price flexibility in developing countries evidence and implications using data for a sample of 50 developing countries the empirical investigation evaluates determinants and implications of asymmetric price flexibility price inflation is characterized by high flexibility to adjust towards full equilibrium further price inflation accelerates flexibly with unanticipated demand growth in both the upward and downward directions in most of the countries under investigation asymmetry indicates higher upward flexibility compared to downward flexibility in many countries aggregate uncertainty determines the degree of asymmetry such that price flexibility is higher with respect to expansionary demand shocks compared to contractionary shocks the higher the variability of aggregate demand across countries in contrast higher trend price inflation increases downward price flexibility across countries output variability decreases with both upward and downward price flexibility in the face of aggregate demand shocks a the views expressed in this article are those of the a

modeling price and quantity relations for danish manufacturing exports this article develops a structural econometric model for danish manufacturing exports the cointegrating relations of the model are determined to be a markup pricing relation and an export demand relation whereas the short run structure shows pricing to market effects both long run and short run pricing relations are found to be empirically constant during a period of large exchange rate variations the model isolates the main interactions between the foreign trade sector the exchange rate and domestic variables which played a key role in the external adjustment of the economy during the sample period

sticky import prices and j curves we show that devaluations lead to a j curve when imported goods are durable and import prices adjust slowly to exchange rate changes the j curve effect is caused by intertemporal speculation as import prices are low relative to future prices immediately after a devaluation

modern money theory and the facts of experience this paper discusses modern money theory mmt with a particular focus on the role of the state in its monetary system and the nature of money it addresses the main differences between the orthodox heterodox and mmt approaches to monetary theory while reconciling endogenous money theory with the state money approach by emphasising the symmetry between how banks create money as they finance private spending and how the government creates money when it finances its own spending we clarify some of the misconceptions surrounding mmt while showing that it is more consistent with the facts of experience furthermore we argue that mmt s insistence that government spending or lending must precede bond sales is consistent with the keynesian emphasis on effective demand as the driving force behind income and saving we delve into mmt s implications for monetary and fiscal policy with a particular focus on the eurozone we conclude our paper by discussing two proposals of monetary cranks narrow banking and government issue of debt free money this allows us to re emphasise mmt s views on the nature of money

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

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

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

pricing exports a cross country study abstract this paper applies cointegration and error correction analysis to estimate the long run steady state and short run dynamic relationships between the exchange rate and export prices in industrial and newly industrializing economies the data coherent analysis allowing the endogeneity of domestic cost and the exchange rate shows that the exchange rate has smaller effects on the export price than previous studies would indicate it contradicts some widely accepted relationships e g smaller more open countries have greater coefficients of pass through the results also exhibit important differences among the usa japan and germany in their export pricing behavior jel f30 f31

on investment and exchange rate movements we investigate the ways in which permanent exchange rate changes may affect investment by influencing domestic and foreign revenue the cost of imported variable inputs and the investment price of imported capital goods we find that the revenue and investment price channels have a quantitatively greater effect on investment than the cost channel the negative effect of the revenue channel which affects the marginal profitability of capital outweighs the positive effect of the investment price channel which affects the marginal cost of capital implying that exchange rate appreciation has a net negative influence on investment the estimation results are robust to different approaches to extracting the permanent components of exchange rates

real and nominal shocks in a two country price setting world abstract this paper develops a two country model in which the law of one price does not hold in the short run and which is consistent with the stylized fact that exchange rates respond more quickly to news than prices this is done by assuming that firms face lumpy information costs in determining what price to charge both domestic and imported goods prices are therefore sticky with respect to news and deviations from the law of one price ppp are due to exchange rate surprises the model is used to analyze the domestic and international impact of real and nominal disturbances

quantitative monetary policy and government debt management in britain since 1919 the enormous increase in the united kingdom s national debt during the two world wars of the twentieth century meant that government debt management which had hitherto been regarded as a matter of budgetary convenience acquired great macroeconomic significance the paper examines and compares four episodes in the management of the national debt since 1919 and in each case explores the relationship between debt management and monetary policy the current policy of quantitative easing is a form of government debt management and the paper discusses it in the context of the earlier episodes copyright 2012 oxford university press

market shares financial constraints and pricing behaviour in the export market a structural dynamic model of price and quantity adjustment is estimated on time series data for exports and export prices two sources of dynamics are considered customer markets and preset prices as predicted by the customer market model the market share adjusts slowly after a change in the relative price and financial conditions affect prices prices are found to be sticky in the sense that they do not reflect the most recent information about costs and exchange rates a parsimoniously parameterized structural model explains about 90 of the variation in market share and the relative price

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

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

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

why do the free trade gain numbers differ so much the role of industrial organization in general equilibrium a small general equilibrium model calibrated approximately to match the canadian tradeable goods sector is used to examine the implications of a range of assumptions about pricing behaviour and entry barriers for the impact of free trade with the united states it turns out that only a model with an extreme combination of non competitive product market and free entry as well as unexploited scale economies can generate substantial gains from free trade other assumptions modelled include monopolistic competition market share pricing an economist s model and a mainstream industrial organization approach the predicted welfare gains range from zero to more than 7 per cent of gnp pourquoi est ce que les evaluations numeriques des gains derives de l accord de libre echange different tellement le role de l organisation industrielle dans l analyse d equilibre g6neral l auteur utilise un petit modele d equilibre general calibre pour approximer le secteur canadien des biens echangeables avec l exterieur dans son analyse des implications d un ensemble de postulats quant a la tarification et aux barrieres a l entree sur l impact du libre echange avec les etats unis il appert que seul un modele impliquant une combinaison extreme de marches de produit non concurrentiels et d entree libre ainsi que d economies d echelle non exploitees peut engendrer des gains substantiels comme resultat du libre echange on examine aussi d autres postulats concurrence monopolistique tarification pour maintenir une part du marche un modele a saveur economiste et 1 approche standard d organisation industrielle les gains de bien etre qu on predit selon les postulats de base couvrent un eventail de zero a 7 pour cent du pnb

some evidence on demand fluctuations and the increased stability of the post war american economy this paper investigates the implications of a sticky wage contracting model that can explain both the decline in wage and price flexibility and the increased stability of the post war american economy the reduction in the size of demand shocks in the post war period has increased agents incentives to write longer contracts though longer contracts have rendered real activity more responsive to demand shocks in the post war period the reduction in the size of these shocks has dominated the increase in the size of response to a particular shock overall real activity has become more stable in the post war period as predicted by theory

equity markets and personal taxation the ex dividend day behaviour of finnish stock prices abstract this paper analyzes the ex dividend day behaviour of stock prices in the finnish stock market the tax structure in finland is strikingly similar to the new tax structure in the u s which was for the first time in effect during the fiscal year 1987 the results in this paper may thus also illuminate the ex dividend day behaviour in the u s stock markets under the new tax law our empirical data show that the average drop in the stock prices on their ex dividend days has been 90 of the amount of the dividend during the years of 1974 to 1985 this is shown to be consistent with the tax explanation taking into account the finnish tax laws it is especially shown that the marginal seller on the ex dividend days is an individual investor with a marginal tax rate of approximately 50

is price flexibility destabilizing sluggish wages and prices are generally the culprits in keynesian models of unemployment and business fluctuations price flexibility in standard fix price models would restore the economy to full employment this line of reasoning has often been at the heart of proposals to reform institutions in order to restore flexibility to wages and prices there is however a strand of macroeconomic thought that questions the wisdom of too much price flexibility john maynard keynes raised the issue in chapter 19 of the general theory by noting that a deflation could raise real interest rates and thereby impede a return to full employment in his 1975 paper keynesian models of recession and depression james tobin develops this point in a formal model low prices work to move the economy to full employment but falling prices to the extent that they lead to expectations of deflation raise the real interest rate through the mundell effect and move the economy away from full employment instability is likely to occur if expectations of inflation adjust rapidly to actual inflation and the real interest rate effect is large our historical experience does include significant episodes where either reductions in inflation or actual deflation were accompanied by high real interest rates although other factors could be responsible the experiences of the great depression the latin american countries in the late 1970 s and the united states in the early 1980 s all add surface plausibility to the real interest rate deflation link and thus to one aspect of the keynes tobin story recently bradford de long and lawrence summers 1984 have argued that the decrease in the variance of output following world war ii can be largely attributable to the decrease in wage and price flexibility in the postwar era the reason output fluctuations are smaller today is precisely because the keynes tobin destabilizing mechanism is less operative today this paper examines whether increased price flexibility can be destabilizing in a version of john taylor s contract model 1979 1980 extended to include real interest rate effects taylor s model includes both backward and forward elements in wage setting behavior and thus permits some rationality in the wage setting process we find that even with this limited degree of rationality increased wage flexibility leads to a decrease in both the variance of output and the variance of prices nicholas carlozzi and taylor 1983 introduce the real rate of interest into a staggered contract framework and discuss in general terms and through simulations the effects that changing real rates may have on the system they do not however study the effects of potential instability through increases in wage flexibility or provide any analytical results they provide an extensive discussion of the implications of alternative policy rules on the stochastic behavior of the economy we first add the real interest rate to the standard taylor model and derive the solution and prove key analytical results these results are further buttressed by simulations

price dynamics of exporting and import competing firms a model of a market for an internationally traded good is presented in this paper buyers who are customers of one firm are imperfectly informed about other firms prices and it is costly for them to change from one supplier to another this leads to dynamic market share equations which allow analysis of the interaction between price quantity decisions of exporting and import competing firms one result is that although the prices of importcompeting firms must in the long run match import prices they may in the short run be uncorrelated or even negatively correlated with import prices

the j curve a literature review due to lag structure currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter j hence the j curve phenomenon since its introduction by magee in 1973 brooking papers on economic activity 1 pp 303 25 a large number of studies have attempted to test the phenomenon using different techniques and different model specifications the results are at best ambiguous and deserve to be collected together for the future generation of researchers and graduate students this paper fills such a vacuum in the literature by reviewing the j curve related empirical papers

firm outsourcing decisions evidence from u s foreign trade zones deborah l swenson this article examines the operations of firms located in u s foreign trade subzones to study the responsiveness of outsourcing to international cost changes i find that firms reduce their reliance on foreign inputs when dollar depreciation increases the relative price of imported inputs the effect is pervasive across industries and is economically significant in addition firms that rely more heavily on imported intermediate inputs reduce their overall shipments when dollar depreciation elevates their imported input costs however the magnitude of the shipments effect is economically small suggesting that firms respond to exchange rate movements by adjusting their operations on other dimensions jel f23 f1 i introduction during the nafta debates u s industry argued that it would be placed at a competitive disadvantage if it failed to gain access to mexican parts that benefited from tariff reductions in the absence of such benefits it was argued that u s firms might even move their production off shore at the same time u s trade unions expressed great concern that jobs and high levels of economic activity would be lost if nafta caused a rise in the outsourcing of intermediate inputs although these countervailing concerns have attracted much attention very little is known about the responsiveness of firm outsourcing to relative price changes or about its secondary effects on firm shipments since outsourcing decisions are made at the firm level and appropriate data is rarely available to researchers this article seeks to address this void by analyzing a data set that provides information on these purchasing and shipment decisions recent aggregate evidence indicates that firms are purchasing an increasing portion of their intermediate inputs from their foreign affiliates or from unrelated parties located abroad 1 it is argued that advances in transportation and communications have facilitated the trend toward the dispersion of production activities while the aggregate trends are striking little research has focused on individual firm decisions one exception is brainard and riker s 1997 examination of multinational firms employment choices as they respond to international wage changes brainard and riker conclude that the degree of firm substitution among a firm s numerous foreign affiliates is much higher than that between parent firms and their foreign affiliates which is relatively small this labor market evidence suggests that foreign affiliate labor is not easily substituted for home labor and that the two may even be complements 2 in contrast a higher degree of substitutability is implied by work including feenstra a nd hanson 1996 and irwin 1996 for the united states or campa and goldberg 1997 for the united states united kingdom japan and canada which documents that the usage of imported intermediate inputs has increased in almost all cases since the 1970s 3 this article studies the issue of input sourcing flexibility and its consequences by examining individual firm decisions the analysis is based on the activities of a set of firms located in u s foreign trade subzones i focus on this subset of firms since the u s foreign trade subzones program provides a unique opportunity to examine firm level decisions regarding inputs and shipments the reporting requirements of the foreign trade zones program enable us to view aspects of firm sourcing decisions that are usually unobservable i use two estimation methods to measure the general substitutability of inputs and outsourcing flexibility first i develop a constant elasticity of substitution ces model of input demand i then use nonlinear least squares techniques to estimate the underlying demand parameters implied by the structural equations i then perform a tobit analysis of firm sourcing decisions the benefit of the second form of analysis is that it allows me to study additional determinants of outsourcing and it does not require strong assumptions about the functional form of the production function

import pricing and the trade balance in a popular model of exchange rate determination abstract this paper extends a popular model of exchange rate determination to include an import pricing relationship that is consistenc with imperfect competition in the importable sector the analysis highlights how import pricing behavior and aggregate macroeconomic relationships interact in determining the dynamics of the exchange rate the price of imports and the trade balance a basic prediction of the analysis is that an increase in the substitutability of imported product varieties in the domestic market will raise the responsiveness of the exchange rate and dampen the responsiveness of the trade account to monetary shocks

flexible exchange rates and commodity price changes the case of japan although agricultural commodities are often assumed to have flexible prices little has been done to estimate exchange rate pass through perfect commodity arbitrage opportunities imply complete pass through imperfect opportunities could lead to incomplete pass through analysis of commodity price and exchange rate adjustments for five commodities exported to japan by the united states reveals that during the 1970s commodity prices were generally flexible during the 1980s when the dollar was rising price stickiness on the part of exporters importers contributed to inflexible prices and asymmetric exchange rate response specifically an exchange rate increase was passed through for some commodities but not a decline

on the real effects of short and long run inflation and relative sector price variability some empirical evidence using the kalman filter this paper evaluates empirically the effects of sector relative price variability and short run and long run inflation on the growth rate of real output in the united states since 1947 also permanent and transitory estimates are constructed to evaluate the effects of unanticipated movements in sector relative price on the growth rate of real output the results show a statistically significant inverse relationship beween the growth rate of real output and transitory sector relative price variability and anticipated long run inflation and a direct relationship between the growth rate of real output and unanticipated short run inflation

monetary policy elasticity dynamics and real exchange rate reversal models of hysteresis in trade invoke permanent shifts in competitiveness to explain the real exchange rate reversal of the 1980s these models predict an immediate and permanent response of competitiveness to exchange rate overshooting in contrast an extensive empirically based j curve literature suggests a lagged response of competitiveness to real exchange rate movements this paper shows that such trade balance elasticity dynamics offer an attractive alternative explanation of real exchange rate reversal copyright 1995 by ohio state university press

exchange rate pass through and international pricing strategy a conceptual framework and research propositions the extent to which exchange rate fluctuations affect international prices is called exchange rate pass through this paper develops a conceptual model in explaining how exchange rate fluctuations are channeled into international pricing strategy and offers research propositions our model posits that the extent of exchange rate pass through in international pricing is affected by the firm s pricing orientation performance orientation distribution policy and brand equity as well as by exchange rate uncertainty and competitive symmetry

exchange rate exposure and competition evidence from the automotive industry this study examines the e ect of real exchange rate changes on multinational rms and incorporates the e ect of intra industry competition on the relation between exchange rates and rm value to test the relation more e ectively tests are conducted using a sample of automotive rms from the united states and japan consistent with theoretical predictions there is signi cant exposure to exchange rate shocks moreover there is evidence of time variation in exchange rate exposure which is consistent with changes in the competitive environment within the industry finally evidence is presented that is consistent with foreign sales being a major determinant of exposure and the e ectiveness of operational hedging through foreign production 2001 elsevier science s a all rights reserved jel classixcation f31 g30 g39

declining exchange rate pass through to u s import prices the potential role of global factors this paper documents a robust and sustained decline in exchange rate pass through to u s import prices from well above 0 5 during the 1970s and 1980s to around 0 2 over the last decade we attribute this decline to the rising prominence of competition from china a shift in import pricing behavior since the asian financial crisis and the reduced share of material intensive goods in u s imports we also find evidence that foreign exporters are increasingly setting their prices with an eye on u s prices these results in turn suggest a new and more general hypothesis linking the decline in pass through to the evolving nature of competition in global markets and structural changes in international production patterns

empirical tests of boundary conditions for toronto stock exchange options using option and stock transaction data for the period 1978 1979 three issues were investigated first the conformance of observed prices to various boundary conditions second the evolution of the market over time as the volume of trading and the number of listed options increased and third to test the efficiency of the market it was found that violations did occur using a trading rule based on the signal of observed violations the results suggest that even after transaction costs the market was inefficient over the sample period

the response of domestic prices to expected exchange rates this article examines the recent u s price experience in response to the actual and anticipated rise and fall of the dollar and tests for determinants of the observed price effects an index of real exchange rate expectations is developed and used to explore its role in determining domestic producer prices actual and expected future real exchange rates are seen to have opposite impacts on domestic price determination at the industry level further the industry specific characteristics interact asymmetrically with actual and expected real exchange rate changes copyright 1992 by university of chicago press

did the strong dollar increase competition in u s product markets sunk cost models of new trade theory have demonstrated that large unanticipated swings in currency values can have permanent effects on trade flows by altering market structure in imperfectly competitive markets the author tests an implication of these models using panel data on export unit values from germany and japan to a number of foreign markets including the united states he finds weak evidence in support of the thesis that u s product markets became more competitive as a result of the large dollar appreciation of the 1980s although the results vary by industry and comparison country copyright 1994 by mit press

intertemporal prices and the u s trade balance the deterioration of the u s merchandise trade deficit in the 1980s fell mostly on durable goods using a representative agent model the authors show that the key distinction between the trade balance in nondurables and durables is the role of intertemporal prices in the latter a decrease in intertemporal prices associated for example with an exchange rate overvaluation should therefore be expected to worsen the trade balance in durables more than in nondurables this interpretation of the compositional changes of the u s trade balance is supported by their econometric findings copyright 1992 by american economic association

the j curve and nafta evidence from commodity trade between the us and mexico the north american free trade agreement nafta was predicted to have a substantial impact on the us mexico trade especially on specific importing and exporting industries in this article we use annual industry level export and import data from 1962 to 2004 to discern both the short and long run effects of real exchange rate depreciation on the mexico us trade balance as well as the effects of nafta on this trade we find that peso depreciation has a positive long run effect on 24 of 102 mexican industries and a negative short run effect on 19 of 102 industries only a small fraction 7 of 102 industries show any support for the j curve hypothesis nafta has had a significant effect on a significant number of the industries however

exchange rates and import prices in the united states a varying parameter estimation of exchange rate pass through this article estimates the import price function in the united states using a varying parameter model the results show that the short run nonoil import price changes have become relatively less responsive to exchange rate changes than to foreign cost changes since the generalized floating began in the early 1970s concomitantly the markup has varied significantly falling when the dollar fell and rising when it rose thus pricing to market is confirmed even for overall u s imports

microeconomic implications of exchange rate variations this paper investigates the effect of exchange rate variations on the equilibrium of an industry in which domestic firms are competing with foreign suppliers the paper is designed as an expository survey it discusses the perfectly competitive industry exchange rate pass through under imperfect competition entry exit and hysteresis with fixed costs and exchange rate uncertainty copyright 1990 by oxford university press

exchange rate expectations and market shares abstract we consider an asymmetric duopoly comprised of a domestic and a foreign firm we derive optimal collusion equilibria and examine how market shares vary in response to changes in the exchange rate our analysis implies some surprising results first a temporary depreciation has a greater impact on market shares than a permanent depreciation second if the change in the expected future rates is of sufficient magnitude then the domestic firm s market share may decrease following a depreciation of the home currency a seemingly perverse effect 1997 elsevier science s a

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

cost pass through in the u s automobile market we study cost pass through in the u s automobile market using a framework that incorporates the effects of cost changes on input decisions we find that accounting for firms factor market decisions significantly increases measured cost pass through although we reject the hypothesis of full cost pass through and constant markups in addition our evidence suggests that cost shocks common to all manufacturers have a greater effect on prices than do model specific cost shocks finally we examine how pass through varies with manufacturer nationality finding that u s firm cost pass through exceeds that of european and asian firms

is price flexibility destabilizing abstract increased price flexibility causes temporary output deviations to be eliminated more quickly but it also makes the effects of inflationary expectations on aggregate demand larger so it can lead to increased output variability this trade off is assessed for an open economy and only limited support is found for keynes concern that increased price flexibility is destabilizing the dependence of this issue on exchange rate policy and on alternative specifications for sticky prices is emphasized

exchange rate pass through in a small open economy the anglo irish case bilateral import unit values are constructed to investigate the extent and speed of exchange rate and production cost pass through into the unit values of irish imports total and sectoral from the uk using menon s 1996 mark up model the approach used to measure exchange rate pass through is based on cointegration and error correction modelling and the period of analysis is from 1979 to 1995 full pass through from the bilateral irish pound sterling exchange rate and from uk producer costs could not be rejected for total and sectoral import unit values for the sample period 1979q1 1995q4 this implies no role for domestic competing prices in explaining the long run relationship determining unit values of irish imports from the uk the results indicate that for aggregate and sectoral unit values of irish imports from the uk pass through is incomplete in the short run

pass through of exchange rates and competition between floaters and fixers this paper studies how a rise in the share of u s imports from china or any country with a fixed exchange rate could disproportionately lower pass through of exchange rates to u s import prices we develop a theoretical model showing how changes in the competitive environment induce exporters from other countries to lower markups in response to a dollar depreciation thereby moderating pass through the model indicates that a particular local bias condition is necessary for this effect and that free entry amplifies it the model also produces an approximately log linear structural equation for pass through regressions including the china share panel regressions over 1993 2006 indicate that the rising share of trade from china or from all countries with fixed exchange rates can explain a decline in pass through by about onefifth of its size

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

a proposition on short run departures from the law of one price unanticipated inflation relative price dispersion and commodity arbitrage abstract this paper proposes an explanation of short run departures from the law of one price based on the characteristics of the inflationary process and changes in the distribution of relative prices unexpected inflation gives rise to volatility of relative prices the more unexpected and hence uneven the rate of inflation the greater the difficulty in discerning from a given structure of relative prices commodity arbitrage opportunities which may be expected to persist and those transient opportunities which do not warrant a firm s incurring fixed costs of arbitrage an illustration portrays a risk averse firm confronting an international arbitrage opportunity

real exchange rates and the pattern of trade comparative dynamics for north and south abstract using a two country model of imperfect competition this paper examines cross sectional implications for the time series behavior of real exchange rates across different patterns of trade under intersectoral trade price setters display less interaction in their pricing decisions across national boundaries allowing for greater deviation and weaker mean reversion in relative prices conversely with intra industry trade greater price linkages between similar countries trading in similar goods generate lower pass through and less real exchange rate persistence the pattern of trade is shown to essentially alter the degree of domestic price stickiness which in turn affects the self correcting mechanism of an open economy

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

asset pricing in partially segmented markets evidence from the finnish market this paper analyzes asset pricing in a partially segmented market where citizens of a small country are allowed to hold only their domestic securities whereas the rest of the investors foreigners are essentially allowed to hold all securities in this market setting it may occur that the citizens of the small country are willing to pay less for their domestic securities than are the foreign investors the paper derives equilibrium required rates of return for different investors in this market setting which perfectly occurred in finland and tests this equilibrium model using data from the finnish stock market empirical results are consistent with the hypotheses derived from the model several studies see e g solnik 1974a and grauer and hakansson 1987 have shown that investors should diversify internationally as by so doing they can reduce the risk of their portfolio without lowering the expected return this implies that if the citizens of a certain country are by legal restrictions prohibited from holding foreign securities they may require a higher rate of return on the domestic securities than the foreign investors do this may happen because the domestic investors cannot diversify away the specific country risk in the same way that the foreign investors can thus if we could observe the prices which the foreign and domestic investors are willing to pay for these domestic securities we would expect them to differ because of this diversification effect the finnish law prohibited finnish investors from investing in foreign securities until 1986 while simultaneously allowing foreign investors to own up to 20 of the shares of any finnish company moreover since 1984 the helsinki stock exchange hse has separately quoted the prices for the unrestricted shares which can be owned both by foreign and domestic investors and for the restricted shares owned solely by domestic investors thus the market setting depicted in the previous paragraph occurred perfectly in finland during the years 1984 and 1985 in this paper our objective is to develop and test an asset pricing model which takes into account the legal restrictions in the finnish stock market in section i we specify the market structure in the finnish stock market in more detail by explaining the relevant legal restrictions affecting the market we also present some descriptive statistics on the prices of the restricted and the unrestricted on

vertical product differentiation and the import demand function theory and evidence in this paper we use a model of vertical product differentiation to cast doubt on the general validity of the import demand function as specified in macroeconomic models the empirical importance of our theoretical concerns is then established according to our first hypothesis the share of a good s imports in total imports is non increasing in domestic wages if the country has comparative advantage in high quality varieties of this good the second hypothesis states that the share of a good s imports is increasing in non wage domes tic income if the country has comparative advantage in high quality varieties of this good

intertemporal speculation devaluation and the j curve abstract this paper presents a new explanation of why j curves i e the tendency of the trade balance to deteriorate immediately after a devaluation and to improve only as time passes may arise the paper focuses on the consequences of price stickiness if prices are sticky the devaluation leads first to asn increse in the relative price of tradables which tends to improve the trade balance and second to rising prices of tradables following the devaluation which tends to temporarily worsen the trade balance as a result of intertemporal speculation if the latter effect dominates a j curves results

the efficiency of the finnish market for right issues abstract this paper analyzes the efficiency of the finnish market for right issues the rights traded on the helsinki stock exchange hse are similar instruments to warrants with some special features attached to them the paper first derives appropriate arbitrage conditions for these rights which must be satisfied in informationally efficient markets and then examines these conditions using both ex post and ex ante test procedures the ex post tests which jointly examine market efficiency and synchroneity of the rights and stock market show a staggering amount of violations against the arbitrage bounds however the ex ante tests reveal that high transaction costs prevent normal investors from benefitting from these violations stockbrokers themselves however seem to be able to earn arbitrage profits in the rights market

price flexibility and aggregate stability new evidence and implications i introduction is increased price flexibility stabilizing the importance of this question can be easily established by observing the number of recently published papers in which this question or a slight modification of it has appeared in their titles 1 while most economists would answer this question affirmatively a strand of macroeconomic thought that questions the wisdom of too much price flexibility has recently regained some attention 2 in the most widely discussed of this recent literature delong and summers 1986b question the wisdom of too much price flexibility their work was motivated by some of the ideas expressed by keynes 1936 and formally articulated by james tobin 1975 low prices work to move the economy to full employment but falling prices to the extent that they lead to expectations of deflation raise the real interest rate through the mundell effect and move the economy away from full employment in a version of taylor s 1979 wage setting model delong and summers show that instability is likely to occur if expectations of inflation adjust rapidly to actual inflation and the real interest rate effect is large this view presents a direct challenge to mainstream keynesian models of business cycles 3 according to these models sluggish wages and prices are generally the culprits of unemployment and business fluctuations an exogenous institutional increase in the degree of price inflexibility increases the size of quantities adjustment in response to aggregate demand shocks in the current period and over time the assumption of exogeneity is consistent with the view that wage and price rigidity are the result of an institutional structure that is relatively unresponsive to changes in the underlying economic conditions in gray and kandil 1991 we find this view unappealing considering recent efforts to rationalize nominal rigidities as the outcome of explicit optimization exercises 4 it is for this reason that we examine the relationship between price flexibility and output variability in a framework in which both are endogenously determined in the model we develop price rigidity is attributed to the length of contractual wage agreements an increase in contract length will occur if the costs of negotiating contracts rise or the amount of uncertainty impinging on the economy declines in the first case declines in wage and price flexibility will be accompanied by decreased stability of output in the latter case the opposite will occur the reduction in the size of stochastic disturbances impinging on the economic system has a direct stabilizing impact on real output concurrently the reduction in the degree of uncertainty increases agents incentives to write longer contracts the increased rigidity is destabilizing this destabilizing impact is dominated however by the direct stabilizing impact the implications of the alternative views can be contrasted in many respects in kandil 1991b i test the relation between measures of wage and price flexibility and the size of macroeconomic fluctuations across a group of ten major industrial countries the analysis of this paper extends this research in several directions first the analysis provides a formal illustration of the channels through which price flexibility may differentiate the real effects of specific shocks underlying aggregate demand and in turn aggregate variability the framework approximates the key relationships for the theoretical debate under consideration these relationships are replicated empirically to establish the validity of the hypotheses that differentiate the alternative views second the analysis provides a more formal attempt towards quantifying the structural shocks underlying aggregate demand these shocks are the driving forces of economic instability and in turn they are crucial to the debate on the stabilizing effects of price flexibility

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

the european distaste for us budget deficits a regime shift explanation it is the general consensus that the chief stimulus to the european recovery from the 1982 recession was exports to the united states it is therefore paradoxical that european official circles were critical of the swingeing us budget deficits throughout the 1980 85 period even though the budget deficits were the driving force behind the high us import demands this paper argues that the european government had become more concerned with price stability and hence was obliged to pursue contractionary macro policies in order to offset the supply side price pressure caused by the strong dollar the europeans were unhappy with the us budget deficits because they would have benefited more if the us recovery had been maintained by looser monetary but tighter fiscal policies the contributions of this paper are one showing how a standard macro model can be modified to accomadate the endogenous european policy response and two testing the joint hypothesis of new european concerns and of induced contraction

accommodation price flexibility and fluctuations abstract we show that in an economy where output fluctuations are driven primarily by aggregate demand shocks allowing a contemporaneous response of nominal wage contracts to actual market conditions in the period of the reopening of a contract invalidates taylor s second order phillips curve and delong and summers destabilizing output effects of increased price flexibility

the j curve evidence from commodity trade between uk and china in testing the short run j curve effect and the long run effects of currency depreciation on the trade balance many researchers have used either trade data between one country and the rest of the world or between one country and another trading partner both groups are said to suffer from aggregation bias to reduce the bias in this article we consider trade data between one country the us and her trading partner china disaggregated by commodity we use imports and exports of 88 industries 2 digit and 3 digit classifications and cointegration analysis to show that the trade balance of at least 34 of the industries react favourably to real depreciation of the dollar the j curve effect is detected in 22 industries furthermore most of these industries that are sensitive to currency depreciation are durable commodity groupings

export pricing flexible exchange rates and divergence in the prices of traded goods abstract a model of firm pricing where customers adjust slowly to price differences is extended to an exporting firm under flexible exchange rates the foreign currency price the firm sets determines both current net revenue and the rate of investment in market share real exchange rate changes lead to price revisions but the protracted adjustment of customers prompts a smaller price response to transitory changes in the real exchange rate the model accounts for observed variations in traded goods prices across countries and the failure of exporting firms to pass through exchange rate changes but in contrast to static models does not predict frequent reallocation of traded goods production

is increased price flexibility stabilizing this paper uses john taylor s model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing because of the mundell effect while lower prices increase output the expectation of falling prices decreases output simulations based on realistic parameter values suggest that increases in price flexibility might well increase the cyclical variability of output in the united states copyright 1986 by american economic association

price flexibility and aggregate stability some evidence contrasting developing and developed countries this paper explores the empirical validity of theoretical channels through which price flexibility may have caused differences in the stability of output in developing and developed countries the relation between these two variables suggests several principles where the size of stochastic disturbances that impinge on the economic system does not play an important role in determining the degree of price flexibility the increased flexibility is clearly stabilizing developing countries generally are characterized by larger stochastic disturbances and a higher flexibility of the price level than developed countries the larger variability of disturbances is indeed destabilizing further this destabilizing effect has domi nated the stabilizing effect that is associated with the increased flexibility of the price level in developing countries and this results in a clear positive correlation between price flexibility and output variability

the effect of exchange rate distortions on grain export markets the case of argentina the growth of agricultural trade in the 1970s and the strong dollar and depressed commodity prices in the 1980s have increased awareness of the vulnerability of agricultural markets to economic forces outside the agricultural sector some of the recent agricultural developments are attributable to changes in exchange rate movements that transmit macroeconomic forces to a trade dependent agricultural sector under the flexible exchange rate system exchange rate volatility has increased artus and young because exchange rates adjust to balance external accounts for an independent level of money supply across countries volatility has also increased because asset markets and adjustments on the capital side of the balance of payments determine the exchange rate in the short run dornbush regardless of the sources of exchange rate movements exchange rate changes can affect terms of trade and international competitiveness as long as they affect relative prices between traded and nontraded goods krueger even if exchange rate changes primarily adjust price levels between countries for a given level of the money supply there are terms of trade changes in the short run however recent evidence indicates that exchange rate changes are greater than can be attributed to changes in domestic price levels across countries frenkel stockman

government monetary and fiscal operations generalising the endogenous money approach the traditional endogenous money approach can be generalised substantially by including the insights of modern money theory regarding the necessary coordination of fiscal and monetary policies a monetarily sovereign government is composed of two entities involved in the issuance and redemption of government monetary instruments as such one should include the role of the treasury in monetary policy and the role of the central bank in fiscal policy the paper suggests a simple way to model that interaction shows some of the theoretical insights that can be drawn from that interaction and illustrates the relevance of that interaction with the monetary and fiscal practices of the us treasury and the federal reserve over the past century times of stress in the monetary system such as the recent great recession usually bring to light more forcefully this necessary interaction

strategic foreign exchange management this paper argues that it is possible to advise firms on how to hedge against foreign exchange risks only if one has detailed knowledge of the competitive environment they work in to illustrate this we compare firms hedging requirements in a number of different standard industrial organizations models in particular the cournot model a model with conjectural variations price taking firms and monopolistic competition consider the situation of a firm producing in germany and selling an important part of its total output in the us obviously its profitability may be seriously compromised by an unexpected appreciation of the dm relatively to the the company can react to this uncertainty in two ways either it can assume that the conditions of the modigliani miller theorem are approximately fulfilled and that it best serves the interests of its shareholders by behaving in a risk neutral fashion alternatively the firm may for a variety of reasons behave as a risk averter itself and try to obtain some coverage against exchange rate risk when looking at the amount of insurance taken up by companies on conventional insurance markets one gets the impression that the latter alternative risk averse firms is for many practical cases a realistic assumption the activities of many companies are more easily understood if one admits that they exhibit a certain degree of risk aversion if one accepts this one may go on to ask just how companies should go about insuring themselves against unexpected exchange rate fluctuations more specifically one has to study how much exchange risk the firms should insure against and which exchange rates are of relevance in the example above of a german company selling in the us the answer might at first sight seem obvious the company should obtain coverage against dm fluctuations for an amount approximately equal to its anticipated revenues on brief reflection it immediately appears that this is surely an excessively simplistic answer first the amount of coverage required must be affected by the question of how the price of the product varies when the dm exchange rate shifts second it may be the case that the german company s main competitors are located in say france in this case fluctuations of the

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices

exchange rate shocks and the speed of trade price adjustment 1 introduction theoretical and empirical work in the international trade literature dealing with the relationship between exchange rate and trade prices has been dominated and guided by the static pass through and profit markup model see e g feinberg 1986 mann 1986 fisher 1989 hooper and mann 1989 knetter 1989 gagnon and knetter 1995 feenstra gagnon and knetter 1996 and lee 1997 the shortcoming of such models is well captured by william branson 1989 p 333 difference in adjustment response signals to me the need for a reconsideration of the theoretical framework for the analysis of the pass through question by now we should be thinking about optimizing price policy for investors and exporters who know that they face an exchange rate that follows some sort of stochastic process over time these differences call for a revision of pass through theory along the lines of time series analysis our explicit incorporation of profit maximizing firms facing adjustment costs develops the model introduced by krugman 1987 it transforms the traditional markup and pass through model to explain from first principles a dynamic markup and a price adjustment speed both depending on fundamental characteristics of the firms involved krugman 1989 concludes his paper on pricing to market by calling for further research on the adjustment cost model regarding the adjustment cost approach he states krugman 1989 p 44 it is still a speculative idea not grounded in solid empirical tests but it is a good story and if it is correct it has extremely important implications for economic policy the present paper provides the quantity adjustment cost approach that krugman calls for as such it complements the work of gagnon 1989 and kasa 1992 while gagnon and kasa employ quantity adjustment cost models with many of the same features as the model developed here they provide only approximate solutions and focus on a quite different set of issues gagnon examines the effect of exchange rate variability on trade volume kasa investigates the importance of mean reversion in exchange rates as an explanation for the pricing to market hypothesis in contrast our focus is on the relation between adjustment speeds and pass through thus our contribution relative to gagnon 1989 and kasa 1992 is that we provide the passthrough issue in a dynamic context with exact analytical solutions that relate the degree of passthrough to adjustment speeds and identify the determinants of commodity specific adjustment speeds in response to exchange rate shocks the remainder of the paper is organized as follows in section 2 we develop a partial equilibrium model taking exchange rates as given of the pricing policies of a profit maximizing firm competing in foreign markets and subject to a convex quantity adjustment cost section 3 develops testable implications directly from the model section 4 discusses the data and empirical methodology for preliminary two stage time series and cross sectional tests section 5 provides the tentative estimation and section 6 concludes 2 a simple partial equilibrium model consider a representative firm producing fox export that maximizes the expected discounted value of infinite horizon real profits the firm generates its revenue abroad in foreign currency it has no influence on the exchange rate may adjust its price at any point in time but is subject to a convex cost of quantity adjustment the firm maximizes where x is the exogenously given real exchange rate at time t we define x as the units of domestic currency per unit of foreign currency multiplied by the export destination country s price index and divided by the home country s price index instantaneous profits are discounted at a rate r which is specific to the firm this rate accounts for a standard risk premium inherent in the riskiness of the firm s activities

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

price flexiblity and output volatility the case for flexible exchange rates abstract this paper uses descriptive statistics and regression analyses to examine the relationship between exchange rate variability and output volatility in developed countries based on 1961 to 1984 data the result indicate that a flexible exchange rate system is associated with less not more dispersion in output growth across industrialized countries despite a more turbulent global environment also countries which have more exchange rate volatility experience less output volatility the relationship appears not to be spurious the results are consistent with the idea that an increase in price flexibility does not destabilize output

exchange rates and oligopoly abstract the purpose of this paper is to explain empirical observations concerning the impact of exchange rate changes on industrial prices as exchange rates change the pass through into industrial prices is often incomplete and sometimes it goes into the wrong direction i e the prices in the depreciating country decrease while those in the appreciating country increase the latter is called perverse pass through the usual context for such observations is one of segmented markets and imperfect competition we consider the simplest model with these characteristics two duopolistic firms which both operate in two countries the markets of the two countries are separate and each of the firms produces its good in one of these countries we study the effect of an exchange rate change on the prices in each country and on the level of sales and of profits of each of the firms when strong restrictions such as constant marginal costs are imposed prices move in the right direction in response to an exchange rate change however with general cost and demand structures even in this simple model it is possible for prices in both countries to move in perverse directions