Reuven Glick

We demonstrate a methodology for replicating and projecting the path of COVID-19 using a simple epidemiology model. We fit the model to daily data on the number of infected cases in China, Italy, the United States, and Brazil. These four countries can be viewed as representing different stages, from later to earlier, of a COVID-19 epidemic cycle. We solve for a model-implied effective reproduction number Rt each day so that the model closely replicates the daily number of currently infected cases in each country. For out-of-sample projections, we fit a behavioral function to the in-sample data that allows for the endogenous response of Rt to movements in the lagged number of infected cases. We show that declines in measures of population mobility tend to precede declines in the model-implied reproduction numbers for each country. This pattern suggests that mandatory and voluntary stay-at-home behavior and social distancing during the early stages of the epidemic worked to reduce the effective reproduction number and mitigate the spread of COVID-19.

This paper provides a synthesis of explanations for why the natural rate of interest, r*, has fallen over the last several decades. Demographic factors, declining productivity, slower output growth, and increasing inequality likely all have been important factors. Perhaps less recognized is the role of increasing global demand for safe assets, particularly by foreign investors. Suggestive empirical evidence is presented showing that foreign demand for U.S. safe assets, particularly government-provided assets, has increased dramatically, and may now be playing a much larger role in the determination of U.S. interest rates than in the past. In addition, the buildup before the 2007–2009 financial crisis of quasi-government and privately-supplied safe assets, held by both domestic and foreign investors, rendered the financial system more vulnerable to shocks that adversely affected the perceived degree of “safeness” they provided.

We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three to four times that following conventional policy changes prior to the 2007-08 financial crisis.

The effects of the European Economic and Monetary Union (EMU) and European Union (EU) on trade are separately estimated using an empirical gravity model. Employing a panel approach with both time-varying country and dyadic fixed effects on a large span of data (across both countries and time), it is found that EMU and EU each significantly boosted exports. EMU expanded European trade by 40% for the original members, while the EU increased trade by almost 70%. Newer members have experienced even higher trade as a result of joining the EU, but more time is necessary to see the effects of their joining EMU.

While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward their long-run equilibrium surprisingly became faster. To investigate, we distinguish between differing rates of purchasing power parity (PPP) convergence conditional on alternative shocks, which we refer to as “conditional PPP.” We find that the loss of the exchange rate as an adjustment mechanism after the introduction of the euro was more than compensated by the elimination of the exchange rate as a source of shocks, in combination with faster adjustment in national prices. These findings support claims that flexible exchange rates are not necessary to promote long-run international relative price adjustment.

In our European Economic Review (2002) paper, we used pre-1998 data on countries participating in and leaving currency unions to estimate the effect of currency unions on trade using (then-) conventional gravity models. In this paper, we use a variety of empirical gravity models to estimate the currency union effect on trade and exports, using recent data which includes the European Economic and Monetary Union (EMU). We have three findings. First, our assumption of symmetry between the effects of entering and leaving a currency union seems reasonable in the data. Second, our preferred methodology indicates that EMU has boosted exports by around 50%. While other estimation techniques yield different results, a panel approach with both time-varying country and dyadic fixed effects on a large span of data (across both countries and time) seems to deliver insensitive and reliable results. Third, different currency unions have different trade effects.

The extreme persistence of real exchange rates found commonly in post-Bretton Woods data does not hold in the preceding fixed exchange rate period, when the half-life was roughly half as large in our sample. This finding supports sticky price models as an explanation for real exchange rate behavior, extending the classic argument of Mussa (1986) from a focus on short-run volatility to long-run dynamics. Two thirds of the rise in real exchange rate variance observed across exchange rate regimes is attributable to greater persistence of responses to shocks, including greater price stickiness, rather than to greater variance of shocks themselves.

This paper presents a model comparing the degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and sovereign wealth fund are affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.

This paper presents empirical evidence on asset market linkages between China and Asia and how these linkages have shifted during and after the global financial crisis of 2008-2009. We find only weak cross-country linkages in longer-term interest rates, but much stronger linkages in equity markets. This finding is consistent with the greater development and liberalization of equity markets relative to bond markets in China, as well as increasing business and trade linkages in the region. We also find that the strength of the correlation of equity prices changes between China and other Asia countries increased markedly during the crisis and has remained high in recent years. We attribute this development to greater “attentiveness” of international investors to China’s role as a source and destination of equity finance during the crisis rather than to any greater financial deepening and liberalization, as China did not implement any major policy measures during this period. By contrast, the transmission of U.S. equity returns to Asian countries decreased after the crisis.

This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Adjustment to purchasing power parity
deviations in aggregated data is not just a slower version of adjustment to the law of one price in microeconomic data, as arbitrage occurs in different markets, in response to distinct
macroeconomic and microeconomic shocks. When half-lives are estimated conditional on macro shocks, micro relative prices exhibit just as much persistence as aggregate real exchange rates.
These results challenge theories of real exchange rate persistence based on sticky prices and on heterogeneity across goods.

We present evidence on the effects of large-scale asset purchases by the Federal Reserve and the Bank of England since 2008. We show that announcements about these purchases led to lower long-term interest rates and depreciations of the U.S. dollar and the British pound on announcement days, while commodity prices generally declined despite this more stimulative financial environment. We suggest that LSAP announcements likely involved signaling effects about future growth that led investors to downgrade their U.S. growth forecasts lowering long-term U.S. yields, depreciating the value of the U.S. dollar, and triggering a decline in commodity prices. Moreover, our analysis illustrates the importance of controlling for market expectations when assessing these effects. We find that positive U.S. monetary surprises led to declines in commodity prices, even as long-term interest rates fell and the U.S. dollar depreciated. In contrast, on days of negative U.S. monetary surprises, i.e. when markets evidently believed that monetary policy was less stimulatory than expected, long-term yields, the value of the dollar, and commodity prices all tended to increase.

We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975-2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to “depreciate” over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007-2008 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.

Conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity, especially international trade. We study the effects of war on bilateral trade with available data extending back to 1870. Using the gravity model, we estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and neutrals, controlling for other determinants of trade, as well as the possible effects of reverse causality. We find large and persistent impacts of wars on trade, national income, and global economic welfare. We also conduct a general equilibrium comparative statics exercise that indicates costs associated with lost trade might be at least as large as the conventionally measured direct costs of war, such as lost human capital, as illustrated by case studies of World Wars I and II.

While nontraded goods play an important role in many open economy macroeconomic models, these models have difficulty explaining the low volatility in the relative price of nontraded goods. In contrast to macroeconomic convention, this paper argues that the share of nontraded goods is endogenous, a time-varying product of macroeconomic shocks and trade costs that are heterogeneous across goods. A simple open economy model demonstrates that trade cost heterogeneity and a time varying margin of tradedness dramatically reduces the volatility of nontraded prices. This also reduces the ability of real exchange rate adjustments to dampen current account imbalances.

This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries, and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.

In recent years China has faced an increasing trilemma–how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China’s monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing
through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China’s reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth such as that seen in late 2008 and 2009 lead to less inflation pressure even with a substantial buildup in international reserves.

Concerns about the implications of foreign investments by sovereign wealth funds (SWFs) stem in large part from apprehensions about the objectives and governance quality of these institutions. This paper contributes to better understanding of the stylized facts of sovereign wealth funds by providing statistical analysis of a range of characteristics of SWFs, including the motivation for their establishment as well as their size, governance, and effect on reserve management behavior. Specifically, it estimates what factors foster the establishment of SWFs as well as affect their size. It also investigates the extent to which the governance and transparency of individual SWFs correlate with domestic and global governance practices. Lastly, it analyzes how asset accumulation by SWFs may affect central bank holdings of official reserves.

We analyze the role of an exchange rate peg as a commitment mechanism to achieve inflation stability when multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative regime not only in order to mitigate inflation bias from time inconsistency but also to avoid high inflation equilibria. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a “trap” whereby the regime initially confers gains in anti-inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy.

This paper studies how nontraded goods limit the ability of a country to finance current account deficits. It uses an intertemporal model of the current account for a small open economy where goods are endogenously nontraded due to explicit trade costs. The economy has an endowment of two goods with differing trade costs, either of which can be traded or nontraded in equilibrium. The model implies that current account deficits impose a cost, in the form of raising the effective interest rate in the country. The findings differ from some recent studies: first, in that the interest rate rises even for countries with modest current account deficits; secondly, the interest rate cost eventually reaches an upper bound as current account deficits grow, and progressively more nontraded goods become traded to service the debt. Panel regression analysis of interest rate and current account data are consistent with our conclusions.

This paper develops a model of endogenously tradable goods to study the implications of international integration for price dispersion and pricing to market. A distinctive feature of the model is heterogeneity in both trade costs and productivity. The model highlights the role of heterogeneity in shaping how new entrants at the extensive margin differ from incumbent traders, thereby giving extensive margin movements distinctive implications relative to the intensive margin. In particular, the model predicts that international integration mainly along the extensive margin should be associated with a more limited degree of price convergence. This prediction finds support in cross-sectional regressions on European data and offers insight into recent integration episodes.

This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups. This time-variation is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time or have not risen in recent years. However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for self-selection bias, because countries with liberalized capital accounts may also have sounder economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity-score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises.

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the Balassa-Samuelson (BS) effect. But looking back 50 years, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times, emerging a half century ago and growing steadily over time. What might potentially explain this historical pattern? We develop an updated BS model inspired by recent developments in trade theory, where a continuum of goods are differentiated by productivity, and where tradability is endogenously determined. Firms experiencing productivity gains are more likely to become tradable and crowd out firms not experiencing productivity gains. As a result the usual BS assumption–that productivity gains be concentrated in the traded goods sector–emerges endogenously, and the BS effect on relative price levels likewise evolves gradually over time.

This paper clarifies one of the puzzling results of the economic growth literature: the impact of military expenditure is frequently found to be nonsignificant or negative, yet most countries spend a large fraction of their GDP on defense and the military. We start by empirical evaluation of the nonlinear interactions between military expenditure, external threats, corruption, and other relevant controls. While growth falls with higher levels of military spending, given the values of the other independent variables, we show that military expenditure in the presence of threats increases growth. We explain the presence of these nonlinearities in an extended version of Barro and Sala-i-Martin (1995), allowing the dependence of growth on the severity of external threats, and on the effective military expenditure associated with these threats.

A large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability. This paper investigates whether legal restrictions on international capital flows are associated with greater currency stability. We employ a comprehensive panel data set of 69 developing economies over the 1975-1997 period, identifying 160 currency crises. We control for macroeconomic, political, and institutional characteristics that influence the probability of a currency crisis, employ alternative measures of restrictions on international payments, and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls. We find evidence that restrictions on capital flows do not effectively insulate economies from currency problems; rather, countries with less restrictive capital controls and more liberalized regimes appear to be less prone to speculative attacks.

Does leaving a currency union reduce international trade? We answer this question using a large annual panel data set covering 217 countries from 1948 through 1997. During this sample a large number of countries left currency unions; they experienced economically and statistically significant declines in bilateral trade after accounting for other factors. Assuming symmetry, we estimate that a pair of countries that starts to use a common currency experiences a near doubling in bilateral trade.

Since the East Asian crises of 1997, a number of East Asian economies
have allowed greater exchange rate flexibility and abandoned monetary targets in favor of inflation targeting, apparently because the perceived usefulness of money as a predictor of inflation (i.e., the information content of money) has fallen. In this paper, we discuss factors that are likely to have influenced the stability of the relationship between money and inflation, particularly in the 1990s, and then assess this relationship in a set of East Asian economies. We focus on (1) the stability of the behavior of the velocity of money; (2) the ability of money growth to predict inflation as measured by tests of Granger causality, and (3) the contribution of money to the variance of the forecast error of inflation. We find evidence that, with a few exceptions in which capital flows were particularly large, velocity remained
generally stable, as did the relationship between money growth and
inflation. However, the contribution of money to inflation forecast errors
fell considerably in the 1990s, reducing its value as an information variable
to monetary authorities.

This paper reviews the theoretical and empirical basis for the view that intermediate (“soft”) exchange rate regimes have become increasingly less feasible. It shows that the proportion of countries with hard currency pegs or flexible exchange rates has increased over time, and that the countries remaining in the “shrinking middle” typically must restrict capital movements. The paper also assesses the feasibility of alternative exchange rate arrangements for the developing countries of East Asia. This paper was presented to the conference on “Financial Markets and Policies in East Asia” at the Australian National University, Canberra, September 4-5, 2000.

The coincidence of banking and currency crises associated with the Asian
financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developing countries over the 1975-1997 period. We measure the individual and joint (“twin”) occurrence of bank and currency crises and assess the extent to which each type of crisis provides information about the likelihood of the other.
We find that the twin crisis phenomenon is most common in financially
liberalized emerging markets. The strong contemporaneous correlation between currency and bank crises in emerging markets is robust, even after controlling for a host of macroeconomic and financial structure variables and possible simultaneity bias. We also find that the occurrence of banking crises provides a good leading indicator of currency crises in emerging markets. The converse does not hold, however, as currency crises are not a useful leading indicator of the onset of future banking crises. We conjecture that the openness of emerging markets to international capital flows, combined with a liberalized financial structure, make them particularly vulnerable to twin crises.

In this paper we argue that more complete modeling of foreign exchange intervention and sterilization dynamics is necessary when there are adjustment costs to changing private portfolios and/or the central bank attempts to balance longer-run monetary control against short-term exchange rate objectives. We show that measured correlations between domestic credit and foreign asset changes, often interpreted as ‘sterilization coefficients,’ may be misleading because they vary with the pattern of disturbances as well as private agent and central bank behavior. We assess the empirical significance of this issue by estimating vector error correction models of the domestic and foreign asset components of the monetary base for Japan and Germany. In both countries, we find that that the impact of foreign exchange intervention on domestic credit falls markedly after several months, implying that the degree of sterilization decreases over time. However, the monetary base remained largely insulated as foreign asset positions were subsequently ‘unwound.’

The Economic and Monetary Union in Europe has recently been the source of a lot of pain. Its economic benefits often seem a lot harder to measure. This column reconsiders earlier opinions on the trade effects of currency unions using the latest data and methodologies. It suggests the euro has at least a mildly stimulating effect on exports. However, the switches and reversals across methodologies do not make allowances for any bold statements.

This chapter highlights the principal issues raised at the 2013 Asia Economic Policy Conference on “Prospects for Asia and the Global Economy,” held at the Federal Reserve Bank of San Francisco on November 3-5, 2013

A currency crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency. This article discusses analytical models of the causes of currency and associated crises, presents basic measures of the incidence of crises, evaluates the accuracy of empirical models in predicting crises, and reviews work measuring the consequences of crises on the real economy. Currency crises have large measurable costs on the economy, but our ability to predict the timing and magnitude of crises is limited by our theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations and government policy.

For many observers, one central flaw of the Eurozone is that countries lose the ability to manipulate their exchange rates to suit their needs. But this article argues that flexible exchange rates are often more likely to make things worse than make things better.

This column provides evidence that there is great deal of difference between the governance standards of the economies in which sovereign wealth funds have been established and the standards of the industrial economies in which they are seeking to invest. It also discusses how the expansion of asset holdings of sovereign wealth funds may reduce official reserve holdings.