster than
international firms did. The paper shows that

it is rare that
governments fully
default, though they
may pay extremely
high spreads
to borrow from

New Zealand dollar and Swedish krona—visà-vis the U.S. dollar.
While this deviation between textbook

domestic firms experienced higher growth

theory and reality, known as the cross-

in labor productivity, and especially greater

currency basis, has been documented and

R&D and capital intensity. The higher degree

studied previously, the authors present

of capital intensity was a direct consequence

evidence pointing to a new combination of

of access to foreign capital. The paper also

factors driving it: 1) the increased cost of

shows that, following the liberalization,

financial intermediation following the crisis,

all firms became more competitive as the

and 2) the persistent imbalances in invest-

foreign firms’ markups decreased relative to

ment demand and funding supply across

domestic firms’, particularly in sectors that

countries. With regard to the first factor, the

rely more on external finance.

authors argue that because of regulations,

International credit and financial mar-

financial intermediaries cannot fully hedge

kets improve the allocation of resources and

their foreign currency positions. They find

generate higher efficiency and productivity,

that the magnitude of the cross-currency ba-

but some features of these markets are not

sis is larger at quarter-ends, when quarterly

well understood. For instance, the foreign

regulatory reports are due, a feature absent

exchange market (one of the largest in the

prior to the crisis. Concerning the second fac-

world) seems to admit systematic arbitrage

tor, they show that the cross-currency basis

opportunities. Consider a U.S. investor ex-

is higher for countries with higher nominal

changing one U.S. dollar for euros on the spot

interest rates, reflecting greater demand for

market, investing those euros in a risk-free

investment relative to saving. Moreover, the

German government bond and then convert-

basis tends to increase with monetary policy

ing the proceeds from that bond back into


dollars at a predetermined forward rate. Such

Whether CIP holds is crucial for central

a transaction should yield the same return

banks, whose monetary policy is aimed at

as investing that same U.S. dollar in a U.S.

targeting the exchange rate of, for instance,

risk-free asset, such as a short-term Treasury.

small open economies. Manuel Amador of

This equality, known as “covered interest

the Federal Reserve Bank of Minneapolis

parity” (CIP), has failed to hold following the

and the University of Minnesota presented

Great Recession yet remains deeply rooted in

“Exchange Rate Policies at the Zero Lower

the way practitioners and researchers think

Bound” (co-authored with Javier Bianchi and

about financial markets. In fact, the assump-

Fabrizio Perri of the Minneapolis Fed and Lu-

tion that CIP holds can be found in almost

igi Bocola of Northwestern University and the

any textbook on international finance.

National Bureau of Economic Research). The

Wenxin Du of the Federal Reserve Board

authors argue that if the nominal interest rate

presented “Deviations from Covered Interest

consistent with CIP happens to be negative,

Parity” (co-authored with Alexander Tepper

pursuing an exchange rate objective neces-

of Columbia University and Adrien Verdel-

sarily implies deviations from CIP given that

han of the Massachusetts Institute of Tech-

the nominal interest rate is constrained to

nology’s Sloan School of Management and

be non-negative. This provides an arbitrage

the National Bureau of Economic Research).

opportunity resulting in capital inflows into

The authors show that while CIP was a robust

the small open economy that is costly for the

feature of the data prior to the financial crisis,

central bank because it has to take the nega-

it has since broken down among the G-10

tive side of the arbitrage trades by accumulat-

currencies—the Australian dollar, Canadian

ing foreign reserves in order to manage an

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 37

exchange rate target.

July 30, 2014, when Argentina defaulted, the

authors refer to these as “desperate deals” be-

The authors also argue that there are

risk-neutral five-year default probability in-

cause the government will have to pay a high

welfare losses to the small open economy

creased from 40 percent to 100 percent, and

spread (over “safe” asset prices) for the credit.

that would not exist away from the zero lower

the estimates imply that this change alone

bound (ZLB). In particular, deeper financial

was responsible for a 28 percent decline in

eign country can circumvent some conse-

integration with the outside world, which

the value of Argentine firms.

quences of coordination failure that result

is typically beneficial when the economy is

The authors translate the changes in

Under these circumstances, the sover-

in a self-fulfilling debt crisis. The model,

above the ZLB, becomes a curse when at the

the value of the equities into changes in real

therefore, produces debt dynamics and vola-

ZLB following foreign interest rate increases.

economic activity, and find that the present

tile spreads more in line with the data than

The reasoning is that, at the ZLB, the size of

discounted value of gross domestic product

what other theories predict. Specifically, the

the required reserve accumulation increases.

growth declined between 3.6 percent and 6.6

model indicates that: 1) actual default is rare,

percent as a result of the default.

2) spreads are volatile in emerging econo-

International financial markets play an
equally important role in the conduct of fiscal

Given that the economic consequences

mies and 3) large spikes in spreads are only

policy as it pertains to debt issuance and re-

of sovereign default are large, it is crucial to

weakly correlated with declines in output

payment. Governments across the world reg-

have a theoretical foundation to understand

(e.g., recently in Portugal, Ireland, Italy, Spain

ularly tap international credit markets for the

the inner workings of the market for sover-

and Greece).

financing of infrastructure projects as well

eign debt. Whether warranted or not, on oc-

as for regular spending on payroll and social

casion investors may place a high probability

programs. In many cases, much financing

on the government defaulting or may believe

is sourced from foreign investors. When a

that there is a high degree of uncertainty in

pushed the research frontier for various

country’s fiscal authority runs into trouble, or

terms of default. This makes it more difficult

subfields within international economics,

when the debt is denominated in foreign cur-

for the government to auction bonds and,

including international trade, international

rency and the local currency depreciates, the

thus, increases the incentive for the govern-

finance and sovereign debt. Moreover, the

government must decide whether to default.

ment to default. In this sense, default can

presentations and discussions made evident

Benjamin Hébert from Stanford University

potentially be self-fulfilling in that investors’

that there are important overlaps between

presented “The Costs of Sovereign Default:

expectations are the very reason for default.

each subfield. The interdependence between

Evidence from Argentina” (co-authored with

In the previous literature, such situations

international trade, trade imbalances and

Jesse Schreger of Princeton University and

tend to result in failed auctions, in which the

capital flows is one such overlap. Another is

Harvard Business School). The paper sheds

government cannot issue debt at a positive

the close relationship between international

light on the magnitude of default costs. A key

price, and default results.

capital markets and sovereign debt and de-

issue that any study confronts is the chick-

Empirically, it is rare that governments

Pushing the Research Frontier
The papers presented at the conference


en-and-egg problem: Does the economy

fully default, though they may pay extremely

deteriorate because of the sovereign default,

high spreads to borrow from investors. Satya-

ticipant discussions, including those by

or does the government default because the

jit Chatterjee of the Federal Reserve Bank of

“Exchange Rate Policies at the Zero Lower

economy deteriorates? To examine this, the

Philadelphia presented “Self-Fulfilling Debt

Bound” co-author Luigi Bocola, Laura Alfaro

authors explore legal rulings in the case of

Crises, Revisited: The Art of the Desper-

of Harvard University, Michael Devereux of

Argentina and examine how equity returns

ate Deal” (co-authored with Mark Aguiar

the University of British Columbia, Jona-

and exchange rates responded to changes in

of Princeton University, Harold Cole of the

than Eaton of Penn State University, Robert

the probability of default.

University of Pennsylvania and Zachary

Johnson of Dartmouth College, Hanno Lustig

By assuming that Argentine firms in the

Each paper prompted excellent par-

Stangebye of the University of Notre Dame).

of Stanford University, Benjamin Malin of the

economy are not directly impacted by the

The paper presents a model that attempts to

Federal Reserve Bank of Minneapolis, Vivian

legal rulings, they use prices of credit default

capture these more realistic features.

Yue of Emory University and Jing Zhang of

swaps to measure changes in the probability

Their model includes “fire-sale auc-

the Federal Reserve Bank of Chicago.

of Argentine government default. The authors

tions,” in which the government can issue

compile and isolate 15 rulings that poten-

debt at a positive, albeit low, price when


tially changed the probability of default.

investors place a high probability on default.

They find that, on average, increases in the

That is, the government knows that its fun-

The Törnqvist index is one of the more commonly used

likelihood of default reduced the U.S.-dollar

damentals are relatively strong enough and

value of Argentine assets. Specifically, on

is therefore willing to make such deals. The


38 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Summary of Activities 2016

Institute staff
published research
in top peer-reviewed
journals and added
35 new papers to its
working paper series
to go with 38 in 2015,
bringing the series
total to 294.

n 2016, the Globalization Insti-

• Open Economies Review—“A Quantitative

tute continued its tradition of re-

Assessment of the Role of Incomplete Asset

search excellence by publishing

Markets on the Dynamics of the Real Ex-

a number of notable academic

change Rate,” by Enrique Martínez-García

papers and convening leading minds in the

• Review of Regional Studies—“Diversification

field of economics to discuss topics vital to

and Specialization of U.S. States,” by Janet

the U.S. and world economies.

Koech and Mark A. Wynne, forthcoming

Institute staff published research in top

In addition, Cambridge University Press

peer-reviewed journals and added 35 new

in spring 2016 published the proceedings of

papers to its working paper series to go with

the institute’s 2014 centennial conference as

38 in 2015, bringing the series total to 294.

The Federal Reserve’s Role in the Global Econo-

Of the 35 new papers, permanent staff in

my: A Historical Perspective (Michael D. Bordo

Dallas contributed 15 and institute research

and Wynne, editors).

associates provided the rest. As in years past,

At year-end, the staff had papers under

a wide range of topics was covered, including

review at Econometrica, the Journal of Monetary

insight from markets for bitcoin, interna-

Economics and the Review of Financial Studies.

tional linkages at the level of individual U.S.
states, technical contributions dealing with


econometric theory, and the solution of ra-

The institute organized one major

tional expectations models (a full list of new

research conference in 2016, a collaboration

working papers is provided elsewhere in this

with the University of Houston that is expect-


ed to become an annual event alternating

In addition, the institute hosted a major

between Dallas and Houston. The conference

research conference with the University of

featured presentations from researchers at

Houston and revived its public lecture series,

the University of Houston as well as the Fed-

renaming it Global Perspectives.

eral Reserve Board of Governors and Federal
Reserve Bank of Minneapolis and Harvard,

Academic Research

Pennsylvania State, Princeton and Stanford

The year 2015 was the institute’s best to date

universities. A full summary of the confer-

in terms of journal acceptances, with perma-

ence by Michael Sposi is presented elsewhere

nent staff contributing 13 papers. While the

in this report.

acceptance rate was notably lower in 2016,

Staff presented their work at high-profile

staff had papers accepted for publication in

conferences and in university seminars

several peer-reviewed journals, including:

throughout 2016. These included the Carne-

• Journal of Monetary Economics (Carnegie-

gie-Rochester-New York University Confer-

Rochester Conference Series)—“Capital

ence Series on Public Policy, Fall Midwest

Controls and Monetary Policy Autonomy in a

Trade meeting, International Association for

Small Open Economy,” by J. Scott Davis and

Applied Econometrics conference, Mid-

Ignacio Presno

west Macroeconomics meeting and RIDGE

• Journal of International Economics—

Workshop on Trade and Firm Dynamics,

“Distribution Capital and the Short- and

plus meetings of the Allied Social Sciences

Long-Run Import Demand Elasticity,” also by

Association, Econometric Society, Midwest

Davis with Mario J. Crucini

Economics Association, Society for Economic
Dynamics, Southern Economic Association,

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 39

Spanish Economic Association, System Com-

former U.S. Treasury Secretary Henry Paul-

mittee on International Economic Analysis

son in March, followed by Harvard Business

and Western Economic Association. Staff

School Dean Nitin Nohria in June, former

also gave seminar presentations abroad at

U.S. Treasury Secretary Larry Summers in

the Bank for International Settlements–Hong

September, former U.S. Treasury Secretary

Kong, Reserve Bank of New Zealand, Shang-

Robert Rubin in October and, finally, former

hai University of Finance and Economics and

Bank of England Governor Lord Mervyn

University of Exeter (UK) and at home at Ari-

King in November. An edited version of the

zona State University, Marquette University,

conversation between Kaplan and Lord King

Purdue University and University of Texas.

appears elsewhere in this report.

Bank Publications


Institute staff contributed seven articles

There were no new hires to the perma-

to the Bank’s Economic Letter publication:

nent staff in 2016. Agustín Bénétrix (Trin-

“Emerging-Market Debtor Nations Likely to

ity College Dublin), Daniel Riera-Crichton

Follow Fed Rate Boosts,” by Davis; “Con-

(Bates College), Jae Won Lee (Seoul National

sequences of the Euro: Monetary Union,

University), Gina Pieters (Trinity University)

Economic Disunion?” by Martínez-García

and Nam Vu (Miami University) joined the

and Valerie Grossman; “Stock Market Pro-

institute’s network of research associates.

vides Imperfect View of Real U.S. Economy,”

Mina Kim (Bureau of Labor Statistics) and Pi-

by Julieta Yung; “Impact of Chinese Slow-

eters visited the institute for the fall semester.

down on U.S. No Longer Negligible,” by

Eric van Wincoop (University of Virginia) also

Alexander Chudik and Arthur Hinojosa;

visited for a week in the fall. Ariel Weinberger

“Global Demographic Trends Shape Policy

(University of Oklahoma) and Alejandro Ri-

Environment,” by Wynne; “Risk, Uncertainty

vera (University of Texas at Dallas) were also

Separately Cloud Global Growth Forecast-

regular visitors during 2016.

ing,” by Chudik, Martínez-García and Grossman; and “U.S. Productivity Growth Flowing
Downstream,” by Sposi and Kelvinder Virdi.
Economic Letter is designed to disseminate
research to a broad nontechnical audience.
Institute Public Lecture Becomes
Global Perspectives
The institute extended its public lecture
series, which resumed toward the end of
2015. The series was rebranded as Global
Perspectives and featured several high-profile speakers. February’s Trilateral Conference was highlighted by a panel discussion
between Dallas Fed President Robert S.
Kaplan, Bank of Canada Governor Stephen
S. Poloz and Banco de México Governor
Agustín Carstens. The series continued with

The institute
extended its public
lecture series,
which resumed
toward the end of
2015. The series
was rebranded as
Global Perspectives
and featured
several high-profile

40 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Institute Working Papers Issued in 2016
Working papers can be found online at

No. 260
Optimal Monetary and Fiscal Policy at
the Zero Lower Bound in a Small Open
Saroj Bhattarai, Konstantin Egorov
No. 261
Inflation as a Global Phenomenon—
Some Implications for Policy Analysis
and Forecasting
Ayse Kabukçuoglu, Enrique Martínez-García
No. 262
Quantitative Assessment of the Role
of Incomplete Asset Markets on the
Dynamics of the Real Exchange Rate
Enrique Martínez-García
No. 263
The U.S. Oil Supply Revolution and the
Global Economy
Kamiar Mohaddes, Mehdi Raissi

No. 268
Big Data Analytics: A New Perspective
Alexander Chudik, George Kapetanios, M.
Hashem Pesaran

No. 276
Is the Renminbi a Safe Haven?
Rasmus Fatum, Yohei Yamamoto, Guozhong

No. 269
The Post-Crisis Slump in the Euro
Area and the U.S.: Evidence from an
Estimated Three-Region DSGE Model
Robert Kollmann, Beatrice Pataracchia, Rafal
Raciborski, Marco Ratto, Werner Roeger, Lukas

No. 277
Oil Prices and the Global Economy: Is It
Different This Time Around?
Kamiar Mohaddes, M. Hashem Pesaran

No. 270
China’s Slowdown and Global Financial
Market Volatility: Is World Growth Losing
Paul Cashin, Kamiar Mohaddes, Mehdi Raissi
No. 271
The Deep Historical Roots of
Macroeconomic Volatility
Sam Hak Kan Tang, Charles Ka Yui Leung

No. 264
The Implications of Liquidity Expansion
in China for the U.S. Dollar
Wensheng Kang, Ronald A. Ratti, Joaquin L.

No. 272
Optimal Monetary Policy in Open
Economies Revisited
Ippei Fujiwara, Jiao Wang

No. 265
Endogenous Firm Competition and the
Cyclicality of Markups
Hassan Afrouzi

No. 273
Banking Crises, External Crises and
Gross Capital Flows
Thorsten Janus, Daniel Riera-Crichton

No. 266
Wages and Human Capital in Finance:
International Evidence, 1970-2005
Hamid Boustanifar, Everett Grant, Ariell Reshef

No. 274
The Market Resources Method for
Solving Dynamic Optimization Problems
Ayse Kabukçuoglu, Enrique Martínez-García

No. 267
Economic Fundamentals and Monetary
Policy Autonomy
Scott Davis

No. 275
Breaking Down World Trade Elasticities:
A Panel ECM Approach
Jaime Martinez-Martin

No. 278
On What States Do Prices Depend?
Answers From Ecuador
Craig Benedict, Mario J. Crucini, Anthony
No. 279
Trends and Cycles in Small Open
Economies: Making the Case for a
General Equilibrium Approach
Kan Chen, Mario Crucini
No. 280
Exposure to International Crises: Trade
vs. Financial Contagion
Everett Grant
No. 281
Half-Panel Jackknife Fixed Effects
Estimation of Panels with Weakly
Exogenous Regressors
Alexander Chudik, M. Hashem Pesaran, JuiChung Yang
No. 282
The Speed of Exchange Rate PassThrough
Barthélémy Bonadio, Andreas M. Fischer, Philip
No. 283
Central Bank Communications: A Case
Scott Davis, Mark A. Wynne

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 41

No. 284
Diversification and Specialization of U.S.
Janet Koech, Mark A. Wynne
No. 285
System Reduction and Finite-Order VAR
Solution Methods for Linear Rational
Expectations Models
Enrique Martínez-García
No. 286
FDI and the Task Content of Domestic
Employment for U.S. Multinationals
Alexis Grimm, Mina Kim
No. 287
Macroeconomic News and Asset Prices
Before and After the Zero Lower Bound
Christoffer Koch, Julieta Yung
No. 288
Financial Performance and
Macroeconomic Fundamentals in
Emerging Market Economies over the
Global Financial Cycle
Scott Davis, Andrei Zlate
No. 289
Globalization, Market Structure and
Inflation Dynamics
Sophie Guilloux-Nefussi
No. 290
A One-Covariate at a Time, Multiple
Testing Approach to Variable Selection
in High-Dimensional Linear Regression
Alexander Chudik, George Kapetanios, M.
Hashem Pesaran

No. 291
Do Oil Endowment and Productivity
Matter for Accumulation of International
Rasmus Fatum, Guozhong Zhu, Wenjie Hui
No. 292
Does Bitcoin Reveal New Information
About Exchange Rates and Financial
Gina Pieters
No. 293
Financial Regulations and Price
Inconsistencies across Bitcoin Markets
Gina Pieters, Sofia Vivanco
No. 294
Capital Goods Trade, Relative Prices, and
Economic Development
Piyusha Mutreja, B. Ravikumar, Michael Sposi

42 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Institute Staff and Senior Fellows

Institute Director

Senior Fellows

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

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


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

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

Michael B. Devereux
Professor of Economics,
University of British Columbia
Visiting Scholar, International Monetary
Charles Engel
Professor of Economics, University of
Research Associate, National Bureau of
Economic Research
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

Globalization and Monetary Policy Institute 2016 Annual Report • FEDERAL RESERVE BANK OF DALLAS 43

Research Associates

Raphael Auer
Swiss National Bank

Silvio Contessi
Monash Business School

Enisse Kharroubi
Bank for International Settlements

Simone Auer
Swiss National Bank

Dudley Cooke
University of Exeter Business School

Mina Kim
Bureau of Labor Statistics

Chikako Baba
International Monetary Fund

Richard Dennis
University of Glasgow

Agustín Bénétrix*
Trinity College Dublin

Roberto Duncan
Ohio University

Robert Kollmann
European Centre for Advanced Research in
Economics and Statistics

Pierpaolo Benigno
LUISS Guido Carli

Peter Egger
Eidgenössische Technische Hochschule

Martin Berka
University of Auckland Business School
Saroj Bhattarai
University of Texas at Austin

Aitor Erce
Bank of Spain and European Stability

Javier Bianchi
Federal Reserve Bank of Minneapolis

Ester Faia
Goethe University Frankfurt

Claudio Borio
Bank for International Settlements

Rasmus Fatum
University of Alberta School of Business

Hafedh Bouakez
HEC Montréal

Andrew Filardo
Bank for International Settlements

Matthieu Bussière
Banque de France

Andreas Fischer
Swiss National Bank

Matteo Cacciatore
HEC Montréal

Marcel Fratzscher
German Institute for Economic Research

Alessandro Calza
European Central Bank

Ippei Fujiwara
Australian National University

Máximo Camacho
Universidad de Murcia

Pedro Gete
Georgetown University

Michele Ca'Zorzi
European Central Bank

Bill Gruben
Texas A&M International University

Bo Chen
Shanghai University of Finance and

Sophie Guilloux-Nefussi
Bank of France

Hongyi Chen
Hong Kong Institute for Monetary Research
Yin-Wong Cheung
University of California, Santa Cruz/City
University of Hong Kong
C.Y. Choi
University of Texas at Arlington
*New to the institute in 2016

Ping He
Tsinghua University
Gee Hee Hong
International Monetary Fund

Jae Won Lee*
Seoul National University
Charles Ka Yui Leung
City University of Hong Kong
Nan Li
International Monetary Fund
Shu Lin
Fudan University
Tuan Anh Luong
De Montfort University
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

Yi Huang
The Graduate Institute Geneva

Jair Ojeda
Banco de la República (Colombia's Central

Erasmus Kersting
Villanova University

Gina Pieters*
Trinity University
(continued on next page)

44 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2016 Annual Report

Deokwoo Nam
City University of Hong Kong

Kozo Ueda
Waseda University, Tokyo

Dimitra Petropoulou
University of Surrey

Joaquin Vespignani
University of Tasmania

Vincenzo Quadrini
University of Southern California

Nam Vu*
Miami University

Mehdi Raissi
International Monetary Fund

Eric van Wincoop
University of Virginia

Attila Rátfai
Central European University

Giovanni Vitale
European Central Bank

Daniel Riera-Crichton*
Bates College

Xiao Wang
University of North Dakota

Kim Ruhl
Stern School of Business

Yong Wang
Hong Kong University of Science and

Katheryn Russ
University of California—Davis
Filipa Sá
King's College London
Raphael Schoenle
Brandeis University
Giulia Sestieri
Banque de France
Etsuro Shioji
Hitotsubashi University

Ariel Weinberger
University of Oklahoma
Tomasz Wieladek
Center for Economic Policy (CEPR)
Hakan Yilmazkuday
Florida International University
Jianfeng Yu
University of Minnesota

Shigenori Shiratsuka
Bank of Japan

Zhi Yu
Shanghai University of Finance and

Ina Simonovska
University of California—Davis

Yu Yuan
University of Iowa

Vanessa Smith
University of York

*New to the institute in 2016

Jens Søndergaard
Capital Strategy Research
Bent E. Sorensen
University of Houston
Heiwai Tang
Johns Hopkins University
Cédric Tille
Graduate Institute for International and
Development Studies
Ben A. R. Tomlin
Bank of Canada