January/February 2005

In This Edition

  • Controlling for Heterogeneity in Gravity Models of Trade and Integration

    This paper compares various specifications of the gravity model of trade as nested versions of a general specification that uses bilateral country-pair fixed effects to control for heterogeneity. For each specification, we show that the atheoretical restrictions used to obtain them from the general model are not supported statistically. Because the gravity model has become the “workhorse” baseline model for estimating the effects of international integration, this has important empirical implications. In particular, we show that, unless heterogeneity is accounted for correctly, gravity models can greatly overestimate the effects of integration on the volume of trade.

  • FOMC Transparency

    This article was originally presented as a speech at the Ozark Chapter of the Society of Financial Service Professionals, Springfield, Missouri, October 6, 2004.

  • Stock Return and Interest Rate Risk at Fannie Mae and Freddie Mac

    Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) with the stated objective of promoting home ownership by improving the availability of mortgage financing for private households. These enterprises engage in two separate and distinct lines of business: (i) assembling and marketing pools of mortgages on which they guarantee the timely payments of principal and interest and (ii) purchasing mortgage assets for their own portfolio, mostly funded with debt securities. This article examines the sensitivity of the returns on GSEs' equity shares to realizations of interest rate risk. The study shows that the market value of Fannie Mae's and Freddie Mac's equity is vulnerable to increases in short-term interest rates and changes in the term spread (the difference between the long-term and short-term interest rates).

  • The Diffusion of Electronic Business in the United States

    The authors provide a recent account of the diffusion of electronic business in the U.S. economy using new data from the U.S. Bureau of the Census. They document the extent of the diffusion in three main sectors of the economy: retail, services, and manufacturing. For manufacturing, they also analyze plants' patterns of adoption of several Internet-based processes and conclude with a look at the future of the Internet's diffusion and a prospect for further data collection by the U.S. Census Bureau.



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