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

tariffs real exchange rates and the trade balance in a two country world abstract an intertemporal model of a two country world in which optimizing agents consume three goods importables exportables and nontradables is developed to investigate a tariffs effects on real interest rates real exchange rates and the trade balance real interest rates and real exchange rates are shown to move asymmetrically across countries in response to a temporary tariff we also show that in contrast to the findings of two tradable good models a temporary tariff may actually worsen the trade balance of both deficit and surplus countries even when there are no cross country differences in tastes

an empirical evaluation of the macroeconomic effects of tarrifs abstract the macroeconomic effects of unilateral tariff changes are reviewed in a variety of theoretical models it is shown that there is no theoretical presumption about the effects of tariffs on output or the trade balance five different data sets are found to be consistent with the hypothesis that tariff changs have no significant effects on the real exchange rate the real trade balance and real output both foreign and domestic tariff rates do appear to have a negative effect on the gross volume of international trade jel f13 f40

inflation persistence the nairu and the great recession the rate of inflation fell far less over the period 2007 2013 than in the period 1979 1985 despite similar large increases in the unemployment rate this paper asks why possible explanations include a change in the persistence of inflation changes in nairu and other shocks a change in the persistence of inflation with inflation more anchored in the period 2007 2013 than in the period 1979 1985 is found to be important the level and change in the nairu cannot be precisely estimated but the data suggest an increase of nearly 1 percentage point since 2007

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

aspects of the optimal management of exchange rates abstract this paper shows that the choice of the optimal exchange rate regime depends on the stochastic shocks affecting the economy the higher the variance of real shocks the larger the desirability of fixity of exchange rates the desirability of exchange rate flexibility increases the larger are the variances of the shocks to the demand for money to the supply of money to foreign prices and to purchasing power parities when the economy produces traded and non traded goods the desirability of exchange rate flexibility diminishes the higher is the relative share of non traded goods and the lower are the elasticities of demand and supply of the two goods

real disturbances the current account and the exchange rate the case of a tariff abstract this paper examines the effects of an unanticipated tariff on the current account and the exchange rate it is demonstrated that if nontraded goods and importables are substitutes complements in excess demand the imposition of a tariff will may lead to a current account surplus deficit and an appreciation depreciation of the domestic currency the model can be extended to analyze the effects of other real disturbances on the current account and the exchange rate

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

the growth and welfare consequences of differential tariffs this paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time particular attention is devoted to the welfare aspects highlighting the cost of the intertemporal distortions produced by protective trade policies several specific welfare propositions are obtained first tariff protection is shown to create short run benefits but long run costs in welfare second the second best policy for the two tariffs is characterized finally several propositions summarizing the implications of our analysis for tariff reform are derived

trade costs and the open macroeconomy trade costs are known to be a major obstacle to international economic integration following the approach of new open economy macroeconomics this paper explores the effects of international trade costs in a micro founded general equilibrium model that also allows for pricing to market trade costs are shown to create an endogenous home bias in consumption and reduce cross country consumption correlations in addition trade costs magnify exchange rate volatility in response to monetary shocks and typically turn a monetary expansion into a beggar thy neighbor policy it is striking that trade costs generally lead to these results both under producer and local currency pricing

tariffs interest rates and the trade balance in the world economy abstract a two commodity intertemporal framework is used to show that in contrast to the conventional wisdom both permanent and temporary tariffs may worsen the trade balance of a large country for a temporary tariff the key condition for this result is a low intertemporal elasticity of substitution in consumption when a temporary tariff worsens the trade balance the world real interest rate must fall if the tariff imposing country is running a deficit and rise if it is running a surplus temporary tariffs can only worsen the trade balance of a surplus country when international differences in tastes are important

tariffs and exchange rate dynamics redux abstract this paper builds a two country intertemporal macroeconomic model similar to one developed recently by obstfeld and rogoff imperfectly competitive producer consumers maximize an intertemporal utility function with consumption real money balances and output as arguments we use the framework to examine both the short run and steady state effects of the imposition of a tariff in one of the countries this results in a fall in the tariff imposer s output in both the steady state and in the short run a small tariff may make a country worse off contrary to the usual result under perfect competition spillover effects are also considered

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

the negative side of inflation targeting revisiting inflation uncertainty in the emu this article tests the friedman ball hypothesis for the european monetary union emu countries using a garch methodology the empirical results show a positive relationship between inflation and

measuring uncertainty about long run predictions long run forecasts of economic variables play an important role in policy planning and portfolio decisions we consider forecasts of the long horizon average of a scalar variable typically the growth rate of an economic variable the main contribution is the construction of prediction sets with asymptotic coverage over a wide range of data generating processes allowing for stochastically trending mean growth slow mean reversion and other types of long run dependencies we illustrate the method by computing prediction sets for 10 to 75 year average growth rates of u s real per capita gdp and consumption productivity price level stock prices and population jel classi cation c22 c53 e17

the macroeconomic dynamics of tariffs a symmetric two country analysis this paper examines the macroeconomic dynamics of tariffs the adverse microeconomic effects of tariffs have been exhaustively discussed in the international trade literature however there are still some debate and discussion on the effects of tariffs on the macroeconomy in the mainstream open economy macroeconomics literature it is argued that the impact of imposing a tariff is likely to be contractionary under flexible exchange rates 1 this view however has been challenged first by the cambridge economic policy group cripps and godley 3 and more recently by ford and sen 7 given the fact that commercial policies have recently returned to playing a more central role in policy debates this then leads to a revival of interest in the effects of tariffs on macroeconomic aggregates one important drawback of the analyses in the literature is that they all assume that the domestic economy faces a given world price of imports i e they focus exclusively on small open economies with virtually no attention being devoted to two country models 2 it is surely a question of relevance to examine the cross country impact of protection although considerable effort has been devoted to examine the international transmission of fiscal and monetary policies recently corden and turnovsky 2 svensson and van wijnbergen 13 little has been done on commercial policies in a two country framework 3 it is our intention therefore to relax the small country assumption to study the transmission effect of tariffs in this paper we discuss how likely a tariff will be beggar thy neighbor our main concern is the dynamic effects of a tariff on domestic and foreign aggregates we pay special attention to the distinction between anticipated and unanticipated permanent tariff changes 4 the case of a temporary tariff is also examined the analysis is conducted in a modified two country mun

tariffs and sectoral adjustments in an open economy abstract this paper analyzes the impact of a tariff on sectoral adjustments in an economy which produces two traded consumption goods one of which is exported and one nontraded investment good the importance of sectoral capital intensities is emphasized in particular the qualitative dynamic adjustment depends upon the relative capital intensities of the import competing consumption good sector and the nontraded investment good sector sectoral labor allocation effects are analyzed and the long run effect on aggregate capital accumulation is shown to depend upon the relative capital intensities of the import and export sectors temporary as well as permanent tariffs are discussed

tariffs and the current account abstract this paper examines the impact of a tariff on the current account in a model which emphasizes the fact that it takes time for the production sector of an economy to adjust to a change in relative prices income effects of the adjustment lead to a transitory current account surplus because the deleterious effect of the tariff on national income is larger in the long run than in the short run in addition relative prices overshoot in response to the tariff leading to an increase in the consumption rate of interest which in turn generates an increase in desired saving

exchange rate pass through and the effects of tariffs on economic performance and welfare abstract we develop a stochastic two country general equilibrium model where prices are determined under conditions of monopolistic competition to examine the macroeconomic and welfare effects of tariffs on the world economy under alternative nominal rigidities producer currency pricing pcp and local currency pricing lcp where the exchange rate pass through is absent we find that the significance of export pricing for the effects of tariffs depends critically upon whether tariffs are anticipated or unanticipated in the former case both pcp and lcp yield the same outcome as do perfectly flexible prices although the mechanism whereby this is achieved is different in the latter case the effects of unanticipated permanent tariffs are highly sensitive to the pricing scheme adopted by exporters leading to a wide range of conflicting outcomes involving tradeoffs among key parameters

a dynamic model of tariffs output and employment under flexible exchange rates abstract a portfolio balance model of the open economy with imperfectly flexible wages and rational expectations is used to analyze the macroeconomic effects of commercial policy previous analyses have led to the counterintuitive and almost inconceivable conclusion that under flexible exchange rates a tariff is contractionary by considering a tariff in a dynamic setting and focusing on the process of adjustment it is shown that there may exist a tradeoff between a tariffs short run and long run effects in certain circumstances a tariff imposed under flexible exchange rates increases output and employment initially while reducing them subsequently