A failure to identify movements in the federal funds rate that are both unpredictable and independent of other determinants of open economy variables may lead to attenuation bias in the estimated effects of U.S. monetary policy on the exchange rate and foreign variables. Using a U.S. monetary policy measure which isolates unpredictable and independent federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices. We compare our results with those obtained using identification based upon: (1) non-recursive VAR restrictions; and, (2) restrictions derived from high frequency asset price behavior.JEL Classification: E52, F31, F41

No abstract

Trade openness can reduce inflation volatility through limiting recourse to seigniorage during periods of temporary fiscal deficits, and by shifting consumption and production towards goods for which the terms of trade are relatively stable. This paper provides evidence for a negative effect of openness on inflation volatility using a dynamic panel model that controls for the endogeneity of openness and the effects of both average inflation and the exchange rate regime. The relationship is found to be strongest amongst developing and emerging market economies. We show that openness reduces the volatility of reserve money growth and terms of trade growth and that these effects contribute to the relationship between openness and inflation volatility.

A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this …nding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and in ‡ation dynamics in open economies, but previous studies have not made a distinction between …xed and ‡oating exchange rate regimes.Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely a¤ected by price and wage controls, in ‡ationary oil price hikes and the role played by …scal policy in driving output and in ‡ation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining ‡exible and semi- ‡exible exchange rate regimes, but is unrelated to openness amongst countries maintaining …xed exchange rate regimes.

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The transmission of monetary policy across borders is central to many open economy models. Research has tried to evaluate the "impossible trinity" through estimating international interest rate linkages under alternative exchange rate regimes using realized base country interest rates. Such interest rates include anticipated and endogenous elements, which need not propagate internationally. We compare international interest rate responses under pegged and non-pegged regimes to identified, unanticipated, and exogenous U.S. interest rate changes and realized U.S. interest rate changes. We find important differences in estimated transmission from the two sets of measures-identified interest rate changes demonstrate a greater concordance with the impossible trinity than realized rate changes. THE IDEA THAT monetary policy autonomy depends on the choice of exchange rate regime has long been prominent in international macroeconomics. According to the "impossible trinity" or open economy trilemma, when capital is mobile a country that maintains a fixed (or pegged) exchange rate against a

This paper examines the impact of union membership rates on inflation in OECD countries. A positive effect of union density is estimated, even after controlling for fixed effects and time dummies. Additional institutional characteristics, for example union coordination, employment protection laws and central bank independence, do not affect inflation directly in a panel setting, but do influence the size of the unionization coefficient via interaction terms. The results are robust to controlling for potential common causes such as oil price shocks and the political stance of the government, and to using GMM/IV techniques to handle possible endogeneity biases. Copyright (c) The London School of Economics and Political Science 2006.

We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound the monetary policy's effects with those of changes in expected macrofundamentals. We also extend Romer and Romer (2004)'s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.