Exchange Rates: Two Stylized Facts and Yet Another (Consequent) Puzzle

My colleague, Charles Engel, has a new paper entitled The Real Exchange Rate, Real Interest Rates, and the Risk Premium, in which he tries to identify what characteristics an exchange rate model must possess in order to explain two stylized facts.

…The well-known interest parity puzzle in foreign exchange markets finds … the high interest rate country tends to have the higher expected return in the short run. The second stylized fact concerns evidence that when a country’s relative real interest rate rises above its average, its currency tends to be stronger than average in real terms.

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Brent-WTI spread

Lots of action in oil prices today, as the unrest has spread from Tunisia and Egypt– which produce relatively modest amounts of crude oil— to Libya, the country sandwiched between them, and producer of over 2% of the world’s crude oil supply. Rather than try to guess where those developments are going to lead, I wanted today to try to make sense of another equally striking development in oil markets over the last 6 weeks– the disparity between the price of oil in the Midwest United States and that elsewhere in the world.

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Dispatches (IV): Wisconsin National Guard Makes Routine Visits to Correctional Institutions

Following up on Walker says National Guard is prepared (2/11), from Wisconsin State Journal:

Madison — As large labor protests continue at the Capitol, the Wisconsin National Guard has toured more than one prison in the state, a spokeswoman said Tuesday.

The Journal Sentinel reported Monday that National Guard members last week had toured Redgranite Correctional Institution with its security director. On Tuesday, Lt. Col. Jackie Guthrie, spokeswoman for the National Guard, confirmed that other prisons had been visited as well.

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On the Underfunded Liabilities Problem (Or Lack Thereof in Wisconsin)

Econbrowser reader Bob_in_MA has argued that Governor Walker’s [the] (edit 7:50am 2/22) desire to strip collective bargaining rights from Wisconsin public employees is derived in part from the high labor costs, hidden in part by large unfunded liabilities (e.g. pensions) in the state. This might be an apt characterization for Massachusetts. It is not for Wisconsin. From the Pew Center for the States:

Some states are doing a far better job than others of managing this bill coming due. States such as Florida, Idaho, New York, North Carolina and Wisconsin all entered the current recession with fully funded pensions.

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Dispatches (III): I Regret…

From “Wis. Law Enforcement Association ‘Regrets’ Endorsing Walker; Thousands Protest At Capitol,” Channel 3000:

[Executive board president of the Wisconsin Law Enforcement Association] Tracy Fuller writes, “I am going to make an effort to speak for myself, and every member of the Wisconsin State Patrol when I say this … I specifically regret the endorsement of the Wisconsin Trooper’s Association for Gov. Scott Walker. I regret the governor’s decision to ‘endorse’ the troopers and inspectors of the Wisconsin State Patrol. I regret being the recipient of any of the perceived benefits provided by the governor’s anointing. …

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Dispatches (II): Walker rejects union offer to accept concessions

From Milwaukee Sentinel Journal:

…The Walker statement was in response to a statement earlier Saturday from [State senator] Erpenbach, who said he had been informed that all state and local public employee unions had agreed to the financial aspects of Walker’s budget-repair bill. Erpenbach added in his statement that the groups wanted, in turn, for Walker to agree to let labor groups bargain collectively, as they do now.

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