explaining the border effect the role of exchange rate variability shipping costs and geography this paper exploits a three dimensional panel data set of prices on 27 traded goods over 88 quarters across 96 cities in the us and japan we show that a simple average of good level real exchange rates tracks the nominal exchange rate well suggesting strong evidence of sticky prices focusing on dispersion in prices between city pairs we find that crossing the us japan border is equivalent to adding as much as 43 000 trillion miles to the cross country volatility of relative prices we turn next to economic explanations for this so called border effect and to its dynamics distance unit shipping costs and exchange rate variability collectively explain a substantial portion of the observed international market segmentation relative wage variability on the other hand has little independent impact on segmentation 2001 elsevier science b v all rights reserved

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

downward nominal wage rigidity and the case for temporary infl ation in the eurozone abstract since the onset of the great recession in peripheral europe nominal hourly wages have not fallen from the high levels they had reached during the boom years this in spite of widespread in

money interest rates and exchange rates with endogenously segmented markets we analyze the effects of money injections on interest rates and exchange rates when agents must pay a baumol tobin style fixed cost to exchange bonds and money asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money infrequently when the government injects money through an open market operation only those agents that are currently trading absorb these injections through their impact on these agents consumption these money injections affect real interest rates and real exchange rates the model generates the observed negative relation between expected inflation and real interest rates as well as persistent liquidity effects in interest rates and volatile and persistent exchange rates

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

wage rigidities and labor market adjustment in europe based on an ad hoc firm level survey on wage and pricing policies conducted in a large number of european countries this study finds that about 60 of firms change base wages once a year with some clustering of wage changes observed in january differences in the frequency of wage changes between firms are mainly attributable to the institutional framework of the labor market in which they operate there is evidence of both nominal and real downward wage rigidity moreover when facing a negative shock european firms prefer to reduce the amount of labor rather than cutting wages among those that decide to cut wages a majority prefers to cut flexible wage components rather than base wages the rigidity of base wages is largely explained by fairness and efficiency considerations jel e24 j30

ppp strikes back aggregation and the real exchange rate we show the importance of a dynamic aggregation bias in accounting for the ppp puzzle we prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics established time series and panel methods fail to control for this using eurostat data we find that when heterogeneity is taken into account the estimated persistence of real exchange rates falls dramatically its half life for instance may fall to as low as eleven months significantly below the consensus view of three to five years

inflation and output dynamics with state dependent pricing decisions this paper studies a state dependent pricing model in which firms face a fixed cost of changing their pricing plans a pricing plan specifies an entire sequence of time varying future prices allowing firms to choose a pricing plan rather than a single price generates inflation inertia in the response of the economy to small changes in the growth rate of money allowing firms to choose when to change their pricing plan generates a non linear response of inflation and output to small and large changes in the money growth rate the non linear solution method also reveals that the model generates an asymmetric response of output and inflation to monetary expansions and contractions

monetary policy in emerging markets can liability dollarization explain contractionary devaluations abstract in emerging markets external debt is denominated almost entirely in large developed country currencies such as the u s dollar this liability dollarization offers a channel through which exchange rate variation can lead to business cycle instability when firms assets are denominated in domestic currency and liabilities are denominated in foreign currency an exchange rate depreciation worsens firms balance sheets which leads to higher capital costs and contractions in capital spending to illustrate this i construct a quantitative sticky price small open economy model in which a monetary policy induced devaluation leads to a persistent contraction in output in this model fixed exchange rates offer greater stability than an interest rule that targets inflation

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

price stickiness empirical evidence of the menu cost channel abstract a leading explanation in the economic literature is that monetary policy has real effects on the economy because firms incur a cost when changing prices using a unique database of cost and retail price changes we find that variation in menu costs results in up to 13 3 fewer price increases we confirm that these effects are allocative and have a persistent impact on both prices and unit sales we provide evidence that the menu cost channel operates only when cost increases are small in magnitude which is consistent with theory and provides the first empirical evidence of boundary conditions

a comparison of the skewness of stock return distributions at earnings and non earnings announcement dates abstract this paper presents evidence that stock return prediction errors are less positively skewed in the time period surrounding accounting earnings report announcements than in a subsequent non announcement period assuming that information available about firms in non announcement periods depends on discretionary disclosure practices of firms and discretionary search for information by investors the results suggest that earnings reports cause more extreme bad news to be reflected in stock prices relative to discretionary sources of information

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

barriers to price convergence this paper investigates the existence of convergence clubs in the cross country price mechanism for 96 individual goods retail price levels across 40 countries available semi annually for 1990 2010 using a nonlinear factor model and threshold regression tools to our knowledge this is the first paper to find strong evidence for club convergence of retail prices these clubs emerge due to the interaction of traded and non traded factors for example countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income moreover being behind the technology frontier appears to be more conducive to price convergence for countries with relatively small physical distance from potential trade partners we interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

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

international price dispersion in state dependent pricing models menu cost models predict a hump shaped relationship between real and nominal exchange rate volatility the hump occurs at higher values of nominal exchange rate volatility the higher trade costs and lower international substitution elasticities are these predictions accord well with the negative relationship between relative price and nominal exchange rate volatility i document using a data set of prices collected in eastern europe in a volatile environment in contrast trade costs must be sufficiently high or international substitution elasticities low in order for the model to account for the positive correlation between real and nominal exchange rate volatility in the aggregate data

the multiperiod information content of accounting earnings confirmations and contradictions of previous earnings reports in this study we propose and test the hypothesis that investors reevaluate earnings announcements in the light of postannouncement information 1 our argument for multiperiod price reactions to earnings news is motivated by the literature linking price responses to earnings persistence 2 when earnings are announced we assume that investors are unable to determine with certainty the persistence of an earnings

how naive is the market s use of firm specific earnings information recent studies suggest the apparent delay in the stock price response to earnings announcements i e post earnings announcement drift is caused by investors who underestimate the autocorrelation of seasonally differenced earnings persistence i present results that suggest 1 a firm s future persistence is predictable on the basis of its past persistence 2 the immediate stock price response to earnings is positively related to historical persistence 3 post earnings announcement drift is independent of historical persistence and 4 consistent with 2 and 3 the difference between a firm s current observed persistence and that implied in stock prices is independent of its historical persistence these results extend prior research by demonstrating that investors are aware not only that seasonally differenced earnings are autocorrelated but that investors recognize firm specific differences in the magnitude of the autocorrelation

financial crises and exchange rate policy this paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and fisherian deation the goal is to evaluate the performance of alternative exchange rate policies in sudden stop prone economies the key element of the analysis is a pecuniary externality arising from frictions in the international credit markets which creates a trade o between price

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

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

expectations and exchange rate dynamics a state dependent pricing approach abstract this paper presents a two country dsge model with state dependent pricing as in dotsey et al dotsey m king r g and wolman a l 1999 state dependent pricing and the general equilibrium dynamics of money and output quarterly journal of economics 114 655 690 and variable demand elasticity as in kimball kimball m s 1995 the quantitative analytics of the basis neomonetarist model journal of money credit and banking 27 1241 1277 following a domestic monetary expansion the model predicts i positive hump shaped responses of domestic output and consumption ii positive spillover effects on foreign output and consumption iii a high international output correlation relative to consumption correlation iv a delayed increase in domestic and foreign inflation v a delayed nominal exchange rate overshooting vi a deterioration in the terms of trade and vii a j curve in the trade balance the model matches the impulse responses from an identified var more closely than an otherwise identical model with time dependent pricing