This thesis examines the extent to which institutional transparency is counterproductive and potentially politicizing within the U.S. Federal Reserve system. It exemplifies a Venn diagram intersection of political and economic theory – and given the meaningful change in behavior at the Fed – to some extent organizational theory as well. This political economy orientation may be illustrated by providing a historical context – and then addressing the relevant catalysts for change: legislative action, financial crises, and the increase in social media technology. In terms of a “broader view,” these changes have occurred against a backdrop of significant changes in the application of Keynesian theories. As a result, this thesis defines modern transparency at the Federal Reserve, including its benefits and potential drawbacks, by connecting the changes in policies and procedures over the last quarter century - and by showing the impact of the evolution of modern New Keynesian interventionist programs within this new environment. The conclusions shown the New Keynesian coincidental contributions to modern interventionalist policies. But the benefits that come from improved transparency have opened the door to unintended consequences – and the main takeaway is the potential for political bias among bankers and the time inconsistencies that come from short-term modifications to otherwise long-term problems. The “secrets of the temple” are no longer secrets…but Greider would agree that the concentration of power and political influence remains the same. / M.A. / This thesis explores to what extent is increased transparency counterproductive and potentially politicizing within the U.S. Federal Reserve system. The Fed is primarily responsible for maintaining price stability, facilitating full employment, and maintaining the health of the banking system, placing it both directly and indirectly at the center of power and influence within American politics. FOMC decisions directly affect American citizens. For instance, their interest rate policies influence the cost of a mortgage, a car loan, a student loan, or possibly the value of 401k accounts – and in the 21st century, the average American is more tied to “credit” than ever before. This analysis will consider how this initiative developed, its original intent, its evolution, and why it may result in significant unintended political consequences. The conclusions illustrated that there are benefits that come from improved transparency. However, improved transparency may have opened the door to unintended consequences.

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Unique and proprietary data of the illiquid, one-year non cancelable for three month Bermudan swaps (1Y NC 3M swaps) and one-year non callable for three months Bermudan CDs (1Y NC 3M CDs), provides evidence of market efficiency. The 1Y NC 3M swap and 1Y NC 3M CD markets efficiently reflected unexpected economic information. The 1Y NC 3M swaption premiums also followed the European one-year into three-month (1Y into 3M) swaption volatilities. Swaption premiums were computed by pricing non-optional instruments using the quoted 1Y NC 3M swap rates and the par value swap rates and taking the difference between them. Swaption premiums ranged from a slight negative premium to a 0.21 percent premium. The average swaption premium during the study period was 0.02 percent to 0.04 percent. The initial swaption premiums were over 0.20 percent while the final swaption premiums were 0.02 percent to 0.04 percent. Premiums peaked and waned throughout the study period depending on market uncertainty as reflected in major national economic announcements, Federal Reserve testimonies and foreign currency devaluations. Negative swaption premiums were not necessarily irrational or quoting errors. Frequently, traders obligated to provide market quotes to customers do not have an interest and relay that lack of interest to the customer through a nonaggressive quote. The short-dated 1Y NC 3M swaption premiums closely followed 3M into 1Y swaption volatilities, indicating the 3M into 1Y swaption market closely follows the 1Y NC 3M swaption market and that similar market factors affect both markets or both markets efficiently share information. Movements in 1Y NC 3M swaption premiums and in 3M into 1Y swaption volatilities reflected a rational response by market participants to unexpected economic information. As market uncertainty decreased in the market place, risk measured both by swaption premiums and swaption volatilities decreased; vice verse when economic factors showed increases in economic uncertainty.

Thesis (M.S.)--Virginia Polytechnic Institute, 1966. / Vita. Abstract. Includes bibliographical references (leaves 67-69). Also available via the Internet.

This dissertation studies topics in international finance and central bank policy. In the first chapter, "Common idiosyncratic volatility and carry trade returns", I provide new evidence that incomplete consumption risk sharing across countries is an important determinant of carry trade returns. I show that there is a strong co-movement in idiosyncratic volatilities over time, and that shocks to the common idiosyncratic volatility (CIV) factor, defined as the equally weighted average of the idiosyncratic volatilities in the cross-section, are priced. I find that high-interest rate currencies deliver low returns when the CIV increases, which are bad times for investors. Low-interest rate currencies provide a hedge by yielding positive returns. CIV shocks remain an empirically powerful risk factor in explaining the cross-section of carry trade returns after controlling for global foreign exchange (FX) volatility risk. Furthermore, CIV risk is correlated with cross-country income risk faced by households. My findings are consistent with a heterogeneous-agent model with persistent, uninsurable idiosyncratic shocks in consumption growth. The calibrated model quantitatively accounts for the cross-sectional differences in average returns across CIV-beta sorted portfolios for plausible market prices of CIV risk. In the second chapter, "Fed-implied market conditions", we propose a novel text processing technique to extract views of market conditions that are implicit in the Fed's policy statements and minutes. The method is easy to apply and addresses several problems inherent in the use of changes in interest rates as a proxy for central bank policy. First, we project market variables into the text of FOMC statements and minutes (separately) using support vector regressions (SVRs) to predict the levels of 10-year yields, 3-month yields, 2s10s, DXY index, VIX, high-yield (HY) and investment-grade (IG) spreads. We then define measures of monetary policy (``FDIF'' variables) as the Fed-implied deviation away from the market variable: the out-of-sample value of the market variable implied by the SVR minus the corresponding value of the market variable the day before the statement (minutes) release. We show that different markets respond differently to monetary policy news in the short-run, in a way that has independent and complementary implications for market movements in the long-run. Fed news also has important long-run implications for macroeconomic outcomes. Our Fed measures outperform Bernanke-Kuttner and changes in 2-year yields for forecasting macro and financial outcomes in the future. Finally, we show that there are Fed-risky and Fed-hedging industries, and these earn risk premia on Fed statement days. Finally, in the third chapter, "Does the counterparty of central banks in derivatives-based foreign exchange interventions matter?", we study how the central bank counterparty in foreign exchange interventions affect the supply of hedge against FX risks to the private sector. We use Brazilian data where derivatives-based interventions have been used in tandem for almost two decades. The analysis finds evidence of a link between central bank counterparties in FX swap operations and the supply of hedge through FX futures contracts. The main central bank counterparty in foreign exchange interventions uses the liquidity provided by the central bank to increase the supply of hedge to the private sector. Other counterparties use the US dollars provided by the central bank to reduce their own foreign exchange exposure.

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no abstract provided by author / Master of Science

Made available in DSpace on 2016-04-26T20:48:32Z (GMT). No. of bitstreams: 1 Daniel Nicolau Ferrara.pdf: 1124449 bytes, checksum: 7323f16541b3af1bf71cf2dc57b02b5d (MD5) Previous issue date: 2011-05-13 / In the analysis of the origins of the severe financial crisis, which began in 2007 in the US, remains an open debate about the reasons that led the Fed to underestimate the severity of the crisis. This study analyzes the perceptions of Central Bank on the peculiar context that has developed from 2001. The economic recovery was based on consumption and housing market, including the income extraction derived from valued housing, and followed by the risk of deflation, which subsequently led to growing fears about what was happening in the markets. The instrument used for this is the thorough analysis of the minutes of the FOMC and the pronouncements of the two presidents of the Fed, from 2001 to 2007, Greenspan and Bernanke, in addition to theoretical concepts and economic problems of that period. The methodology is justified because the communication with the market has become a relevant instrument in the Fed's action since the 1990s. The analysis of documents showed that in the aftermath of the crises of 2001-2002, the Fed used to acknowledge consumption and housing market to be important forces in the economic recovery. From 2003-2004, the FOMC members showed concern about the speculative behavior in housing and the effects of the reversal of the expansionary monetary policy would have on property prices and on consumption. The Fed's action to combat these threats was restrained by the belief in the strength of the deregulated financial system, by pragmatic confidence in the conduct of monetary policy guided by the risk management approach and the belief that Central Bank should not act against the formation of bubbles / Na análise das origens da grave crise financeira iniciada, em 2007, nos EUA, permanece em aberto o debate a respeito dos motivos que levaram o Fed a subestimar a gravidade da crise em formação. Este estudo analisa as percepções do BC sobre o quadro peculiar que se desenvolveu, a partir de 2001. A recuperação econômica foi pautada no consumo e no mercado imobiliário, inclusive na extração de renda derivada da valorização dos imóveis, seguida do risco de deflação que, posteriormente, deu lugar a receios crescentes em relação ao que ocorria nos mercados. O instrumento utilizado para isso é a análise minuciosa das atas do FOMC e os pronunciamentos dos dois presidentes do Fed, de 2001 a 2007, Greenspan e Bernanke, além das concepções teóricas e problemas conjunturais do período. A metodologia de análise justifica-se porque a comunicação com o mercado tornou-se instrumento relevante na ação do Fed, desde os anos 1990. A análise dos documentos mostrou que, no rescaldo das crises, de 2001-2002, o Fed reconhecia no consumo e no mercado imobiliário forças importantes na recuperação econômica. A partir de 2003-2004, membros do FOMC demonstravam preocupação quanto ao comportamento especulativo no mercado imobiliário e os efeitos que a reversão da política monetária expansionista teria sobre os preços dos imóveis e sobre o consumo. A ação do Fed para combater esses riscos foi contida pela crença na resistência do sistema financeiro desregulamentado, pela confiança na condução pragmática da política monetária orientada pelo risk management approach e pela convicção de que BC não deve agir frente à formação de bolhas

It is the purpose of this thesis to give a factual presentation of the operation of the discount system of the Federal Reserve Bank of Dallas, Texas, covering the years 1914 through 1935.