Bank of New York Number 2 2005 ResearchUpdate

Research and Statistics Group www.newyorkfed.org/research

New Study Estimates U.S. Welfare Gains from the Increased Variety of Imported Goods he growth of international trade To measure the degree to which this in recent decades has greatly increase in available varieties enhances Texpanded U.S. consumers’ choice consumer well-being, the authors recal- of goods. While the benefits of trade have culate the U.S. import price index for traditionally been associated with 1972-2001 taking variety growth into declines in the price of existing products, account. By comparing their variety- economists now recognize that the avail- adjusted estimate of the rate of change in ability of new imported goods and varie- import prices over the sample period with ties constitutes another important gain the conventional estimate that does not from trade. include variety growth, they obtain a In “Are We Underestimating the Gains measure of the nation’s welfare gains from Globalization for the United States?” from variety growth. (Current Issues in Economics and Finance, The authors’ calculations show that vol. 11, no. 4), authors Christian Broda between 1972 and 2001, the variety- and David Weinstein break new ground adjusted price of imports fell about 1.2 per- by providing a measure of the gains from centage points per year faster than the variety growth. Their estimates put the unadjusted price. Thus, the real cost of value to U.S. consumers of global variety imports was almost 30 percent lower at growth in the 1972-2001 period at the end of the period than the conven- roughly $260 billion. tional price index would suggest. Reason- The authors begin their analysis by ing that imports account for about 10 per- calculating the increase in global varieties cent of U.S. GDP, Broda and Weinstein from 1972 to 2001. They find that over then estimate that the value to consumers this period, the number of product varie- of this drop in import prices is about 3 per- ties more than tripled. This increase cent of GDP in 2001, or approximately reflects a sharp rise in both the number $260 billion. ■ of goods available and the number of countries supplying each good. ResearchVolume 9, Update Number ■ 2,Number 2005 2, 2005

Premier Issue of International Journal of Central Banking Is Published n May, the Federal Reserve Board, ■ Do Actions Speak Louder Than Words? along with the twenty-four other The Response of Asset Prices to Monetary sponsoring institutions of the Policy Actions and Statements I Refet S. Gürkaynak, Brian Sack, International Journal of Central Banking and Eric T. Swanson (IJCB), announced the publication of the ■ The Performance and Robustness of Interest- journal’s first issue and the launch of a Rate Rules in Models of the Euro Area website hosted by the Bank for Ramón Adalid, Günter Coenen, International Settlements. Peter McAdam, and Stefano Siviero The IJCB, a quarterly publication, is an ■ Monetary Policy Neglect and the Great initiative of the central banking commu- Inflation in Canada, Australia, nity. It features articles on central bank and New Zealand 2 theory and practice, with a special Edward Nelson emphasis on research relating to mone- ■ Committees versus Individuals: An tary and financial stability. The journal’s Experimental Analysis of Monetary main objectives are to disseminate widely Policy Decision Making Clare Lombardelli, James Proudman, the best policy-relevant and applied and James Talbot research that reflects the missions of ■ central banks around the world across a Exchange Rate Volatility and the Credit Channel in Emerging Markets: range of disciplines, and to promote A Vertical Perspective communication among researchers both Ricardo Caballero and Arvind Krishnamurthy inside and outside central banks. The IJCB’s first issue contains the Detailed information on the International following articles: Journal of Central Banking can be found at ■ Monetary Policy with Judgment: www.ijcb.org. Forecast Targeting Lars E. O. Svensson

Publications and Papers

The Research and Statistics Group produces a wide range of publications: ■ The Economic Policy Review—a policy-oriented journal focusing on economic and financial market issues. ■ EPR Executive Summaries—online versions of selected Economic Policy Review articles in abridged form. ■ Current Issues in Economics and Finance—concise studies of topical economic and financial issues. ■ Second District Highlights—a regional supplement to Current Issues. ■ Staff Reports—technical papers intended for publication in leading economic and finance journals, available only online. ■ Publications and Other Research—an annual catalogue of our research output.

Federal Reserve Bank of New York www.newyorkfed.org/research

New Titles in the Staff Reports Series

The following new Staff Reports are welfare. Indeed, one or, more surprisingly, available at www.newyorkfed.org/ both types of agents may benefit if the cen- research/staff_reports. tral bank deviates from the Friedman rule. MACROECONOMICS AND GROWTH INTERNATIONAL

No. 206, April 2005 No. 209, May 2005 Shock Identification of Macroeconomic The Simple Geometry of Transmission Forecasts Based on Daily Panels and Stabilization in Closed and Marlene Amstad and Andreas M. Fischer Open Economies Giancarlo Corsetti and Paolo Pesenti This paper proposes a new procedure for shock identification of macroeconomic This paper provides an introduction to the forecasts based on factor analysis. The recent literature on macroeconomic stabili- 3 authors’ identification scheme for informa- zation in closed and open economies. tion shocks relies on data reduction Corsetti and Pesenti present a stylized theo- techniques for daily panels and the recog- retical framework, illustrating its main nition that macroeconomic releases exhibit properties with the help of an intuitive a high level of clustering. This information graphical apparatus. Among the issues dis- clustering facilitates the interpretation of cussed are optimal monetary policy and the forecast innovations as real or nominal welfare gains from macroeconomic stabili- information shocks. An empirical applica- zation, the international transmission of tion is provided for Swiss inflation. Amstad real and monetary shocks and the role of and Fischer show that the monetary policy exchange rate pass-through, and the design shocks generate an asymmetric response to of optimal exchange rate regimes and mone- inflation, that the pass-through for con- tary coordination among interdependent sumer price index inflation is weak, and economies. that the information shocks to inflation are not synchronized. MICROECONOMICS

No. 208, May 2005 No. 212, June 2005 Who Is Afraid of the Friedman Rule? Propensity Score Matching, a Distance- Joydeep Bhattacharya, Joseph Haslag, Based Measure of Migration, and the Antoine Martin, and Rajesh Singh Wage Growth of Young Men The authors explore the connection John C. Ham, Xianghong Li, and Patricia B. Reagan between optimal monetary policy and het- erogeneity among agents. They utilize a This paper estimates the effect of U.S. standard monetary economy with two types internal migration on real wage growth of agents that differ in the marginal utility between the movers’ first and second jobs. they derive from real money balances—a Ham, Li, and Reagan develop an economic framework that produces a nondegenerate model to 1) assess the appropriateness of stationary distribution of money holdings. matching as an econometric method for Without type-specific fiscal policy, the studying migration and 2) choose the con- authors show that the zero-nominal-interest- ditioning variables used in the matching rate policy (the Friedman rule) does not procedure. The authors find a significant maximize type-specific welfare; further, it effect of migration on the wage growth of may not maximize aggregate ex ante social college graduates of 10 percent and a

Research and Statistics Group Research Update ■ Number 2, 2005

marginally significant effect for high-school cap sectors are modeled by way of a vector dropouts of -12 percent. If the authors use autoregression model, using data that span a measure of migration based on moving more than 3,000 trading days. The authors across either county lines or state lines, the find that volatility and liquidity innovations significant effects of migration for college in one sector are informative in predicting graduates and dropouts disappear. liquidity shifts in the other. Impulse responses indicate the existence of persist- No. 213, June 2005 ent liquidity, return, and volatility spill- Selection Bias, Demographic Effects, overs across the small- and large-cap and Ability Effects in Common Value sectors. Lead and lag patterns across small- Auction Experiments and large-cap stocks are stronger when Marco Casari, John C. Ham, spreads in the large-cap sector are wider. and John H. Kagel Consistent with the notion that private The authors find clear demographic and informational trading in large-cap stocks is ability effects on bidding in common value transmitted to other stocks with a lag, 4 auctions: inexperienced women are much order flows in the large-cap decile predict more susceptible to the winner’s curse than both transaction-price-based and mid- are men, but they catch up quickly; eco- quote returns of small-cap deciles when nomics and business majors substantially large-cap spreads are high. overbid relative to other majors; and those with superior SAT/ACT scores are much No. 210, June 2005 less susceptible to the winner’s curse. Banking, Markets, and Efficiency There are strong selection effects in bid Falko Fecht and Antoine Martin estimates for both inexperienced and expe- This paper addresses the question whether rienced subjects that are not identified the increased financial market access of using standard econometric techniques, but households improves welfare in a financial rather through the authors’ experimental system where there is intense bank compe- design effects. Ignoring these selection tition for private households’ funds. The effects is most misleading for inexperi- authors use a model in which the degree of enced bidders, because the unbiased esti- liquidity insurance offered to households mates of the bid function indicate much through banks’ deposit contracts is restrained faster learning and adjustment to the win- by household financial market access; ner’s curse for individual bidders than do however, they also assume spatial monopo- the biased estimates. listic competition among banks. Fecht and Martin’s results suggest that in Germany’s bank-dominated financial system, charac- BANKING AND FINANCE terized by intense competition for house- No. 207, April 2005 holds’ deposits, improved financial market The Joint Dynamics of Liquidity, access might reduce welfare because it Returns, and Volatility across only reduces risk sharing. In contrast, in Small and Large Firms the U.S. banking system, where there is Tarun Chordia, Asani Sarkar, less competition for households’ deposits, and Avanidhar Subrahmanyam a high level of household financial market participation might be beneficial. This paper explores liquidity spillovers in market-capitalization-based portfolios of NYSE stocks. Return, volatility, and liquid- ity dynamics across the small- and large-

Federal Reserve Bank of New York www.newyorkfed.org/research

No. 211, June 2005 branch networks. This paper assesses the The Impact of Network Size implications of these developments by exam- on Bank Branch Performance ining a series of simple branch performance Beverly Hirtle measures and asking how these measures Despite recent innovations that might have vary, on average, across institutions with reduced banks’ reliance on brick-and-mortar different branch network sizes. Based on branches for distributing retail financial ser- bank-average deposits per branch, small vices, the number of U.S. bank branches has business loans per branch, and net deposit continued to increase steadily over time. funding costs, mid-sized branch networks Further, an increasing percentage of these may be at a competitive disadvantage relative ■ branches are held by banks with large to both larger and smaller branch networks.

5 Recently Published

Stefano Eusepi. 2005. “Did the Great Antoine Martin. 2005. “Recent Evolution Inflation Occur despite Policymaker of Large-Value Payment Systems: Commitment to a ?” with Balancing Liquidity and Risk.” Federal James Bullard. Review of Economic Reserve Bank of Kansas City Economic Dynamics 8, no. 2 (April): 324-59. Review 90, no. 1 (first quarter): 33-57.

Michael J. Fleming. 2005. “U.S. Treasury Hamid Mehran. 2005. “Regulatory and Agency Securities,” with Frank J. Incentives and Consolidation: The Case Fabozzi. In Frank J. Fabozzi, ed., The of Commercial Bank Mergers and the Handbook of Fixed Income Securities, 7th Community Reinvestment Act,” with ed., 229-50. New York: McGraw-Hill. Raphael Bostic, Anna L. Paulson, and Marc Saidenberg. B. E. Journals in Michael J. Fleming and Kenneth D. Economic Analysis and Policy 5, no. 1 Garbade. 2005. “Anomalous Bidding in (March):1-27. Short-Term Treasury Bill Auctions,” with Frank Keane. Journal of Financial Simon Potter. 2005. “Predicting Recessions Research 28, no. 2 (summer): 165-76. Using the Yield Curve,” with Marcelle Chauvet. Journal of Forecasting 24, no. 2 Charles Himmelberg. 2005. “Do Stock (March): 77-103. Price Bubbles Influence Corporate Investment?” with Simon Gilchrist and Charles Steindel. 2005. “Future Public Gur Huberman. Journal of Monetary Debt Accumulation and Saving in the Economics 52, no. 4 (May): 805-27. United States.” In Daniele Franco, ed., Public Debt. Rome: Bank of Italy. ■ Amartya Lahiri. 2005. “A Two-Country Model of Endogenous Growth,” with Roger E. Farmer. Review of Economic Dynamics 8, no. 1 (January): 68-88.

Research and Statistics Group Research Update ■ Number 2, 2005

Papers Presented by Economists “Predatory Lending?” Donald Morgan. Federal Reserve Bank of Chicago Bank in the Research and Statistics Group Structure Conference, Chicago, Illinois, “Does the Time Inconsistency Problem May 4. With Samuel Hanson. Make Flexible Exchange Rates Look “Current Accounts and Global Worse Than You Think?” Roc Armenter. Rebalancing in a Multi-Country Centre de Recerca en Economia Simulation Model,” Paolo Pesenti. NBER Internacional macroeconomics workshop, conference on G7 Current Account Imbalances, Universitat Pompeu Fabra, Barcelona, Newport, Rhode Island, June 1. With Hamid Spain, June 21. With Martin Bodenstein. Faruqee, Douglas Laxton, and Dirk Muir. “Corporate Payments Services Survey “The Global Economy Model (GEM): Results,” Michele Braun. National Design and Applications,” Paolo Pesenti. Automated Clearing House Association Bank of Canada International Department conference, San Antonio, Texas, April 11. seminar, Ottawa, Canada, May 10. With Sandy Krieger. “Productivity Spillovers, Terms of 6 “Trade Invoicing in the Accession Trade, and the ‘Home Market Effect,’” Countries: Are They Suited to the Euro?” Paolo Pesenti. Centre for Economic Policy Linda Goldberg. NBER conference, Research and Central Bank of Cyprus Euro- Budapest, Hungary, June 18. pean Summer Symposium in International “Vehicle Currency Use in International Macroeconomics, Limassol, Cyprus, May 28. Trade,” Linda Goldberg. NBER conference, With Giancarlo Corsetti and Philippe Martin. Cambridge, Massachusetts, April 1. With “The Simple Geometry of Transmission Cédric Tille. Also presented at a University and Stabilization in Closed and Open of Houston Department of Economics Economies,” Paolo Pesenti. Harvard University seminar, Houston, Texas, May 2, and a Department of Economics lecture, Cambridge, conference cosponsored by Northwestern Massachusetts, May 9. With Giancarlo Corsetti. University and the European University “Welfare-Based Monetary Policy Rules Institute, Florence, Italy, June 14. in an Estimated Model of the U.S. “Vertical Contracts as a Source of Economy,” Paolo Pesenti. International Incomplete Cross-Border Transmission: Research Forum on Monetary Policy, The Case of Autos,” Rebecca Hellerstein. European Central Bank, Frankfurt, Workshop on Globalization and Contracts, Germany, May 21. With Michel Juillard, cosponsored by the Centre for Economic Philippe Karam, and Douglas Laxton. Policy Research and the Department and “Bank Loans, Bonds, and Informational Laboratory of Theoretical and Applied Monopolies across the Business Cycle,” Economics at the École Normale João Santos. Federal Reserve Bank of Supérieure, Paris, France, April 28. Chicago Bank Structure Conference, With Sofia Berto Villas-Boas. Chicago, Illinois, May 4. With Andrew Winton. “Unemployment Insurance and the “The Joint Dynamics of Liquidity, Diminished Importance of Temporary Returns, and Volatility across Large and Layoffs over the Business Cycle,” Small Firms,” Asani Sarkar. International Margaret McConnell. Society of Labor Conference on New Financial Market Economics meetings, San Francisco, Structures, held at HEC Montréal, California, June 2. With Joseph Tracy. Montreal, Canada, April 8. With Tarun “Board Committee Structures, Chordia and Avanidhar Subrahmanyam. Incentives, and Firm Performance,” Hamid Mehran. Rutgers University semi- nar, New Brunswick, New Jersey, June 10. With Rachel Hayes and Scott Schaefer. Federal Reserve Bank of New York www.newyorkfed.org/research

“A Search for a Structural Phillips at the Rutgers University Conference on Curve,” Argia Sbordone. Columbia Pacific Basin Finance, Economics, and Business School seminar, New York City, Accounting, New Brunswick, New Jersey, March 15. With Timothy Cogley. June 11.

“A General Approach to Integrated Risk “Bank Risk and Revenue Diversification: Management with Skewed, Fat-Tailed An Assessment Using Equity Returns,” Distributions,” Til Schuermann. Georgia Kevin Stiroh. Basel Committee on Banking Tech University, Atlanta, Georgia, April 1. Supervision, Oesterreichische Nationalbank, With Joshua Rosenberg. Also presented at Vienna, Austria, April 22. the Journal of Applied Econometrics Annual Lecture Series and Conference, “Financial Integration and the Wealth Venice, Italy, June 2. Effect of Exchange Rate Fluctuations,” Cédric Tille. Cornell University seminar, “Scope for Credit Risk Diversification,” Ithaca, New York, April 13. Also presented Til Schuermann. University of Massachusetts at the Society for Economic Dynamics annual Department of Finance seminar, Amherst, meeting, Budapest, Hungary, June 23. 7 Massachusetts, March 11. With M. Hashem Pesaran and Samuel Hanson. Also presented

Research and Statistics Group Publications and Papers: April-June 2005 CURRENT ISSUES IN ECONOMICS No. 208, May 2005 AND FINANCE, VOL. 11 Who Is Afraid of the Friedman Rule? Joydeep Bhattacharya, Joseph Haslag, No. 4, April 2005 Antoine Martin, and Rajesh Singh Are We Underestimating the Gains from Globalization for the United States? No. 209, May 2005 Christian Broda and David Weinstein The Simple Geometry of Transmission and Stabilization in Closed and Open Economies No. 5, May 2005 Giancarlo Corsetti and Paolo Pesenti Improving Business Payments by Asking What Corporations Really Want No. 210, June 2005 Sandy Krieger and Michele Braun Banking, Markets, and Efficiency Falko Fecht and Antoine Martin No. 6, June 2005 New York City Immigrants: No. 211, June 2005 The1990sWave The Impact of Network Size Rae Rosen, Susan Wieler, and Joseph Pereira on Bank Branch Performance Second District Highlights Beverly Hirtle No. 212, June 2005 STAFF REPORTS Propensity Score Matching, a Distance- No. 206, April 2005 Based Measure of Migration, and the Shock Identification of Macroeconomic Wage Growth of Young Men Forecasts Based on Daily Panels John C. Ham, Xianghong Li, Marlene Amstad and Andreas M. Fischer and Patricia B. Reagan No. 207, April 2005 No. 213, June 2005 The Joint Dynamics of Liquidity, Selection Bias, Demographic Effects, Returns, and Volatility across Small and Ability Effects in Common Value and Large Firms Auction Experiments Tarun Chordia, Asani Sarkar, Marco Casari, John C. Ham, and John H. Kagel and Avanidhar Subrahmanyam

The views expressed in the publications and papers summarized in Research Update are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.