sticky import prices and j curves we show that devaluations lead to a j curve when imported goods are durable and import prices adjust slowly to exchange rate changes the j curve effect is caused by intertemporal speculation as import prices are low relative to future prices immediately after a devaluation

stock returns and volatility a firm level analysis abstract it has been previously documented that individual firms stock return volatility rises after stock prices fall this paper finds that this statistical relation is largely due to a positive contemporaneous relation between firm stock returns and firm stock return volatility this positive relation is strongest for both small firms and firms with little financial leverage at the aggregate level the sign of this contemporaneous relation is reversed the reasons for the difference between the aggregate and firm level relations are explored

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

real and nominal shocks in a two country price setting world abstract this paper develops a two country model in which the law of one price does not hold in the short run and which is consistent with the stylized fact that exchange rates respond more quickly to news than prices this is done by assuming that firms face lumpy information costs in determining what price to charge both domestic and imported goods prices are therefore sticky with respect to news and deviations from the law of one price ppp are due to exchange rate surprises the model is used to analyze the domestic and international impact of real and nominal disturbances

market shares financial constraints and pricing behaviour in the export market a structural dynamic model of price and quantity adjustment is estimated on time series data for exports and export prices two sources of dynamics are considered customer markets and preset prices as predicted by the customer market model the market share adjusts slowly after a change in the relative price and financial conditions affect prices prices are found to be sticky in the sense that they do not reflect the most recent information about costs and exchange rates a parsimoniously parameterized structural model explains about 90 of the variation in market share and the relative price

price dynamics of exporting and import competing firms a model of a market for an internationally traded good is presented in this paper buyers who are customers of one firm are imperfectly informed about other firms prices and it is costly for them to change from one supplier to another this leads to dynamic market share equations which allow analysis of the interaction between price quantity decisions of exporting and import competing firms one result is that although the prices of importcompeting firms must in the long run match import prices they may in the short run be uncorrelated or even negatively correlated with import prices

flexible exchange rates and commodity price changes the case of japan although agricultural commodities are often assumed to have flexible prices little has been done to estimate exchange rate pass through perfect commodity arbitrage opportunities imply complete pass through imperfect opportunities could lead to incomplete pass through analysis of commodity price and exchange rate adjustments for five commodities exported to japan by the united states reveals that during the 1970s commodity prices were generally flexible during the 1980s when the dollar was rising price stickiness on the part of exporters importers contributed to inflexible prices and asymmetric exchange rate response specifically an exchange rate increase was passed through for some commodities but not a decline

exploring return dynamics via corridor implied volatility some fundamental questions regarding equity index return dynamics are difficult to address due to the latent character of spot volatility we exploit tick by tick option quotes to compute a novel corridor volatility index which may serve as an observable proxy for short term volatility exploiting this index we find that equity index volatility jumps are common symmetrically distributed and cojump with the underlying returns moreover the return volatility asymmetry is more pronounced than is generally recognized and is in force for both diffusive and jump innovations in volatility finally the index performs admirably during turbulent market conditions constituting a useful real time gauge of market stress

the response of domestic prices to expected exchange rates this article examines the recent u s price experience in response to the actual and anticipated rise and fall of the dollar and tests for determinants of the observed price effects an index of real exchange rate expectations is developed and used to explore its role in determining domestic producer prices actual and expected future real exchange rates are seen to have opposite impacts on domestic price determination at the industry level further the industry specific characteristics interact asymmetrically with actual and expected real exchange rate changes copyright 1992 by university of chicago press

exchange rates and import prices in the united states a varying parameter estimation of exchange rate pass through this article estimates the import price function in the united states using a varying parameter model the results show that the short run nonoil import price changes have become relatively less responsive to exchange rate changes than to foreign cost changes since the generalized floating began in the early 1970s concomitantly the markup has varied significantly falling when the dollar fell and rising when it rose thus pricing to market is confirmed even for overall u s imports

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

a proposition on short run departures from the law of one price unanticipated inflation relative price dispersion and commodity arbitrage abstract this paper proposes an explanation of short run departures from the law of one price based on the characteristics of the inflationary process and changes in the distribution of relative prices unexpected inflation gives rise to volatility of relative prices the more unexpected and hence uneven the rate of inflation the greater the difficulty in discerning from a given structure of relative prices commodity arbitrage opportunities which may be expected to persist and those transient opportunities which do not warrant a firm s incurring fixed costs of arbitrage an illustration portrays a risk averse firm confronting an international arbitrage opportunity

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

intertemporal speculation devaluation and the j curve abstract this paper presents a new explanation of why j curves i e the tendency of the trade balance to deteriorate immediately after a devaluation and to improve only as time passes may arise the paper focuses on the consequences of price stickiness if prices are sticky the devaluation leads first to asn increse in the relative price of tradables which tends to improve the trade balance and second to rising prices of tradables following the devaluation which tends to temporarily worsen the trade balance as a result of intertemporal speculation if the latter effect dominates a j curves results

bureaucratic agenda control imposition or bargaining niskanen s economic model of bureaucratic behavior assumes that bureaucratic agenda control allows the bureau to impose upon a passive legislature its most preferred alternative from among the set of alternatives that dominate the status quo but does a monopoly on the agenda give bureaus this degree of influence over a voting body this article reports on experiments that demonstrate that a monopoly on the agenda puts the agenda monopolist in a position to bargain with a voting body without being able to impose his or her most preferred alternative on that body this evidence supports theories of bureaucratic legislative bargaining at the expense of theories of bureaucratic imposition

the leverage effect puzzle disentangling sources of bias at high frequency the leverage effect refers to the generally negative correlation between an asset return and its changes of volatility a natural estimate consists in using the empirical correlation between the daily returns and the changes of daily volatility estimated from high frequency data the puzzle lies in the fact that such an intuitively natural estimate yields nearly zero correlation for most assets tested despite the many economic reasons for expecting the estimated correlation to be negative to better understand the sources of the puzzle we analyze the different asymptotic biases that are involved in high frequency estimation of the leverage effect including biases due to discretization errors to smoothing errors in estimating spot volatilities to estimation error and to market microstructure noise this decomposition enables us to propose novel bias correction methods for estimating the leverage effect

export pricing flexible exchange rates and divergence in the prices of traded goods abstract a model of firm pricing where customers adjust slowly to price differences is extended to an exporting firm under flexible exchange rates the foreign currency price the firm sets determines both current net revenue and the rate of investment in market share real exchange rate changes lead to price revisions but the protracted adjustment of customers prompts a smaller price response to transitory changes in the real exchange rate the model accounts for observed variations in traded goods prices across countries and the failure of exporting firms to pass through exchange rate changes but in contrast to static models does not predict frequent reallocation of traded goods production

the effect of exchange rate distortions on grain export markets the case of argentina the growth of agricultural trade in the 1970s and the strong dollar and depressed commodity prices in the 1980s have increased awareness of the vulnerability of agricultural markets to economic forces outside the agricultural sector some of the recent agricultural developments are attributable to changes in exchange rate movements that transmit macroeconomic forces to a trade dependent agricultural sector under the flexible exchange rate system exchange rate volatility has increased artus and young because exchange rates adjust to balance external accounts for an independent level of money supply across countries volatility has also increased because asset markets and adjustments on the capital side of the balance of payments determine the exchange rate in the short run dornbush regardless of the sources of exchange rate movements exchange rate changes can affect terms of trade and international competitiveness as long as they affect relative prices between traded and nontraded goods krueger even if exchange rate changes primarily adjust price levels between countries for a given level of the money supply there are terms of trade changes in the short run however recent evidence indicates that exchange rate changes are greater than can be attributed to changes in domestic price levels across countries frenkel stockman

stock returns and volatility most asset pricing models postulate a positive relationship between a stock portfolio s expected returns and risk which is often modeled by the variance of the asset price this paper uses garch in mean models to examine the relationship between mean returns on a stock portfolio and its conditional variance or standard deviation after estimating a variety of models from daily and monthly portfolio return data we conclude that any relationship between mean returns and own variance or standard deviation is weak the results suggest that investors consider some other risk measure to be more important than the variance of portfolio returns

exchange rates and oligopoly abstract the purpose of this paper is to explain empirical observations concerning the impact of exchange rate changes on industrial prices as exchange rates change the pass through into industrial prices is often incomplete and sometimes it goes into the wrong direction i e the prices in the depreciating country decrease while those in the appreciating country increase the latter is called perverse pass through the usual context for such observations is one of segmented markets and imperfect competition we consider the simplest model with these characteristics two duopolistic firms which both operate in two countries the markets of the two countries are separate and each of the firms produces its good in one of these countries we study the effect of an exchange rate change on the prices in each country and on the level of sales and of profits of each of the firms when strong restrictions such as constant marginal costs are imposed prices move in the right direction in response to an exchange rate change however with general cost and demand structures even in this simple model it is possible for prices in both countries to move in perverse directions