estimation of de facto flexibility parameter and basket weights in evolving exchange rate regimes a new technique for estimating countries de facto exchange rate regimes synthesizes two approaches one approach estimates the implicit de facto basket weights in an ols regression of the local currency value rate against major currency values here the hypothesis is a basket peg with little flexibility the second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up here the hypothesis is an anchor to the dollar or some other single major currency but with a possibly substantial degree of exchange rate flexibility around that anchor it is important to have available a technique that can cover both dimensions inferring anchor weights and the flexibility parameter we test the synthesis technique on a variety of fixers floaters and basket peggers we find that real world data demand a statistical technique that allows parameters and regimes to shift frequently accordingly we here take the next step in estimation of de facto exchange rate regimes endogenous estimation of parameter breakpoints following bai and perron jel numbers f31 f41

exchange rate pass through and the welfare effects of the euro this article explores the implications of the european single currency within a simple sticky price intertemporal model we focus on the question of how the euro may change the sensitivity of consumer prices in europe to exchangerate changes our central conjecture is that the acceptance of the euro will lead european prices to become more insulated from exchange rate volatility we find that this affects both the volatility and levels of macroeconomic aggregates in both the u s and europe we find that european welfare is enhanced and the u s shares in europe s good fortune

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

the mirage of floating exchange rates this note summarizes some of the highlights of my longer paper with guillermo calvo fear of floating many emerging market countries have suffered financial crises one view blames soft pegs for these crises adherents to that view suggest that countries move to corner solutions hard pegs or floating exchange rates we analyze the behavior of exchange rates reserves and interest rates to assess whether there is evidence that country practice is moving toward corner solutions we focus on whether countries that claim they are floating are indeed doing so we find that countries that say they allow their exchange rate to float mostly do not there seems to be an epidemic case of fear of floating

distribution capital and the short and long run import demand elasticity the elasticity of substitution between home and foreign goods is one of the most important parameters in international economics the international macro literature which is primarily concerned with short run business cycle fluctuations assigns a low value to this parameter the international trade literature which is more concerned with long run changes in trade flows following a change in relative prices assigns a high value to this parameter this paper constructs a model where this discrepancy between the short and long run elasticities is due to frictions in distribution goods need to be combined with a local non traded input distribution capital which is good specific home and foreign goods may be close substitutes but if distribution capital is slow to adjust then agents cannot shift their consumption in the short run following a change in relative prices and home and foreign goods appear as poor substitutes in the short run in the long run this distribution capital can be reallocated and agents can shift their purchases following a change in relative prices thus the observed substitutability gets larger as time passes

price dispersion and the border effect abstract cross country price differences could reflect regional market segmentation within countries or national segmentation at the border in a search based model of price setting identifying national versus regional segmentation requires data on regional trade flows a calibration to u s and canadian data implies predominantly regional frictions u s producers are three times more likely to sell in their home region than another u s region and canadian producers are seven times more likely to sell in their home region than another canadian region frictions vis a vis foreign regions are only slightly higher models that ignore regional segmentation can misstate the severity of frictions at the border

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

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

international prices costs and markup differences relative cross border retail prices in a common currency comove closely with the nominal exchange rate using product level prices and wholesale costs from a grocery chain operating in the united states and canada we decompose this variation into relative costs and markup components the high correlation of nominal and real exchange rates is driven mainly by changes in relative costs national borders segment markets retail prices respond to changes in costs in neighboring stores within the same country but not across the border prices have a median discontinuous change of 24 percent at the border and 0 percent at state boundaries jel f31 l11 l81

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

potential pitfalls in determining multiple structural changes with an application to purchasing power parity we investigate the empirical performance of the bai and perron multiple structural change tests and show that the use of their critical values may cause severe size distortions in persistent series to correct these size distortions while maintaining a good power we implement the bai structural change test and extend it in two directions developing a new procedure to choose the number of breaks and a restricted version that specifically models breaks that imply mean or trend reversion using our new methodologies we reconcile the results of unit root tests with those of tests for structural change when testing for long run purchasing power parity

on what states do prices depend answers from ecuador in this paper we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices we develop a menu cost model of pricing in which retail firms intermediate trade between producers and consumers an important facet of our analysis is that the labor cost share of retail production differs across goods and services in the consumption basket for example the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor even when both retailers face a common menu cost this modeling approach allows us to account for some of the cross sectional differences observed in the frequency of price adjustments across goods we apply this model to ecuador to take advantage of inflation variations and the rich panel of monthly retail prices

dynamics of the u s price distribution abstract we use microdata underlying u s consumer producer and import price indices to document how the distribution of price changes evolves over time two striking features characterize pricing across all three datasets 1 frequency of price adjustments is countercyclical 2 frequency of price adjustments is correlated with variance conversely other statistics that have received recent attention like kurtosis do not exhibit uniform patterns across our data sets what implications do our empirical results have for monetary policy using a flexible accounting framework that collapses the high dimensional distribution of price changes into a single measure of aggregate price flexibility we show that flexibility is highly variable and countercyclical

pass through in retail and wholesale this paper studies how prices comove across products firms and locations to gauge the relative importance of retailer versus manufacturer level shocks in determining prices i make use of a large panel data set on prices for a cross section of retailers in the u s i analyze prices at the barcode or universal product code upc level for individual stores i find that only 16 of the variation in prices is common across stores selling an identical product 65 of the price variation is common to stores within a particular retail chain but not across retail chains while 17 is completely idiosyncratic to the store and product product categories with frequent temporary sales exhibit a disproportionate amount of completely idiosyncratic price variation my results suggest that most of the observed price variation arises from retail level rather than manufacturer level demand and supply shocks however the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level this suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers rather than static demand and supply shocks this abstract was borrowed from another version of this item

do central banks respond to exchange rate movements some new evidence from structural estimation l auteure etudie l incidence des mouvements du taux de change sur la conduite de la politique monetaire en australie au canada en nouvelle zelande et au royaume uni elle elabore et estime un modele structurel d equilibre general a deux secteurs dans lequel les prix et les salaires sont rigides et les variations du taux de change se repercutent de facon limitee

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

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

accounting for uncertainty in willingness to pay for environmental benefits previous literature on the distribution of willingness to pay has focused on its heterogeneity distribution without addressing exact interval estimation in this paper we derive and analyze bayesian confidence sets for quantifying uncertainty in the determination of willingness to pay for carbon dioxide abatement we use two empirical case studies household decisions of energy efficient heating versus insulation and purchase decisions of ultralow emission vehicles we first show that deriving credible sets using the posterior distribution of the willingness to pay is straightforward in the case of deterministic consumer heterogeneity however when using individual estimates which is the case for the random parameters of the mixed logit model it is complex to define the distribution of interest for the interval estimation problem this latter problem is actually more involved than determining the moments of the heterogeneity distribution of the willingness to pay using frequentist econometrics a solution that we propose is to derive and then summarize the distribution of point estimates of the individual willingness to pay under different loss functions

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

explaining the exchange rate pass through in different prices abstract this paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass through in a wide range of prices quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock predicted responses are compared with the evidence based on var models to examine how well different models fit the data the results show that the best fitting model incorporates a number of features highlighted by different strands of the literature sticky prices sticky wages distribution costs and a combination of local lcp and producer currency pricing pcp

import prices and invoice currency evidence from chile abstract we use transaction level customs data to document that a large majority of chilean imports are invoiced in dollars regardless of country of origin and sector we study the implications of this fact for the determination of exchange rate pass through erpt to border prices we find that the special role of the dollar in international trade has real effects but bilateral exchange rates with respect to exporter currencies also matter in the medium term in particular exchange rate fluctuations against the dollar account for most of the erpt in the short run and are still relevant after two years however the cumulative erpt with respect to the exporter country s currency increases with time and after two years accounts for most of the erpt to border prices

accounting for incomplete pass through recent theoretical work has suggested a number of potentially important factors in causing incomplete pass through of exchange rates to prices including markup adjustment local costs and barriers to price adjustment we empirically analyze the determinants of incomplete passthrough in the coee industry the observed pass through in this industry replicates key features of pass through documented in aggregate data prices respond sluggishly and incompletely to changes in costs we use microdata on sales and prices to uncover the role of markup adjustment local costs and barriers to price adjustment in determining incomplete pass through using a structural oligopoly model that nests all three potential factors the implied pricing model explains the main dynamic features of short and long run pass through local costs reduce long run pass through by a factor of 59 relative to a ces benchmark markup adjustment reduces pass through by an additional factor of 33 where the extent of markup adjustment depends on the estimated super elasticity of demand the estimated menu costs are small 0 23 of revenue and have a negligible eect on long run pass through but are quantitatively successful in explaining the delayed response of prices to costs we nd that delayed passthrough in the coee industry occurs almost entirely at the wholesale rather than the retail level

market structure and cost pass through in retail abstract we examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass through to answer this question we use scanner data from a large u s retailer to estimate product level pass through for three vertical structures national brands private label goods not manufactured by the retailer and private label goods manufactured by the retailer our approach circumvents issues associated with internal firm prices and demonstrates that accounting for horizontal market structure is important for measuring the effects of vertical integration and reduced double marginalization on pass through

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

a structural approach to explaining incomplete exchange rate pass through and pricing to market the continuing depreciation of the dollar against other major currencies coupled with concerns about the impact of china s exchangerate policy on domestic prices has spurred new interest in the exchange rate pass through literature a recent study by economists at the federal reserve board of governors see mario marazzi et al 2005 attracted wide attention by documenting a steady decline over the past decade in the pass through of exchange rates into us import prices this finding was later challenged by a study published by the federal reserve bank of new york hellerstein deirdre daly and christina marsh 2006 which demonstrated that the finding of such a decline depends crucially on the specification of the pass through regression and in particular the inclusion of commodity prices this exchange highlights the need to understand the structural determinants of exchange rate pass through not only because such understanding is important when trying to forecast future pass through patterns but also because it provides guidance regarding the specification of the appropriate reduced form regression and more generally measurement of pass through the increased availability of micro data on prices and quantities means that research uncovering these determinants is more promising than sources of international price stickiness

frequency of price adjustment and pass through we empirically document using u s import prices that on average goods with a high frequency of price adjustment have a long run pass through that is at least twice as high as that of low frequency adjusters we show theoretically that this relationship should follow because variable mark ups that reduce long run pass through also reduces the curvature of the proflt function when expressed as a function of the cost shocks making the flrm less willing to adjust its price lastly we quantitatively evaluate a dynamic menu cost model and show that the variable mark up channel can generate signiflcant variation in frequency equivalent to 37 of the observed variation in the data on the other hand the standard workhorse model with constant elasticity of demand and calvo or state dependent pricing has di culty matching the facts