Sylvain Leduc

Vice President

Macro & Micro Research

Monetary Policy, International Trade, Productivity

Sylvain.Leduc (at)

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Show less Current Unpublished Working Papers

Are State Governments Roadblocks to Federal Stimulus? Evidence from Highway Grants in the 2009 Recovery Act
2013-16 | With Wilson | January 2014

+ abstract
We examine how state governments adjusted spending in response to the large temporary increase in federal highway grants under the 2009 American Recovery and Reinvestment Act (ARRA). The mechanism used to apportion ARRA highway grants to states allows us to isolate exogenous changes in these grants. We find that states increased highway spending in 2010 nearly dollar-for-dollar with their apportioned grants, implying little if any crowd-out. We show that our results are not unique to the ARRA period, but rather are consistent with a strong effect from grants dating back at least to the early 1980s.

The Effects of Unconventional and Conventional U.S. Monetary Policy on the Dollar
2013-11 | With Glick | May 2013

+ abstract
We examine the effects of unconventional and conventional monetary policy announcements on the value of the dollar using high-frequency intraday data. Identifying monetary policy surprises from changes in interest rate futures prices in narrow windows around policy announcements, we find that surprise easings in monetary policy since the crisis began have had significant effects on the value of the dollar. We document that these changes are comparable to the effects of conventional policy changes prior to the crisis.

Should Transportation Spending Be Included in a Stimulus Program? A Review of the Literature
2012-15 | With Wilson | September 2012

+ abstract
Transportation spending often plays a prominent role in government efforts to stimulate the economy during downturns. Yet, despite the frequent use of transportation spending as a form of fiscal stimulus, there is little known about its short- or medium-run effectiveness. Does it translate quickly into higher employment and economic activity or does it impact the economy only slowly over time? This paper reviews the empirical findings in the literature for the United States and other developed economies and compares the effects of transportation spending to those of other types of government spending.

Uncertainty Shocks are Aggregate Demand Shocks
2012-10 | With Liu | February 2014

+ abstract
We present some empirical evidence and a theoretical argument that uncertainty shocks act like a negative aggregate demand shock, which raises unemployment and lowers inflation. We measure uncertainty using survey data from the United States and the United Kingdom. We estimate the macroeconomic effects of uncertainty shocks in a vector autoregression (VAR) model and document that uncertainty shocks accounted for about one percentage point increase in the unemployment rate in the Great Recession and recovery. We present a DSGE model to show that uncertainty shocks can be contractionary in a flexible-price economy with search frictions, in contrast to the standard Real Business Cycle model. We also show that the interactions between search frictions and nominal rigidities help amplify the macroeconomic effects of uncertainty shocks.
+ supplement
wp12-10bk_appendix.pdf – Supplemental Appendix

Should Central Banks Lean Against Changes in Asset Prices?
2011-15 | With Natal | May 2011

+ abstract
How should monetary policy be conducted in the presence of endogenous feedback loops between asset prices, firms’ financial health, and economic activity? We reconsider this question in the context of the financial accelerator model and show that, when the level of natural output is inefficient, the optimal monetary policy under commitment leans considerably against movements in asset prices and risk premia. We demonstrate that an endogenous feedback loop is crucial for this result and that price stability is otherwise quasi-optimal absent this feature. We also show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables.

Monetary Policy Announcements Effects on Commodity Prices in High-Frequency Data
Manuscript | With Glick | November 2012

Show less Published Articles (Refereed Journals and Volumes)

Commodity Price Movements in a General Equilibrium Model of Storage
Forthcoming in IMF Economic Review

+ abstract
The paper embeds the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the nonlinear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. The paper’s main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared with a model in which the real interest rate is fixed, the paper finds that storage in general equilibrium leads to more persistence in commodity prices and to a lower frequency of stockouts. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochastic equilibrium. Finally, the model is used to examine the macroeconomic effects of biofuel subsidies for ethanol producers.

The International Dimension of Productivity and Demand Shocks in the US Economy
Forthcoming in Journal of the European Economic Association | With Corsetti and Dedola

+ abstract
This paper investigates the international dimension of productivity and demand shocks to US manufacturing. Identifying shocks with sign restrictions based on standard theory we find that productivity gains in manufacturing — our measure of tradables — have substantial aggregate effects, boosting US consumption and investment, relative to the rest of the world; net exports and US net foreign assets correspondingly decrease. In addition, we ascertain a significant role of international financial adjustment, via a rise in US shares prices and nontrivial portfolio shifts in gross US foreign assets and liabilities. Most notably, these shocks appreciate the US real exchange rate and improve its terms of trade. Shocks to the demand for US manufacturing also lead to real dollar appreciation; however, they appear to have less pronounced aggregate effects, with limited impact on trade and capital accounts. Our findings provide novel evidence on key channels of the international transmission of business cycle impulses (including financial channels), highlighting endogenous wealth and demand effects as a fundamental element of international interdependence. Namely, asymmetric wealth effects amplify rather than attenuate the consequences of US shocks to tradables on domestic aggregate spending, driving endogenous aggregate demand fluctuations across countries.

Expectations and Economic Fluctuations: An Analysis Using Survey Data
Forthcoming in Review of Economics and Statistics

+ abstract
Using survey-based measures of future U.S. economic activity from the Livingston Survey and the Survey of Professional Forecasters, we study how changes in expectations, and their interaction with monetary policy, contribute to fluctuations in macroeconomic aggregates. We find that changes in expected future economic activity are a quantitatively important driver of economic fluctuations: a perception that good times are ahead typically leads to a significant rise in current measures of economic activity and inflation. We also find that the short-term interest rate rises in response to expectations of good times as monetary policy tightens. Our results provide quantitative evidence on the importance of expectations-driven business cycles and on the role that monetary policy plays in shaping them.

Optimal Monetary Policy in Open Economies
Forthcoming in Handbook of Monetary Economics, ed. by M. Woodford and B. Friedman | With Corsetti and Dedola

+ abstract
This chapter studies optimal monetary stabilization policy in interdependent open economies, by proposing a unified analytical framework systematizing the existing literature. In the model, the combination of complete exchange-rate pass-through (“producer currency pricing”) and frictionless asset markets ensuring efficient risk sharing results in a form of open-economy “divine coincidence”: in line with the prescriptions in the baseline New Keynesian setting, the optimal monetary policy under cooperation is characterized by exclusively inward-looking targeting rules in domestic output gaps and GDP-deflator inflation. The chapter then examines deviations from this benchmark, when cross-country strategic policy interactions, incomplete exchange-rate pass-through (“local currency pricing”) and asset market imperfections are accounted for. Namely, failure to internalize international monetary spillovers results in attempts to manipulate international relative prices to raise national welfare, causing inefficient real exchange rate fluctuations. Local currency pricing and incomplete asset markets (preventing efficient risk sharing) shift the focus of monetary stabilization to redressing domestic as well as external distortions: the targeting rules characterizing the optimal policy are not only in domestic output gaps and inflation, but also in misalignments in the terms of trade and real exchange rates, and cross-country demand imbalances.

Is Asia Decoupling from the United States (Again)?
Pacific Economic Review 18(3), August 2013, 345-369 | With Spiegel

+ abstract
The recovery from the recent global financial crisis exhibited a decline in the synchronization of Asian output with the rest of the world. However, a simple model based on output gaps demonstrates that the decline in business cycle synchronization during the recovery from the global financial crisis was exceptionally steep by historical standards. We posit two potential reasons for this exceptionally steep decline. First, financial markets during this recovery improved from particularly distressed conditions relative to previous downturns. Second, monetary policy during the recovery from the crisis was constrained in developed economies by the zero bound, but less so in Asia. To test these potential explanations, we examine the implications of an increase in corporate bond spreads similar to that which took place during the recent European financial crisis in a three-region open-economy dynamic stochastic general equilibrium model. Our results confirm that global business cycle synchronization is reduced when zero-bound constraints across the world differ. However, we find that the impact of reduced financial contagion actually goes modestly against our predictions.

Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment
In NBER Macroeconomic Annual 2012, 27, ed. by Jonathan Parker and Michael Woodford | University of Chicago Press, 2013. 89-142 | With Wilson

+ abstract
We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.
+ supplement
wp12-04bk.pdf – Working Paper 2012-04
wp12-04bkAppendices.pdf – Appendices to Working Paper 2012-04

Central Bank Announcements of Asset Purchases and the Impact on Global Financial and Commodity Markets
Journal of International Money and Finance 31(8), December 2012, 2078-2101 | With Glick

+ abstract
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.

Entry Dynamics and the Decline in Exchange-Rate Pass-Through
In Macroeconomic Performance in a Globalising Economy, ed. by R. Anderton and G. Kenny | Cambridge University Press, 2011 | With Gust and Vigfusson

+ abstract
The degree of exchange-rate pass-through to import prices is low. An average passthrough estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. In this paper, we model how the entry and exit decisions of exporting firms affect pass-through. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.

Trade Integration, Competition, and the Decline in Exchange-Rate Pass-Through
Journal of Monetary Economics 57, April 2010, 309-324 | With Gust and Vigfusson

+ abstract
Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that a significant portion of this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which trade occurs along both the intensive and extensive margins. The key element we introduce into this environment is strategic complementarity in price setting. As a result, a firm’s pricing decision depends on the prices set by its competitors. This feature implies that a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate.

Optimal Monetary Policy and the Sources of Local-Currency Price Stability
In International Dimensions of Monetary Policy, ed. by J. Gali and M. Gertler | Chicago: University of Chicago Press, 2010 | With Corsetti and Dedola

The Adjustment of Global External Balances: Does Partial Exchange Rate Pass-Through to Trade Prices Matter?
Journal of International Economics 79(2), November 2009, 173-185 | With Gust and Sheets

+ abstract
This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DSGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through environment with more adjustment in a low pass-through world occurring through movements in the terms of trade rather than real trade flows and through a larger response of the exchange rate.

High Exchange-Rate Volatility and Low Pass-Through
Journal of Monetary Economics 55(6), September 2008, 1113-1128 | With Corsetti and Dedola

+ abstract
Two specifications of an open-economy model are shown to generate high exchange-rate volatility and low exchange-rate pass-through (ERPT). In the model, price discrimination causes ERPT to be incomplete in both the short and the long run. In the short run, a small amount of nominal rigidities is enough to reduce ERPT sharply; still, exchange-rate depreciation worsens the terms of trade, consistent with the evidence. Possible biases from omitted variables and measurement error in the ERPT empirical literature (due to data limitations) are investigated using model-generated time series. Estimates of ERPT coefficients can be quite different from true parameters and are sensitive to the shocks driving the economies. Estimates can nonetheless detect key structural features of the models.

Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries
In NBER International Seminar on Macroeconomics 2006 | Cambridge, MA: MIT Press, 2008. 117-194 | With Corsetti and Dedola

+ abstract
This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labor productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables–in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade differs across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country’s terms of trade fall when its output grows, thus providing a mechanism to contain differences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growth in the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run.

International Risk Sharing and the Transmission of Productivity Shocks
Review of Economic Studies 75(2), April 2008, 443-473 | With Corsetti and Dedola

+ abstract
This paper shows that standard international business cycle models can be reconciled with the empirical evidence on the lack of consumption risk sharing. First, we show analytically that with incomplete asset markets productivity disturbances can have large uninsurable effects on wealth, depending on the value of the trade elasticity and shock persistence. Second, we investigate these findings quantitatively in a model calibrated to the U.S. economy. With the low trade elasticity estimated via a method of moments procedure, the consumption risk of productivity shocks is magnified by high terms of trade and real exchange rate (RER) volatility. Strong wealth effects in response to shocks raise the demand for domestic goods above supply, crowding out external demand and appreciating the terms of trade and the RER. Building upon the literature on incomplete markets, we then show that similar results are obtained when productivity shocks are nearly permanent, provided the trade elasticity is set equal to the high values consistent with micro-estimates. Under both approaches the model accounts for the low and negative correlation between the RER and relative (domestic to foreign) consumption in the data–the “Backus–Smith puzzle.”

Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility
Review of Economic Dynamics 10(4), October 2007, 595-614 | With Sill

+ abstract
An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in US inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally.

Self-Fulfilling Expectations and the Inflation of the 1970s: Evidence From the Livingston Survey
Journal of Monetary Economics 54(2), March 2007, 433-459 | With Sill and Stark

+ abstract
Using survey data on expectations, we examine whether the response of monetary policy to sudden movements in expected inflation contributed to the persistent high inflation of the 1970s. The evidence suggests that, prior to 1979, the Fed accommodated temporary shocks to expected inflation, which then led to persistent increases in actual inflation. We do not find this behavior in the post-1979 data. Among commonly cited factors, oil and fiscal shocks do not appear to have triggered an increase in expected inflation that eventually resulted in higher actual inflation.

An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies
International Finance 9(1), Spring 2006, 37-61 | With Croke and Kamin

+ abstract
Much has been written about prospects for US current account adjustment, including the possibility of what is sometimes referred to as a ‘disorderly correction’: a sharp fall in the exchange rate that boosts interest rates, depresses stock prices and weakens economic activity. This paper assesses some of the empirical evidence bearing on the plausibility of the disorderly adjustment scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during and after the onset of adjustment, building on the analysis of Freund (2000). We found little evidence among past adjustment episodes of the features highlighted by the disorderly adjustment hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome.

A Quantitative Analysis of Oil-Price Shocks, Systematic Monetary Policy, and Economic Downturns
Journal of Monetary Economics 51(4), May 2004, 781-808 | With Sill

+ abstract
Are the recessionary consequences of oil-price shocks due to oil-price shocks themselves or to the monetary policy that responds to them? We investigate this question in a calibrated general equilibrium model in which oil use is tied to capital utilization. The response to an oil-price shock is examined under a variety of monetary policy specifications. Under our benchmark calibration, which approximates the Federal Reserve’s behavior since 1979, monetary policy contributes about 40 percent to the drop in output following a rise in oil prices. Moreover, none of the commonly proposed policies we examine completely offsets the recessionary consequences of oil shocks.

A Quantitative Analysis of Currency Regimes
In Exchange-Rate Dynamics, ed. by J.O. Hairault | Oxford: Routledge, 2004 | With Dedola

Incomplete Markets, Borrowing Constraints, and the Foreign Exchange Risk Premium
Journal of International Money and Finance 21(7), December 2002, 957-980

+ abstract
This paper solves a model consisting of two monetary economies with incomplete markets, in which agents are subject to borrowing constraints. The paper investigates if such a framework is able to account for the volatility and the size of the foreign exchange risk premium. The model succeeds in increasing substantially the volatility of the risk premium to about 30% of that in the data. However, this more volatile risk premium does not translate into sufficiently large predictable excess returns. It thus appears unlikely that excess returns from currency speculation can be uniquely explained by a time-varying risk premium in an incomplete-markets economy with exogenous borrowing constraints.

Why Is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?
International Journal of Finance and Economics 6(4) , October 2001, 401-419 | With Dedola

+ abstract
Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyers’ currencies. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, this pricing behavior is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle.

Show less FRBSF Publications

Fueling Road Spending with Federal Stimulus
Economic Letter 2014-25 | August 25, 2014 | With Wilson

Slow Business Start-ups and the Job Recovery
Economic Letter 2014-20 | July 7, 2014 | With Laderman

Uncertainty and the Slow Labor Market Recovery
Economic Letter 2013-21 | July 22, 2013 | With Liu

Unconventional Monetary Policy and the Dollar
Economic Letter 2013-09 | April 1, 2013 | With Glick

Highway Grants: Roads to Prosperity?
Economic Letter 2012-35 | November 26, 2012 | With Wilson

Uncertainty, Unemployment, and Inflation
Economic Letter 2012-28 | September 17, 2012 | With Liu

Are Large-Scale Asset Purchases Fueling the Rise in Commodity Prices?
Economic Letter 2011-10 | April 4, 2011 | With Glick

Confidence and the Business Cycle
Economic Letter 2010-35 | November 22, 2010

Disagreement about the Inflation Outlook
Economic Letter 2009-31 | October 5, 2009 | With Rudebusch and Weidner

Fighting Downturns with Fiscal Policy
Economic Letter 2009-20 | June 19, 2009

Show more Other Works

Optimal Monetary Policy in Open Economies
Forthcoming in Handbook of Monetary Economics, ed. by M. Woodford and B.M. Friedman. Elsevier | With Corsetti and Dedola

+ abstract
This chapter studies optimal monetary stabilization policy in interdependent open economies, by proposing a unified analytical framework systematizing the existing literature. In the model, the combination of complete exchange-rate pass-through (`producer currency pricing’) and frictionless asset markets ensuring efficient risk sharing, results in a form of open-economy `divine coincidence’: in line with the prescriptions in the baseline New-Keynesian setting, the optimal monetary policy under cooperation is characterized by exclusively inward-looking targeting rules in domestic output gaps and GDP-deflator inflation. The chapter then examines deviations from this benchmark, when cross-country strategic policy interactions, incomplete exchange-rate pass-through (‘local currency pricing’) and asset market imperfections are accounted for. Namely, failure to internalize international monetary spillovers results in attempts to manipulate international relative prices to raise national welfare, causing inefficient real exchange rate fluctuations. Local currency pricing and incomplete asset markets (preventing efficient risk sharing) shift the focus of monetary stabilization to redressing domestic as well as external distortions: the targeting rules characterizing the optimal policy are not only in domestic output gaps and inflation, but also in misalignments in the terms of trade and real exchange rates, and cross-country demand imbalances.

The Role of China in Asia: Engine, Conduit, or Steamroller?
Forthcoming in The Future of Asian Trade and Growth: Economic Development with the Emergence of China, ed. by Linda Yueh. Routledge