the term structure of euromarket interest rates an empirical investigation abstract this paper is an empirical investigation of the predictability and co movement of risk premia in the term structure of euromarket interest rates we present regression results which suggest that risk premia in three euromarket term structures and on uncovered foreign asset positions move together we test formally the hypothesis that these risk premia move in proportion to a single latent variable we are unable to reject this hypothesis the single latent variable model can be interpreted as in hansen and hodrick 1983 and hodrick and srivastava 1984 as a specialization of the icapm in which assets have constant betas on a single unobservable benchmark portfolio

income dispersion and counter cyclical markups recent advances in measuring cyclical changes in the income distribution raise new questions how might these distributional changes affect the business cycle itself we show how counter cyclical income dispersion can generate counter cyclical markups in the goods market without any preference shocks or price setting frictions in recessions idiosyncratic labor productivity shocks raise income dispersion lower the price elasticity of demand and increase imperfectly competitive firms optimal markups the calibrated model explains not only many cyclical features of markups but also cyclical and long run patterns of standard business cycle aggregates

the impact of fiscal policy on profits i introduction a large number of policy making decisions rely on the key issue of the impact of fiscal policy on the economy therefore it is not surprising that the effect of fiscal policy on macroeconomic aggregates has been extensively studied in the empirical literature 1 several authors starting with blanchard and perotti 2002 have attempted to estimate the effect of government spending shocks on output and other variables in the context of structural var models see perotti 2008 for a survey this interest has been renewed since the 2008 2009 recession given the unprecedented size of fiscal packages worldwide barro and redlick 2009 hall 2009 an important part of this literature focuses on the theoretical and empirical investigation of the fiscal policy transmission channels theories of fiscal policy transmission differ in their implications regarding the response of different macroeconomic variables to government spending shocks for example the neoclassical model predicts a negative impact of government spending on real wages and consumption while this prediction is challenged by new keynesian models to that end an important branch of empirical literature on fiscal multipliers has investigated the transmission channels of fiscal policy by looking mainly at the response of private consumption and real wages 2 this paper deals with an important but relatively under investigated channel of fiscal policy transmission which is the effect of fiscal policy on profits as pointed out by hall 2009 the impact of fiscal shocks on the markup of price over marginal cost is important for understanding the functioning of the fiscal multiplier in the purely neoclassical general equilibrium model a rise in government spending produces a negative wealth effect the labor supply curve shifts outward and real wages and consumption fall this implies that the output multiplier will be well below unity a keynesian type fiscal multiplier implying a large positive output effect and positive responses of private consumption and real wages to increased government spending relies on a negative response of the markup of price over marginal cost to an increase in economic activity the intuition is that a decrease in the price marginal cost markup in response to higher government spending allows a rise in wages or at least a smaller reduction in wages compared with the case when the markup is constant a rise in wages would then imply that households will substitute away from leisure and into consumption therefore if the markup is countercyclical conditional on government spending shocks sizeable output multipliers of fiscal spending are consistent with existing empirical evidence that fiscal shocks are not related to strong decreases in real wages or consumption blanchard and perotti 2002 fatas and mihov 2001 gall david lopez salid and valles 2007 perotti 2005 2008 in general a new keynesian model with sticky prices implies a countercyclical markup ratio as input prices rise in a boom while output prices stay constant however for understanding the fiscal policy transmission the key factor is markup and not price stickiness itself as a countercyclical markup could also be implied by models with flexible prices when the desired markup changes in response to a shock 3 a model which assigns a central role to markups for fiscal policy transmission has been presented by ravn schmitt grohe and uribe 2007 assuming that demand has a price inelastic component that is a function of deep habits a government spending shock that leads to a positive output response increases the share of the price elastic component of demand causing a rise in the overall demand elasticity and a corresponding decline in the optimal markup 4 thus for a sufficient decline in the markup the resulting rise in wages induces households to substitute away from leisure and into consumption thereby more than offsetting the negative wealth effect of government spending predicted by the neoclassical model

pricing in a customer market in standard pricing models movements in demand are partially offset by price responses in a customer market however price markups may decrease with high demand thus price may magnify rather than stabilize demand movements i consider a monopolist selling a good of which first time consumers are uncertain repeat customers know that the product works the monopolist trades the objectives of exploiting past customers and attracting new ones in a period with many new potential customers the monopolist gives more weight to attracting and lowers its markup last i examine some evidence on whether expansions are periods with disproportionately many new customers

a theory of sticky rents search and bargaining with incomplete information abstract this paper offers the first theoretical explanation of housing rent stickiness and differential stickiness by housing structure type key features of rental markets worldwide previous theoretical work on the subject is sparse and explains why some landlords charge below market rents not stickiness apart from its interest for understanding housing markets and overall inflation rent stickiness is intriguing because it shows that stickiness can emerge in markets where the typical menu cost logic does not apply and where market participants typically engage in repeated bargaining over contracts our model involves search and bargaining with incomplete information in a two period game and generates stickiness in a novel manner the key decision is the landlord s choice of whether to renegotiate or not crucially landlords do not know tenant perceptions of unit quality the key force generating stickiness is that offering the identical contract preempts tenant search thus limiting tenants outside options and resolves uncertainty early risk aversion reinforces this mechanism and yields differential stickiness by landlord type renegotiation risk for large landlords disappears because the different outcomes rent increase rent decrease and vacancy average out landlords who manage only one unit loathe vacancy and are highly motivated to avoid renegotiation

is the consumer sector competitive in the u k a test using household level demand elasticities and firm level price equations this article tests the hypothesis of perfect competition in the consumer nondurables sector of the u k economy first it uses household level data to estimate time varying price elasticities of demand for disaggregated commodity groups u s product prices are used as instruments for u k prices in the demand equation then it matches the product definitions to the standard industry classification and uses firm level data combined with the estimated elasticities to estimate a price model of firms operating in different industries household characteristics are used as instruments for the demand effects in the firms supply equation the results reject perfect competition and appear to be consistent with the argument that less competition increases profits through collusion

immigration and prices this paper examines the behavior of prices following the unexpected arrival of a large number of immigrants from the former soviet union fsu to israel during 1990 i use store level price data on 915 consumer price index products to show that the increase in aggregate demand prompted by the arrival of the fsu immigration significantly reduced prices during 1990 when one controls for native population size and city and month effects a one percentage point increase in the ratio of immigrants to natives in a city decreases prices by 0 5 percentage point on average it is argued that this negative immigration effect is consistent with fsu immigrants the new consumers having higher price elasticities and lower search costs than the native population thus immigration can have a moderating effect on inflation through its direct effect on product markets and not only by increasing the supply of labor

markups aggregation and inventory adjustment in this paper i suggest a unified explanation for two puzzles in the inventory literature first estimates of inventory speeds of adjustment in aggregate data are very small relative to the apparent rapid reaction of stocks to unanticipated variations in sales second estimates of inventory speeds of adjustment in firm level data are significantly higher than in aggregate data the paper develops a multisector model where inventories are held to avoid stockouts and price markups vary along the business cycle the omission of countercyclical markup variations from inventory targets introduces a downward bias in estimates of adjustment speeds obtained from partial adjustment models when the cyclicality of markups differs across sectors this downward bias is shown to be more severe with aggregate rather than firm level data similar results apply not only to inventories but also to labor and prices montercarlo simulations of a calibrated version of the model suggest that these biases are quantitatively significant

the timing and magnitude of retail store markdowns evidence from weekends and holidays we examine daily prices of eight goods at seventeen retail stores collected in ann arbor michigan over a four month period from november 1 to february 28 we focus on weekly and seasonal price patterns and on the frequency of price markdowns or sales there were frequent markdowns in the intensive shopping period prior to christmas and a tendency for such sales to occur on weekends we interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high we complement the imperfect information based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

on the counter cyclicality of prices and markups in a cournot model of entry abstract we prove in a cournot model that the price and markup are counter cyclical due to changes in the extent of competition if the income effect is decreasing in the price as occurs when preferences are homothetic or demand is isoelastic

price dispersion over the business cycle evidence from the airline industry this study provides empirical evidence documenting how price dispersion moves with the business cycle in the airline industry performing a fixed effects panel analysis on seventeen years of data covering two business cycles we find that price dispersion is highly pro cyclical this effect is especially pronounced for legacy carriers relative to low cost carriers we show that our empirical result is consistent with firms implementing second degree price discrimination tactics

a supply chain under limited time promotion the effect of customer sensitivity abstract we consider a two echelon supply chain with a supplier and a retailer facing stochastic customer demands the supplier is a leader who determines a wholesale price in response the retailer orders products and sets a price which affects customer demands the goal of both players is to maximize their profits we find the stackelberg equilibrium and show that it is unique not only when the supply chain is in a steady state but also when it is in a transient state induced by a supplier s promotion there is a maximum length to the promotion however beyond which the equilibrium ceases to exist moreover if customer sensitivity increases then the wholesale equilibrium price decreases product orders increase and product prices drop this effect well observed in real life does not however necessarily imply that the promotion is always beneficial conditions for the profitability of a limited time promotion are shown and analyzed numerically we discuss both open loop and feedback policies and derive the conditions necessary for them to remain optimal under stochastic demand fluctuations

sensitivity of multivariate tests of the capital asset pricing model to the return measurement interval the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta recent research indicates that inferences about the riskreturn relation are sensitive to the choice of the return measurement interval we perform multivariate tests of the sharpe lintner capm using monthly and annual returns on market value ranked portfolios the capm is rejected using monthly returns a result consistent with previous research in contrast we fail to reject the capm when annual holding period returns are used the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta

equilibrium in a durable goods market with lumpy adjustment abstract durable goods are an important component of the business cycle equilibrium models of durable goods markets are made difficult by the lumpy nature of individual purchases we show that a straightforward approximation of the distribution of durable goods holdings gives rise to a tractable equilibrium model we analyze the case of competition as well as that of a monopoly producer

retailer price distributions and promotional activities abstract an interesting feature of the data is that the price distribution in the absence of promotional activities first order stochastically dominates that under display or feature advertising the theoretical model we introduce can yield an equilibrium that is consistent with the above observations

on multivariate tests of the capm abstract this paper evaluates the power of multivariate tests of the capital asset pricing model the results indicate that when employing an unspecified alternative hypothesis the ability of the tests to distinguish between the capm and other pricing models is poor an upper bound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the capm are due to missing factors this upper bound explains the low power of the tests

customer markets credit market imperfections and real price rigidity according to standard theory an increase in demand should raise prices of goods given factor prices empirically however prices appear to be unaffected by short run variations in demand this paper suggests an explanation of this observation if customers react slowly to price changes and credit markets are imperfect prices may be unchanged or even fall when demand increases the reason is that when demand is high profits are high and firms can compete more intensely for customers without increasing their borrowing copyright 1991 by the london school of economics and political science

time varying competition normative models typically suggest that prices rise in periods of high demand and cost however in many markets prices fall when demand or costs rise this inconsistency occurs because the normative models assume that competitive intensity does not change with demand and cost conditions over time we therefore introduce the notion of time varying competition by suggesting that it is important not only to account for the direct effect of demand and cost on prices e g higher demand means higher prices but also the indirect effect of demand and cost changes on competition e g higher demand could cause more competition and hence lower prices we develop a general unified framework to empirically model the direct and indirect effects of demand and cost shifts on pricing in differentiated product markets our approach allows us to measure the indirect effect of multiple demand and cost drivers on competitive intensity and test predictions from alternative theories of repeated games the empirical application is to the u s photographic film industry where there are two main players kodak and fuji we find that the indirect effects are highly significant and comparable in magnitude to the direct effects competitive intensity is greater in periods of high demand and lower cost and is moderated by whether demand or costs are expected to grow or decline interestingly we find asymmetries in the competitive responses of kodak and fuji while kodak is sensitive to demand factors fuji is sensitive to costs our results suggest that market characteristics such as observability of competitor prices can be an important determinant of how competitive intensity is affected by demand and cost conditions

price and investment dynamics theory and plant level data we construct a model of a firm competing for market share in a customer market and making investments in physical capital the firm is financially constrained and there are implementation lags in investment our model predicts that product prices should depend on costs and competitors prices but respond weakly to demand shocks also prices should be strongly related to investment we estimate price and investment equations on panel data for swedish manufacturing plants and find results that are qualitatively in line with these predictions though the relation between investment and prices is stronger than predicted by our model

inflation dynamics during the financial crisis using confidential product level price data underlying the u s producer price index ppi this paper analyzes the effect of changes in firms financial conditions on their price setting behavior during the great recession that surrounds the financial crisis the evidence indicates that during the height of the crisis in late 2008 firms with weak balance sheets increased prices significantly relative to industry averages whereas firms with strong balance sheets lowered prices a response consistent with an adverse demand shock these stark differences in price setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks we explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets in the model firms have an incentive to set a low price to invest in market share though when financial distortions are severe firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance sheet capacity consistent with our empirical findings the model with financial distortions relative to the baseline model without such distortions implies a substantial attenuation of price dynamics in response to contractionary demand shocks

the demand for youth explaining age differences in the volatility of hours over the business cycle young workers experience much greater volatility of hours worked than prime aged workers this can arise from age differences in labor supply or labor demand characteristics to distinguish between these we document that for young workers both the cyclical volatilities of hours and wages are greater than those of the prime aged we argue that a general class of models featuring only age specific labor supply differences cannot reconcile these facts we then show that a simple model featuring labor demand differences can

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

retail price fixity as a facilitating mechanism previous theoretical explanations for retail price fixity show that fixed retail prices can be consistent with either competitive or imperfectly competitive behavior we develop a conceptual model of retail pricing wherein fixed price points are facilitating mechanisms for tacit collusion a non cooperative equilibrium in fixed retail prices is supported through credible threats to revert to nash pricing if cheating is suspected we test the implications of this model using a two stage ordered probit approach in weekly supermarket pricing data the results show that price fixity does support collusive equilibria among retailers but other factors may also explain retail price behavior

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

customer markets and the welfare effects of monetary policy a customer market model in which firms and customers form long term relations is developed and integrated into the canonical new keynesian framework this leads to two important differences compared to the standard model first the purely forward looking phillips curve is replaced by a hybrid variant where current inflation also depends on past inflation second the welfare cost of inflation is much lower which leads to an optimal monetary policy where relatively more weight is put on output gap stabilization than previously found in the literature

deep habits and exchange rate pass through abstract habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass through to international prices deep habits give rise to a dynamic import demand function that leads to import price markup adjustments independently of nominal pricing frictions augmenting a two country dsge model with deep habits we obtain low exchange rate pass through to import prices even when nominal local currency price rigidities are negligibly low as nominal pricing frictions become more important the presence of deep habits further impedes the pass through of exchange rate fluctuations estimating model variants with limited information as well as full information methods we find that the deep habits model requires much lower degrees of nominal price rigidities to match empirical measures of the pass through of exchange rate fluctuations to us import prices

countercyclical pricing in customer markets i present a dynamic model of price determination in customer markets that are subject to exogenous business cycle fluctuations the business cycle is described in terms of a markov process in which market demand alternates stochastically between fast growth boom and slow growth recession phases in the consumers preferred equilibrium outcome 1 prices are below the monopoly level and 2 prices are countercyclical when demand growth rates are positively correlated through time a firm faces a dynamic trade off when making its current price selection while a higher price may raise a firm s profit in the short term it also may diminish the firm s reputation for low prices leading to lower profits in the future

estimating the mark up over marginal cost a panel analysis of japanese firms 1971 1994 abstract in this paper we propose a new method to estimate mark ups over marginal cost at the firm level this method is based on the identity between the short run elasticity of output to inputs the mark up rate and the factor shares we then apply this method to a panel of japanese firms in 21 industries over 24 years we have three main results first there is strong evidence of imperfect competition in this panel in which internationally competitive industries show low mark ups second the mark up rate differs considerably among firms and its distribution is skewed third the mark up rate over marginal cost shows strong procyclicality and its sensitivity is uniform within the industry

sticky price models and durable goods the inclusion of a durable goods sector in sticky price models has strong and unexpected implications even if most prices are flexible a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky in contrast flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models in a limiting case flexibly priced durables cause monetary policy to have no effect on aggregate output our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity jel e21 e23 e31 e52

advertising and aggregate consumption a bayesian dsge assessment aggregate data reveal that advertising in the u s absorbs approximately 2 of gdp and has a well defined pattern over the business cycle being strongly procyclical and highly volatile because the purpose of brand advertising is to foster sales we ask whether such spending has an appreciable effect on the pattern of aggregate consumption and through this avenue on economic activity this question is addressed by developing a dynamic general equilibrium model in which households preferences for differentiated goods depend on the intensity of brand advertising which is endogenously determined by profit maximizing firms once the model is estimated to match the u s economy it argues that the presence of advertising in the long run raises aggregate consumption and hours worked eventually fostering economic activity we also find that advertising has a relevant impact on fluctuations in consumption investment and markup over the business cycle all of the abovementioned effects are proven to epend crucially on the degree of competitiveness of advertising at the firm level

household gasoline demand in the united states supported by the mit center for energy and environmental policy research the u s dept of energy and the national science foundation

identifying a permanent markup shock and its implications for macroeconomic dynamics abstract a permanent price markup shock is justified using an industry based model in which an increase in market concentration raises the desired markup moreover evidence in favor of the non stationarity of the markup is presented which in turn implies that per capita hours are also non stationary structural vector autoregressions are then constructed that can identify shocks to the markup technology and the federal funds rate the results show that 1 inflation responds immediately to shocks to the markup and technology whereas it displays a hump shaped response to a monetary policy shock and that 2 per capita hours decline in response to positive shocks to the markup and technology these empirical findings have important implications for macroeconomic dynamics including the issues on inflation inertia and the technology hours debate the paper also points out that the dynamics of the economy cannot be correctly explained without consideration of the permanent markup shock finally the approach in this paper suggests several ways to identify a wage markup shock using structural vector autoregressions

a survey of new keynesian theories of aggregate supply and their relation to industrial organization i survey the recent literature on the phillips curve along the way i will try to relate this literature to topics of interest to industrial organization i will also point out the gaps in our understanding and places where more careful micro economic analysis would be helpful to macroeconomists in the conclusion i summarize what an industrial organization economist might take away from this literature

firm dynamics and pricing under customer capital accumulation abstract in a search model of firm dynamics customer accumulation is shown to affect the lifecycle of firms and the dynamics of markups in response to aggregate demand shocks in the model sellers of different sizes and productivities post dynamic pricing contracts to strike a balance between attracting new customers and exploiting pre existing ones calibrated using establishment level and micro pricing data from the u s retail sector the model provides a quantitatively good fit to the lifecycle and cross sectional properties of retail establishments further the model predicts that markups are procyclical to aggregate demand shocks with a larger contribution by small sellers

decision stages and asymmetries in regular retail price pass through we study the pass through of wholesale price changes onto regular retail prices using an unusually detailed data set obtained from a major retailer we model pass through as a two stage decision process that reflects both whether as well as how much to change the regular retail price we show that pass through is strongly asymmetric with respect to wholesale price increases versus decreases wholesale price increases are passed through to regular retail prices 70 of the time while wholesale price decreases are passed through only 9 of the time pass through is also asymmetric with respect to the magnitude of the wholesale price change with the magnitude affecting the response to wholesale price increases but not decreases finally we show that covariates such as private label versus national brand 99 cent price endings and the time since the last wholesale price change have a much stronger impact on the first stage of the decision process i e whether to change the regular retail price than on th

aggregate demand idle time and unemployment this paper develops a model of unemployment fluctuations the model keeps the architecture of the barro and grossman 1971 general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework on the product and labor markets both price and tightness adjust to equalize supply and demand there is one more variable than equilibrium condition on each market so we consider various price mechanisms to close the model from completely flexible to completely rigid with some price rigidity aggregate demand influences unemployment through a simple mechanism higher aggregate demand raises the probability that firms find customers which reduces idle time for firms employees and thus increases labor demand which in turn reduces unemployment we use the comparative statics predictions of the model together with empirical measures of quantities and tightnesses to re examine the origins of labor market fluctuations we conclude that 1 price and real wage are not fully flexible because product and labor market tightness fluctuate significantly 2 fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness and 3 labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness

insiders outsiders and nominal wage contracts while the consequences of nominal wage contracts have been rather thoroughly analyzed there is no generally accepted theory of why such contracts prevail in this paper i argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts since most employment fluctuations take the form of fluctuations in hiring insiders are normally not affected by them since prices are primarily determined by costs demand shocks have small effects on real wages thus insiders have little incentive to change to more complicated contracts with rigid nominal wages nominal demand shocks have large effects on the employment opportunities of outsiders but outsiders have little influence on labor contracts