can producer currency pricing models generate volatile real exchange rates if the elasticities of substitution between traded and nontraded and between home and foreign traded goods are sufficiently low then the real exchange rate generated by a model with full producer currency pricing is as volatile as in the data

consumer search incomplete exchange rate pass through and optimal interest rate policy this paper studies utility maximizing monetary policy in a two country economy with consumer search frictions search frictions provide a microfoundation for incomplete exchange rate pass through and international deviations from the law of one price lop i show that optimal interest rate policy targets deviations from the lop and acts to mitigate the effect of search frictions in a quantitative setting with internationally correlated technology and preference shocks optimal policy generates positive cross country correlation of nominal interest rates

euro dollar real exchange rate dynamics in an estimated two country model an assessment abstract several theoretical contributions using two country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics we estimate a two country model using data for the united states and the euro area and study the importance of such alternative assumptions in fitting the data a model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility and fits the dynamics of domestic variables well the complete markets assumption delivers a similar fit only when the structure of shocks is rich enough

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

real exchange rates and relative prices an empirical investigation abstract this paper uncovers a striking empirical regularity the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country this fact seems to hold for all goods except very simple homogeneous products models of real exchange rates are likely to have predictions regarding this relation so this fact may provide a useful gauge for discriminating among models

capital flows and real exchange rate fluctuations following spain s entry into the european community abstract spain s 1986 entry into the european community was followed by a dismantling of restrictions on international capital flows initial trade deficits and real exchange rate appreciation were followed by trade surpluses and real exchange rate depreciation this paper analyzes spain s financial liberalization using a dynamic general equilibrium model with a traded and nontraded good where a capital poor country opens itself to its capital rich neighbors a carefully calibrated model has trouble accounting for the large changes in relative prices observed given the small changes in quantities variants of the model with frictions in factor mobility between sectors fare better

revisiting the importance of non tradable goods prices in cyclical real exchange rate fluctuations abstract in an influential paper engel 1999 argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods and that only a small part of the fluctuations can be attributed to changes in the relative price of non tradables we revisit this important issue and our main finding suggests that the relative distribution wedge i e the relationship between traded goods prices at the dock and the retail prices of those goods is key to understanding real exchange rate fluctuations importantly our results suggest that variations in the relative wedge are driven by fluctuations in mark ups and not in distribution costs

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

explaining price level differences new evidence on the balassa samuelson effect we re examine one of the most venerable results in economics the balassa samuelson effect of balassa 1964 and samuelson 1964 the central claim of balassa samuelson is that nontradables explain price level differences across rich and poor economies we test balassa samuelson by quantifying the contribution of nontradables to cross sectional price level variation for countries in the international comparison program icp our results suggest that nontradables explain up to two thirds of price level variation

a dynamic general equilibrium analysis of deviations from the laws of one price abstract using disaggregated west german prices this study documents movements in relative export and producer prices and in relative import and producer prices which are variable and highly autocorrelated this suggests the presence of time varying persistent deviations from the laws of one price perfect competition monopoly and monopolistic competition with constant mark up pricing are inconsistent with the variability in relative export and producer prices furthermore cournot oligopoly is inconsistent with the variability in relative import and producer prices a dynamic general equilibrium model with differentiated oligopolistic competition and strategic pricing is shown to generate variable and persistent movements in both measures of relative prices

the exchange rate pass through to import and export prices the role of nominal rigidities and currency choice abstract using both regression and var based estimates the paper finds that the exchange rate pass through to import prices for a large number of countries is incomplete and larger than the pass through to export prices previous studies have reported similar results which give rise to the puzzle that while local currency pricing is needed to account for incomplete import price pass through it would not imply a lower export price pass through recent explanations of this puzzle have emphasized markup adjustment in response to exchange rate changes this paper suggests an alternative explanation based on the presence of both producer and local currency pricing using a dynamic general equilibrium model the paper shows that a mix of producer and local currency pricing can explain the pass through evidence even with a constant markup the model can also explain the observed variability of key variables as well as the fact that the regression and var estimates tend to be similar

openness and optimal monetary policy abstract we show that the composition of international trade has important implications for the optimal volatility of the exchange rate above and beyond the size of trade flows using an analytically tractable small open economy model we characterize the impact of the trade composition on the policy trade off and on the role played by the exchange rate in correcting for price misalignments contrary to models where openness can be summarized by the degree of home bias we find that openness can be a poor proxy of the welfare impact of alternative monetary policies using input output data for 25 countries we document substantial differences in the import and non tradable content of final demand components and in the role played by imported inputs in domestic production the estimates are used in a richer small open economy dsge model to quantify the loss from an exchange rate peg relative to the ramsey policy conditional on the composition of imports we find that the main determinant of the losses is the share of non traded goods in final demand

do online homework tools improve student results in principles of microeconomics courses recent technological advances in education have made it possible for instructors to use new tools in their attempt to enhance student interest and improve understanding of economic principles a substantial body of economic education literature has examined the effectiveness of these tools in influencing student performance generally these studies compare student performance between a control group and a test group in the last decade or so these new tools have tended to focus on different aspects of computer technology and whether or not use of the technology enhances student learning along these lines agarwal and day 1998 found that use of the internet in economics instruction had a positive effect on student learning as measured by improvement in the test of understanding in college economics tuce scores in both graduate and undergraduate economics courses similarly sosin et al 2004 suggest that tuce scores of students in classes using extensive technology showed a small but significant improvement over those students in classes using little technology this paper contributes to and extends the literature by reporting the results of an empirical study investigating the effect on student learning of an online homework tool aplia compared to the more traditional instructor assigned and graded homework do online homework tools improve student results in principles of microeconomics courses

the role of expenditure switching in the global imbalance adjustment abstract in theory nominal exchange rate movements can lead to expenditure switching when they generate changes in the relative prices of goods across countries this paper explores whether the expenditure switching role of exchange rates has changed in the current episode of significant global imbalances we develop a multi sector two country model for the united states and the g6 countries with the rest of the world captured by exogenous price and demand shocks and estimate the model over two sub samples which cover the periods before and after the early 1990s our results indicate that both u s imports and exports have become much less responsive to exchange rate movements in recent years mainly due to changes in firms pricing behavior and global trade pattern these findings suggest that the exchange rate would have to move by a much larger amount now than in the 1970s and 1980s to reduce the u s trade deficit by a given amount

the home bias in equities and distribution costs we show that incorporating distribution costs into a general equilibrium model of international portfolio choice helps to explain the home bias in international equity investment our model is able to replicate observed investment positions for a wide range of parameter values even if agents have an incentive to hedge labor income risk by purchasing foreign equity this is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and non financial income

real exchange rate fluctuations and the relative importance of nontradables abstract the real exchange rate is one of the most important price variables in macroeconomics as changes in it have implications for both external competitiveness as well as internal sectoral resource allocation this paper decomposes real exchange rate volatility into its two components for a panel of 51 economies over the period 1990 2010 and specifically estimates the relative importance of internal prices in real exchange rate fluctuations unlike other studies this paper goes a step further and examines the role of a set of economic fundamentals in explaining the relative contribution of the non traded component in real exchange rate fluctuations

u s real exchange rate fluctuations and relative price fluctuations abstract traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods this paper studies the relation between the united states bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships we find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner the relation is stronger when we measure relative prices using producer prices rather than consumer prices the relation is stronger the more important is the trade relationship between the united states and a trade partner even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods however a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

modelling the sectoral allocation of labour in open economy models indivisible labour is not the only type of nonconvexity affecting labour supply decisions another type of nonconvexity arises in economies with sectors whenever individuals can work in only one sector at a time i introduce this restriction into an open economy model with a tradeable and a nontradeable sector and i use lotteries to convexify the consumption possibilities set this approach implies that the aggregate elasticity of labour supply becomes infinite i compare the performance of the model with an analogous model in which the labour supply elasticity is finite i find that the infinite labour supply elasticity helps explain the persistence of net exports however all the other consequences of the labour supply elasticity for the model implied second order moments depend on whether the pricing assumption is producer currency pricing pcp or local currency pricing lcp

consumption and exchange rate uncertainty evidence from selected asian countries we set out to assess the effects of exchange rate uncertainty on real consumption in selected asian countries consumption influences business cycles which in turn shape short run monetary policy decisions hence understanding factors driving consumption is appealing to policymakers in the extant literature few studies have analysed the effects of uncertainty on consumption the available ones generally focus on the long run effects in spite of the fact that the short run persistence and adjustments to equilibrium are equally relevant our study takes this limitation seriously by distinguishing the short and long run effects of exchange rate uncertainty on consumption using a flexible dynamic panel data technique that allows long run effects to be homogeneous and the short run effects to be heterogeneous we find that uncertainty impedes consumption in the long run in the short run however the effects are immaterial this evidence remains robust to the measure of uncertainty asymmetric uncertainty the role of consumer prices and the global financial crisis of 2008 by decomposing uncertainty into its temporary and permanent components we find that the latter have a stronger effect on consumption in the long run than the former although both components demand policy attention the evidence suggests that policymakers should be more concerned with permanent uncertainty

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

the yield curve in a small open economy abstract long term nominal interest rates in a number of inflation targeting small open economies have tended to be strongly correlated with those of the united states this observation has recently led support to the view that in these economies the long end of the yield curve has decoupled from its short end and naturally to a concern that monetary policy may have lost some of its autonomy we set up and estimate a two country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co movement of long term nominal interest rates of different currencies we show that differences in the persistence of domestic and foreign disturbances a hypothesis for which we find support in recent data can explain the observed pattern of correlations these correlations are not evidence of weaker monetary policy

price stability with imperfect financial integration this paper studies whether the international monetary system can be affected by asymmetries in the cross country positions in the international financial markets i e the fact that some countries are large debtors while others are creditors an important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country the main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases 1 of a permanent shift in steady state consumption for the welfare costs of incomplete markets and 0 2 for the gains of deviating from a policy of price stability when global imbalances become larger optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates which should happen to be more correlated across countries

accounting for real exchange rates using micro data the classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non traded goods in the cpi basket because traded goods obey the law of one price in stark contrast engel 1999 found that traded goods had comparable volatility to the aggregate real exchange rate our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of nal goods using highly disaggregated retail price data since the typical good found in the cpi basket is about equal parts traded and non traded inputs we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value

inflation differentials between spain and the emu a dsge perspective this paper estimates a dynamic stochastic general equilibrium model of a currency union with nominal rigidities to explain the sources of inflation differentials between the economic monetary union emu and one of its member countries spain the paper finds that productivity shocks account for 85 of the variability of the inflation differential demand shocks explain a large fraction of output growth volatility but not variability in inflation differentials in addition the estimated model finds evidence that inflation dynamics are different across countries in the nontradable sector only finally the balassa samuelson effect does not appear to be an important driver of the inflation differential during the emu period

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

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

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

the consumption real exchange rate anomaly nontraded goods and distribution services in the data real exchange rates rers tend to move in opposite directions with respect to the relative consumption across countries chari et al 2002 refer to the inability of models to replicate the previous stylized fact as the consumption rer anomaly in this article it is shown that an international real business cycle irbc model similar to the one proposed by chari et al but extended by considering nontraded goods and an incomplete asset market structure can solve the anomaly nontradable goods amplify wealth effects arising from the incomplete assets market structure generating a negative co movement between the rer and relative consumption adding distribution services ds improves the performance of the model in some other dimensions in particular ds help to generate countercyclical net exports

listen to sraffa s silences a new interpretation of sraffa s production of commodities this paper argues that the received interpretation of sraffa s prices as classical natural prices that would prevail when the system is at the centre of gravitation cannot be retained it offers an alternative interpretation in which sraffa s prices are completely independent of demand considerations or the condition of equilibrium of demand and supply the requirement of the uniform rate of profits in sraffa s price equations is argued to be a logical consequence of the assumption that wages are uniform and fixed from outside the system the paper provides evidence from sraffa s published and unpublished writings to buttress its new interpretation it also provides answers to the major criticisms and questions raised against the new interpretation copyright oxford university press

the test of understanding of college economics this edition of the test of understanding of college economics tuce 4 is a revision of a test that was developed 40 years ago and has a long history of use by teachers and research ers in the economics profession the previous editions and their uses have been described in earlier studies e g rendigs fels 1967 phillip saunders fels and arthur l welsh 1981 saunders 1991 and in research in economic education e g william e becker 1997 as with past editions the tuce 4 has two main objectives to offer a reliable and valid assessment instrument for students in principles of economics courses and to provide norming data for a national sample of students in prin ciples classes so instructors can compare the performance of their students on a pretest and a posttest with this national sample separate exams were prepared in microeconomics and macroeconomics both exams consist of 30 multiple choice items and can be administered within the time constraints of a single class period for most course formats what follows is a description of the revision process the con tent and cognitive specifications the norming sample and the statistical characteristics of the tuce 4

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

endogenous tradability and some macroeconomic implications abstract while nontraded goods play an important role in many open economy macroeconomic models these models have difficulty explaining the low volatility in the relative price of nontraded goods in contrast to macroeconomic convention this paper argues that the share of nontraded goods is endogenous a time varying product of macroeconomic shocks and trade costs that are heterogeneous across goods a simple open economy model demonstrates that trade cost heterogeneity and a time varying margin of tradedness dramatically reduces the volatility of nontraded prices this also reduces the ability of real exchange rate adjustments to dampen current account imbalances

real exchange rates and sectoral productivity in the eurozone we investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the eurozone real exchange rate patterns closely accord with an amended balassa samuelson interpretation both in cross section and time series we construct a sticky price dynamic general equilibrium model to generate a cross section and time series of real exchange rates that can be directly compared to the data under the assumption of a common currency estimates from simulated regressions are very similar to the empirical estimates for the eurozone our ndings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high income countries but those studies have included country pairs which have a oating nominal exchange rate

can firms location decisions counteract the balassa samuelson effect this paper examines the determinants of relative prices in a model combining a harrod balassa samuelson hbs mechanism and an endogenous location of traded good producers besides the standard hbs effect asymmetric productivity improvements in the traded good sector push new firms to enter the market this benefits local consumers who save on trade costs and exerts an upward pressure on relative wages as a consequence relative prices in the traded good sector either increase or fall in general equilibrium in a panel cointegration framework the wage effect is shown to dominate this means the hbs effect is strengthened by the relocation of traded good producers

piero sraffa and the true object of economics the role of the unpublished manuscripts this special issue is concerned with the work of piero sraffa and with recent developments in its interpretation occasioned by the opening of the sraffa archives in late 1993 1 it brings together some of the contributions to a workshop on this theme that was sponsored by the cambridge journal of economics and held in july 2010 on the occasion of the 50th anniversary of the publication of piero sraffa s major work production of commodities by means of commodities pcmc the original workshop on new perspectives on the work of piero sraffa was aimed at sraffa scholars who had taken the opportunity to engage with materials in the sraffa archives and who were interested in exploring their potential for revisiting and placing pcmc in the wider context of ongoing debates on economic philosophy economic theory and economic policy as is usually the case not all presentations made at the workshop were advanced for consideration in this special issue nor could all invitees attend heinz kurz as chief editor of the sraffa archives agreed to present his view on the relevance of the sraffa archives to research on sraffa and to comment on contributions at the workshop as well as on their final versions submitted for publication in this special issue kurz s contribution to this special issue was thus written in the short time available between the receipt of final versions and publication deadlines we are indebted to him for his cooperation in the preparation of this special issue we are especially grateful for his patience in the time taken to bring this project to publication this abstract was borrowed from another version of this item

inattentive consumers and international business cycles this paper presents and studies the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently introducing inattentive consumers has important implications through a mechanism resembling the limited participation models exchange rate volatility observed in the data can be addressed for reasonable values of risk aversion the model generates more persistence in output consumption and employment which brings us closer to the data impulse responses to monetary shocks are hump shaped consistent with the empirical evidence forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate the decline in the correlation is quantitatively small for our benchmark model model generates a substantial amount of consumer forecast errors when producers are attentive and productivity shocks are persistent this specification results in a large decline of the correlation of real exchange rate and relative consumption due to consumer inattentiveness when trade elasticity is set to values at the low end of macro estimates or at higher values consistent with sectoral estimates the correlation is in the negative territory with inattentive consumers

border prices and retail prices abstract we analyze retail prices and at the dock import prices of specific items in the bureau of labor statistics bls cpi and ipp databases using both databases simultaneously to identify items that are identical in description at the dock and when sold at retail this identification allows us to measure the distribution wedge associated with bringing traded goods from the point of entry into the united states to their retail outlet we find that overall u s distribution wedges are 50 70 around 10 to 20 percentage points higher than that reported in the literature we discuss the implications of this for measuring the size of the pure tradeables sector exchange rate pass through and real exchange rate determination we find that distribution wedges are very stable over time but there is considerable variation across items there is some variation across the country of origin for the imported item for our major trading partners but not as much as the cross item variation we also investigate the determinants of distribution wedges finding that wedges do not vary systematically with exchange rates but are related to other features of the micro data

the evolution of price dispersion in the european car market car prices in europe are characterized by large and persistent differences across countries the purpose of this paper is to document and explain this price dispersion using a panel data set extending from 1980 to 1993 we first demonstrate two main facts concerning car prices in europe i the existence of significant differences in quality adjusted prices across countries with italy and the u k systematically representing the most expensive markets 2 substantial year to year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations these facts are analysed within the framework of a multiproduct oligopoly model with product differentiation the model identifies three potential sources for the international price differences price elasticities generating differences in markups costs and import quota constraints local currency price stability can be attributed either to the presence of a local component in marginal costs or to markup adjustment that is correlated with exchange rate volatility the latter requires that the perceived elasticity of demand is increasing in price we find that the primary reason for the higher prices in italy is the existence of a strong bias for domestic brancs that generates high markups for the domestic firm fiat in the u k higher prices are mainly attributed to better equipped cars and or differences in the dealer discount practices the import quota constraints are found to have a significant impact on japanese car prices in italy france and the u k with respect to local currency price stability a large percentage of the documented price inertia can be attributed to local costs and a smaller fraction to markup adjustment that is indicative of price discrimination based on these results we conjecture that the emu will substantially reduce the year to year volatility observed in the car price data but without further measures to increase european integration it will not completely eliminate existing cross country price differences

fiscal policy the real exchange rate and traded goods we estimate the effects of government spending shocks on the cpi real exchange rate the trade balance and their co movements with gdp and private consumption we decompose the variations of the cpi real exchange rate into variations of the traded goods real exchange rate and the relative price of traded to non traded goods we reach three main conclusions a rise in government spending induces a depreciation of the cpi real exchange rate and a trade balance deficit private consumption rises in response to a government spending shock and therefore co moves positively with the real exchange rate both components of the cpi real exchange depreciate we employ vector auto regression var techniques to estimate the effects of fiscal policy and in particular government spending on the cpi real exchange rate and the trade balance in the us and three other oecd countries our empirical analysis delivers two key results first a rise in government spending tends to induce a real exchange rate depreciation and a trade balance deficit although especially in the us the latter effect tends to be small second in all countries private consumption rises in response to a government spending shock and therefore co moves positively with the real exchange rate two important implications follow from these results our evidence provides support for a traditional twin deficit hypothesis in stark contrast with a recent study by kim and roubini 2008 a second implication concerns the consistency of facts and theory both the response of the real exchange rate and its co movement with private consumption and the trade balance are at odds with a benchmark general equilibrium open economy model featuring complete financial markets in fact while the model is successful in replicating the negative response of the trade balance to a government spending shock that we observe in the data and also in linking the magnitude of that response to the degree of openness it has counterfactual predictions on the response of the real exchange rate and of private consumption we argue that the key failure of the model lies in the equilibrium behaviour of private consumption in the model as a result of a typical wealth effect on labour supply private consumption falls in response to a rise in government spending whereas the opposite is true in the data this in turn explains the behaviour of the real exchange rate in the reference model with complete asset markets a risk sharing arbitrage condition ties the ratio of the marginal utilities of consumption across countries to the real exchange rate via this condition and provided that deviations from purchasing power parity are feasible the fall in consumption is accompanied by an equilibrium appreciation of the real exchange rate we proceed by investigating further the sources of the cpi real exchange rate movements in the data a traditional approach decomposes the real exchange rate into two terms

sraffa s system equal rate of profits and the notion of center of gravitation abstract this paper argues that the condition of uniform rate of profits in sraffa s system is not based on his implicit assumption that the system is at the equilibrium or the center of gravitation it is rather a logical requirement of a reproducing system of basic goods as long as prices are not imposed from outside the system this condition holds irrespective of supplies being equal to their respective effectual demands it conjectures that sraffa could have arrived at this conclusion through his analysis of the standard system on the basis of this result a critique of the received interpretation led by garegnani of sraffa s prices is developed

the effect of skilled emigration on real exchange rates through the wage channel abstract building on an analytical model we provide cross country empirical evidence that net skilled emigration appreciates bilateral real exchange rates through the wage channel in source countries chains of causality in the presence of the law of one price run through the spending effect and the resource allocation effect analogous to the remittance based dutch disease effect a pricing to market model allows pass through for both traded and nontraded prices when the law of one price is violated the skilled emigration elasticity of real exchange rate is estimated to be in the range of between 0 6 and 0 8 with internal prices playing a dominant role alternative model specifications show robust outcomes

cointegration analysis with structural breaks and deterministic trends an application to the canadian dollar this article applies recent developments in cointegration analysis with structural breaks and deterministic trends to analyse the relationship between the real canada us exchange rate and commodity prices previous empirical studies disagree on whether these variables are cointegrated the root of disagreement could be in the handling of deterministic trends and potential structural breaks i find that even after controlling for these matters the question of whether the real exchange rate and commodity prices are cointegrated for canada remains unresolved

haircuts or hysteresis sources of movements in real exchange rates abstract we empirically assess the importance of two sources of real exchange rate movements in models where ppp holds only among traded goods real exchange rate variation results from relative price movements within countries an alternative explanation relies on hysteretic price setting and nominal exchange rate changes using disaggregated price data from 11 oecd nations we find some support for the non traded goods models for example prices of haircuts in canada and the united states are unrelated in the long run we find stronger evidence to support models that emphasize sticky prices transportation costs or other impediments to frictionless trade

intertemporal dependence impatience and dynamics abstract this paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes since the preferences studied need not be time additive they allow the marginal utility of consumption on a given date to vary with consumption on other dates intertemporal dependence is induced by the presence of a variable individual rate of time preference the optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard constant time preference model intuitive explanations of the first order conditions describing optimal paths are provided

brics how important is the exchange rate pass through this paper analyses the exchange rate pass through erpt into domestic consumer prices in brics brazil russia india china and south africa countries from mid 1990s onwards by using three different econometric approaches i e the single equation approach the var approach and the time varying parameter approach it is also studied the role of macroeconomic determinants in erpt our results suggest that a erpt is higher for the emerging markets with mostly floating exchange rates brazil russia and south africa than for the other brics countries b exchange rate explains on average around the 40 of the price variance for brazil russia and south africa and c inflation volatility exchange rate volatility and openness seem to be the key macroeconomic determinants in brics countries

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

causes of nonlinearities in low order models of the real exchange rate abstract this paper investigates the extent to which modern dsge models which feature local currency pricing home bias nontraded goods and incomplete markets can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current floating period our key findings are as follows first if the true model can be appropriately characterized as a set of linear equations then linearity tests that utilize univariate autoregressions of the real exchange rate suffer from an omitted variables problem which leads them to overestimate the true incidence of nonlinearity consequently studies that fail to control for this problem may spuriously find evidence of nonlinearities in the data despite the fact that the data generating process may be linear second we propose a strategy that can largely eliminate this distortion finally we find that dsge models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples

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

a basis for sraffian ecological economics a comment on martins ecosystems strong sustainability and the classical circular economy martins 2016 recently emphasized the role that classical economics can play in building sustainability economics in this respect he uses sraffa s theory of value and sen and nussbaum s capability theory to support his argument my comment focuses on the part of his article concerning sraffa s theory and aims to refine some of martins claims in order to avoid misunderstandings about the possibilities offered by sraffa s theory

volatility and persistence of simulated dsge real exchange rates abstract we investigate the time series properties of both filtered and unfiltered real exchange rate series produced by dsge models that feature local currency pricing home bias nontraded goods and incomplete markets detrended series produced by several specifications approach the empirically observed volatility although none of the models generates enough persistence conversely several models produce unfiltered series that possess the same degree of persistence as the data but none can match its volatility

exchange rate regimes and wage comovements in a ricardian model with money we construct a ricardian model of trade with money and trade costs the model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates while comovements of real wages are not affected by exchange rate regimes our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements regardless of regimes when downward nominal wage rigidity is introduced nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon when we consider membership in the economic and monetary union of the european union as a fixed exchange rate regime panel regression results based on data from oecd countries are broadly consistent with our model and numerical experiments

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

step away from the zero lower bound small open economies in a world of secular stagnation abstract we study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed building on the framework of eggertsson et al 2016 we show that the transition to full employment and at target inflation requires real and nominal depreciation of the exchange rate however because of adverse income and valuation effects from real depreciation the escape has a beggar thy self effect that may end up lowering welfare while eliminating underemployment we show that as long as the economy remains financially open domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive however closing domestic capital markets does not necessarily enhance the monetary authorities ability to rescue the economy from stagnation

real exchange rates and productivity evidence from asia this paper examines a productivity based explanation of the long run real exchange rate movements of six asian economies using industry level data we construct total factor productivities tfps for the tradable and nontradable sectors we find that a within each country the relative price of nontradable goods is cointegrated with the sectoral tfp differential and b the real exchange rates are cointegrated with the home and foreign sectoral tfp differentials using the predicted real exchange rate as a measure of the long run equilibrium we find that most asian economies real exchange rates are overvalued before the asian financial crisis

boom goes the price giant resource discoveries and real exchange rate appreciation we estimate the effect of giant oil and gas discoveries on bilateral real exchange rates the size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices we find that a giant discovery with the value of a country s gdp increases the real exchange rate by 14 within 10 years following the discovery the appreciation is nearly exclusively driven by an appreciation of the prices of non tradable goods we show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and dutch disease dynamics

international comparisons of pricing to market behavior this paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using u s u k german and japanese industry level data given the industries sampled more price discrimination across destinations is observed in the u k german and japanese data for industries that match across source countries however behavior is very similar across source countries furthermore destination specific price adjustment on exports to the united states from germany and japan is similar to price adjustment observed on shipments to other destinations most variation in the data appears to be related to industry copyright 1993 by american economic association