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September/October 2009

In This Edition

  • Challenges in Macro-Finance Modeling

    This article discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor models ("internal basis models") and models that have observed macroeconomic variables as state variables ("external basis models") and examines the underlying assumptions behind these models.


  • Do Macroeconomic Announcements Move Inflation Forecasts?

    This paper presents an empirical strategy that bridges the gap between event studies and macroeconomic forecasts based on common-factor models. Event studies examine the response of financial variables to a market-sensitive "surprise" component using a narrow event window.


  • Investment Analysts' Forecasts of Earnings

    The literature on investment analysts' forecasts of firms' earnings and their forecast errors is enormous. This paper summarizes the evidence on the distribution of analysts' forecasts and forecast errors using data for all U.S. firms from 1990 to 2004.


  • Milton Friedman and U.K. Economic Policy: 1938-1979

    Milton Friedman's publications and commentaries became the subject of enormous publicity and scrutiny in the United Kingdom. This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979.


  • Can the Term Spread Predict Output Growth and Recessions? A Survey of the Literature

    This article surveys recent research on the usefulness of the term spread (i.e., the difference between the yields on long-term and short-term Treasury securities) for predicting changes in economic activity.


  • Mexico's Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

    The authors use a threshold autoregressive model to confirm the presence of nonlinearities in sectoral real exchange rate dynamics across Mexico, Canada, and the United States for the periods before and after the North American Free Trade Agreement (NAFTA).


  • Systemic Risk and the Financial Crisis: A Primer

    How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk management.


  • The Credit Crisis and Cycle-Proof Regulation

    This article was originally presented as the Homer Jones Memorial Lecture, organized by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, April 15, 2009.