state dependent pricing invoicing currency and exchange rate pass through abstract we analyze exchange rate pass through and volatility of import prices in a dynamic framework where firms are subject to menu costs and decide on price adjustments in response to exchange rate innovations the exchange rate pass through and import price volatility then depend on the invoicing currency in combination with functional forms of cost and demand functions in particular there is lower pass through less frequent price adjustments and lower price volatility when prices are set in the importer s currency than when prices are set in the exporter s currency

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

exchange rate pass through in developing and emerging markets a survey of conceptual methodological and policy issues and selected empirical findings abstractglobal integration has increased the international linkages of financial markets for emerging market countries a key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices known as exchange rate pass through erpt this article reviews the conceptual methodological and policy issues connected with erpt in emerging market and developing countries and critically surveys selected empirical studies a key contribution is to categorise and compare the heterogeneous methodologies used to extract erpt measures in the empirical literature single equation models and systems methods are contrasted frequent misspecifications that produce unreliable erpt estimates are highlighted the discerning policy maker needs to ascertain by which methods erpt measures were calculated the controls and restrictions applied and the time frame and stability of the estimates

scale of production and choice of technique in the engineering industries in developing countries this article examines the relationship between scale of production optimal choice of technique and costs for three engineering industries nuts and bolts iron founding and machine tools in all three industries costs of production fell as the scale of output increased this was associated with switches of technique and the spread of fixed costs over a larger number of units the capital output ratio fell and labour productivity increased with increases in scale while in most cases the capital labour ratio increased the implications of these findings are briefly discussed

monetary policy in open economies abstract the recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates we argue that this result may owe much to the combination of two commonly made assumptions that nominal goods prices are rigid and that the monetary authorities have a lot of information about the economy when the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules such as a standard interest rate rule policies that stabilize the money supply or the nominal exchange rate may perform better

stabilising properties of discretionary monetary policies in a small open economy this article sets out a simple new keynesian open economy model and shows that the conduct of discretionary monetary policy in an open economy differs substantially from the closedeconomy framework the article shows analytically that the existence of the direct exchange rate channel in the open economy phillips curve impairs the perfect stabilising property of monetary policy in the face of demand side disturbances under domestic inflation targeting if cpi inflation is instead the target then the perfect stabilising property of monetary policy breaks down even in the absence of the direct exchange rate channel in the phillips curve

aggregate implications of factor substitution in industrial processes abstract using a number of recently completed studies of the scope for factor substitution in industrial processes we estimate the total private benefits of systematic adoption cost minimizing technology as compared with capital intensive technology obstacles to the choice of such technology are examined and presented within a benefit cost framework the reasons for some of the current choices of technology are analyzed and policies necessary to alter these are suggested

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

high exchange rate volatility and low pass through 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

multiproduct technology and market structure a recent line of research has exposed some technological determinants of the structure of industries that produce more than one good the analyses of both multiproduct perfect competition and natural monopoly require a generalized notion of average cost and in addition several newly identified technological characteristics pertinent only to joint production this paper provides an overview of these new results and suggests a unifying framework in which the theory can be further developed

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics a svar analysis the article is an empirical investigation of the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics three new open economy macro economics noem models are studied to motivate the empirical investigation then i apply the blanchard quah decomposition to identify a svar model the empirical evidence supports the noem model with the simplified household preference specification and with the small degree of pricing to market the evidence also illustrates monetary shocks important for the real exchange rate and the terms of trade movements but not for the current account fluctuations

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

nontraded goods market segmentation and exchange rates abstract empirical evidence suggests that movements in international relative prices are large and persistent nontraded goods both in the form of final consumption goods and as an input into the production of final tradable goods are an important aspect driving international relative price movements in this paper we show that nontraded goods play an important role in the context of an otherwise standard open economy macromodel our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods

on the benefits of a monetary union does it pay to be bigger this paper revisits the question of the appropriate domain of a currency area using a new keynesian open economy model in which the world is split into two areas each framed as a continuum of small open regions we show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union since the spill over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country specific shocks we also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved monetary integration of two large economies such as the euro area and the u s will not these findings can help to rationalize the process of the creation and enlargement of multi country currency areas like the eurozone

markup adjustment and exchange rate fluctuations evidence from panel data on automobile exports abstract this paper uses data on bilateral automobile export prices from the usa germany and japan to gauge the importance of markup adjustment driven by exchange rate movements across several destination markets we find that japanese exports are characterized by a high degree of markup adjustment designed to stabilize the price measured in the buyer s currency there is weak evidence for such behavior on the part of german exporters and no evidence of markup adjustment by us exporters where it exists markup adjustment tends to be highly persistent the dynamic pattern of markup adjustment is consistent with invoicing in the exporter s currency except for exports to the usa and canada

terms of trade and exchange rate regimes in developing countries abstract since friedman essays in positive economics university of chicago press chicago 1953 157 203 an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks i use a post bretton woods sample 1973 96 of 75 developing countries to assess whether the responses of real gdp real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes i find that responses are significantly different across regimes in a way that supports friedman s hypothesis the paper also examines the importance of terms of trade shocks in explaining the overall variance of output and prices in developing countries

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

exchange rate determination the role of factor price rigidities and nontradeables this paper introduces factor labor markets into the intertemporal monetary model of obstfeld and rogoff and combines this richer market structure with a new utility independent representation of nontradeables this allows us to explore the international monetary transmission mechanism for factor price wage rigidities under different degrees of macroeconomic openness factor price rigidities imply similar properties for the international transmission mechanism as domestic producer price rigidities nontradeables give raise to interesting new effects under asymmetric monetary shocks they create short run ppp deviations increase exchange rate volatility relative to price level volatility and reduce positive consumption and negative output comovements 2000 elsevier science b v all rights reserved

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

nominal wage stickiness and aggregate supply in the great depression building on earlier work by eichengreen and sachs we use data for 22 countries to study the role of wage stickiness in propagating the great depression recent research suggests that monetary shocks transmitted internationally by the gold standard were a major cause of the depression accordingly we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships we find that nominal wages adjusted quite slowly to falling prices and that the resulting increases in real wages depressed output these findings leave open the question of why wages were so inertial in the face of extreme labor market conditions

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

the role of countercyclical monetary policy when firms set nominal prices in advance optimal monetary policy insulates aggregate output against shocks to demand it can do so however by following the constant money growth rule advocated by milton friedman it need not respond to the shocks in an actively countercyclical way in addition to the extent that output fluctuations are driven by shocks to supply money growth should be procyclical

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

real exchange rates and macroeconomics evidence and theory since the early 1980s a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates the authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment many studies have established the pertinence of long run purchasing power parity ppp and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations a reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates which emphasizes short run price stickiness but long run ppp but a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the law of one price an example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

open economy macroeconomics developments in theory and policy this paper views developments in open economy macroeconomics through the lens of the debate over european monetary unification the empirical tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by sticky price theories or models of asset market liquidity effects but plausible liquidity models have difficulty generating enough persistence to match the data thus the macroeconomic stabilization costs of forgoing the exchange rate realignment option seem pertinent it is argued that our theories of efficiencies due to a common currency remain unsatisfactory despite recent advances the paper concludes by reviewing theories of currency crisis

sources of bias in women s wage equations results using sibling data we use data on sisters to jointly address heterogeneity bias and endogeneity bias in estimates of wage equations for women this analysis yields evidence of biases in ols estimates of wage equations for white and black women some of which are detected only when the two sources of bias are addressed simultaneously for both white and black women there is evidence of upward bias in the estimated returns to schooling bias corrected estimates of the effect of marriage on wages for white women suggest a positive marriage premium we also use the sibling data to identify our models and test a number of other commonly used identifying assumptions as overidentifying restrictions