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

convergence to the law of one price without trade barriers or currency fluctuations using a panel of 51 prices from 48 cities in the united states we provide an upper bound estimate of the rate of convergence to purchasing power parity we find convergence rates substantially higher than typically found in cross country data we investigate some potentially serious biases induced by i i d measurement errors in the data and find our estimates to be robust to these potential biases we also present evidence that convergence occurs faster for larger price differences finally we find that rates of convergence are slower for cities farther apart however our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders

why does the cyclical behavior of real wages change over time the cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era this paper presents a general equilibrium business cycle model that helps explain the evolution in the model changes in the real wage cyclicality arise from interactions between nominal wage and price rigidities and an evolving input output structure

do sticky prices increase real exchange rate volatility at the sector level abstract we introduce the real exchange rate volatility curve as a useful device to understand the relationship between price stickiness and the fluctuations in law of one price deviations in the presence of both nominal and real shocks the theory predicts that the real exchange rate volatility curve is a u shaped function of the degree of price stickiness using sector level us european real exchange rate data and frequency of price changes we estimate the volatility curve and find the predominance of real effects over nominal effects good by good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level consistent with significant averaging out of good specific real microeconomic shocks

the effect of bond rating changes on common stock prices abstract the evidence in this paper suggests that downgrades by both moody s and standard and poor s are associated with negative abnormal stock returns in the two day window beginning the day of the press release by the rating agency significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent potentially contaminating news releases there is little evidence of abnormal performance on announcement of an upgrade significant abnormal returns are associated with announcements of additions to the standard and poor s credit watch list if either a potential downgrade or a potential upgrade is indicated

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

nominal rigidities and retail price dispersion in canada over the twentieth century we introduce a new data set on over 230 000 monthly prices for 10 goods in 50 canadian cities over the 40 year period from 1910 to 1950 this information coupled with previously published price information from the late twentieth century allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years we find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s additionally the process of retail market integration has followed a u shaped trajectory with many domestic markets being better integrated as measured by the average dispersion of retail prices at mid century than in the 1990s we also consider the linkages between nominal rigidities and price dispersion finding results consistent with present day data on utilise des donnees inedites de 230 000 prix mensuels pour 10 produits dans 50 villes canadiennes au cours de la periode de quarante ans qui va de 1910 a 1950 ces donnees ajoutees aux renseignements deja publies anterieurement sur les prix dans la derniere portion du vingtieme siecle permettent de presenter l un des premiers portraits comprehensifs des rigidites nominales et de la dispersion des prix de detail au cours des derniers 100 ans on decouvre que les rigidites nominales ont ete influencees par les taux d inflation qui ont prevalu avec pour consequence une plus grande frequence de changements de prix dans les annees 1920s et 1970s de plus chose surprenante le processus d integration du marche de detail a suivi une trajectoire en u plusieurs marches domestiques etant davantage integres en prenant comme mesure la dispersion moyenne des prix de detail au milieu du siecle que dans les annees 1990s on examine aussi les liens entre rigidites nominales et dispersion des prix et les resultats concordent avec ce que revelent les donnees recentes

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

picture this a simple graph that reveals much ado about research funnel graphs provide a simple yet highly effective means to identify key features of an empirical literature this paper illustrates the use of funnel graphs to detect publication selection bias identify the existence of genuine empirical effects and discover potential moderator variables that can help to explain the wide variation routinely found among reported research findings applications include union productivity effects water price elasticities common currency trade effects minimum wage employment effects efficiency wages and the price elasticity of prescription drugs

meta analysis of economics research reporting guidelines meta regression analysis mra can provide objective and comprehensive summaries of economics research their use has grown rapidly over the last few decades to improve transparency and to raise the quality of mra the meta analysis of economics research network maer net has created the below reporting guidelines future meta analyses in economics will be expected to follow these guidelines or give valid reasons why a meta analysis must deviate from them

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

the law of one price without the border the role of distance versus sticky prices we examine the role of nominal price rigidities in explaining the deviations from the law of one price lop across cities in japan focusing on intra national relative prices isolates the border eect and thus enables us to extract the pure eect of sticky prices a two city model with nominal rigidities and transportation costs predicts that the variation of lop deviations is lower for goods with less frequent price adjustment after controlling for the distance separating the cities using retail price data for individual goods and services collected in japanese cities we find strong evidence supporting this prediction adapting the engel and rogers 1996 regression framework to our theoretical setting we quantify the separate roles of nominal rigidities and trade costs proxied by distance in generating lop variability our estimates suggest that the distance equivalent of nominal rigidities can be as large as the width of the border typically found in the literature on international lop deviations the findings point to both the utility of the regression framework in identifying qualitative eects i e sign of a coecient and the challenges interpreting their quantitative implications

moral hazard and information sharing a model of financial information gathering agencies we propose a theory of information gathering agencies in a world of informational asymmetries and moral hazard in a setting in which true firm values are certified by screening agents whose payoffs depend on noisy ex post monitors of information quality the formation of information gathering agencies groups of screening agents is justified on two grounds first it enables screening agents to diversify their risky payoffs second it allows information sharing the first effect itself is insufficient despite the risk aversion of screening agents and the stochastic independence of the monitors used to compensate them this paper develops a model that explains the formation of financial institutions which acquire and process information for the purpose of certifying asset qualities but do not get involved in funding the model makes two basic assumptions the first is that there is an informational asymmetry in the capital market involving insiders possessing more accurate information about the true economic values of their firms than outsiders and the second is that those engaged in the production of information to rectify this asymmetry can gain from sharing their information examples of the information gathering agencies iga s we study are creditrating agencies financial newsletters standard and poor s value line investment counselors credit bureaus etc iga s are distinct from funding financial intermediaries ffi s like banks and credit unions that in addition to acquiring and processing information also issue claims against themselves fund their customers needs and transform asset characteristics from a modeling standpoint a key distinction between iga s and ffi s is that in the case of the latter outsiders depositors for instance do not necessarily have to assess the quality of the intermediary s information since the intermediary can be made accountable for this quality through the positions it takes in the screened assets thus models that explain ffi s focus on how the contracts offered by the intermediary ensure information reliability without reliance on explicit monitoring on the other hand because of the absence of loan and deposit type contracts to dissipate informational problems a model explaining iga s must rely on monitoring related mechanisms

are all economic facts greatly exaggerated theory competition and selectivity there is growing concern and mounting evidence of selectivity in empirical economics most empirical economic literatures have a truncated distribution of results the aim of this paper is to explore the link between publication selectivity and theory contests this link is confirmed through the analysis of 87 distinct empirical economics literatures involving more than three and a half thousand separate empirical studies using objective measures of both selectivity and contests our meta meta analysis shows that publication selection is widespread but not universal it distorts scientific inference with potentially adverse effects on policy making but competition and debate between rival theories reduces this selectivity and thereby improves economic inference

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

incomplete information higher order beliefs and price inertia the question that motivates this paper is how incomplete information impacts the response of prices to nominal shocks our baseline model is a variant of the calvo model in which firms observe the underlying nominal shocks with noise in this model the response of prices is pinned down by three parameters the precision of available information about the nominal shock the frequency of price adjustment and the degree of strategic complementarity in pricing decisions this result synthesizes the broader lessons of the pertinent literature however this synthesis provides only a partial view of the role of incomplete information once one allows for more general information structures than those used in previous work one cannot quantify the degree of price inertia without data on the dynamics of higher order beliefs or of the agents forecasts of inflation we highlight this with three extensions of our baseline model all of which break the tight connection between the precision of information and higher order beliefs featured in previous work

oligopoly and welfare welfare losses due to monopoly have received much attention in the literature since the pioneering work of harberger 1954 over the past decade the discussion has inter alia been extended to take explicit account of oligopolistic interaction see in particular dixit and stern 1982 masson and shaanan 1984 daskin 1991 however the ultimate aim has mostly remained to work towards theoretically well grounded empirical estimates of actual losses in different industries sectors or economies as daskin observes the range of estimated losses though significantly larger than harberger s original 0 1 per cent of gnp with one or two notable exceptions rarely exceeds 1 3 per cent of the value of output based on monopoly models1 though using a theoretical extension and empirical implementation of dixit and stern daskin himself goes on to report an estimate of 6 10 per cent of the value of shipments for the us manufacturing sector if industry demand is elastic and considerably higher with inelastic demand

price level convergence new evidence from u s cities abstract this paper tests the bilateral price level convergence among 52 u s cities at the good level by using a new econometric approach the estimated median half lives are far below the half lives found in the corresponding studies for the u s

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

market frictions and real exchange rates abstract one explanation for the failure of purchasing power parity ppp is that market frictions impede trade allowing departures from ppp to grow quite large without precipitating goods arbitrage if this explanation is correct then other things equal large deviations from ppp should be less persistent than small differences this paper examines this prediction over the modern floating rate era the outcome is surprising between most countries large deviations from ppp appear to be at least as persistent as small deviations and perhaps even more so the exceptions are for some intra ec real exchange rates the implication is that market frictions alone do not explain the chimerical nature of ppp

imperfect common knowledge staggered price setting and the effects of monetary policy this paper studies the consequences of a lack of common knowledge in the transmission of monetary policy by integrating the woodford 2003a imperfect common knowledge model with taylor calvo staggered price setting models the average price set by monopolistically competitive firms depends on their higher order expectations about not only the current state of the economy but also about the states in the future periods in which prices are to be fixed this integrated model provides a plausible explanation for the observed effects of monetary policy it shows analytically how price adjustments are delayed and how the response of output to monetary disturbances is amplified

noisy information distance and law of one price dynamics across us cities abstract us micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between us cities a standard two city equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance we show that if there is imperfect information about the state of nominal aggregate demand with noisy signals that are asymmetric across cities then distance and persistence will be positively correlated our main results are shown to be robust to the introduction of sticky prices and multiple cities

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

does distance reflect more than transport costs we decompose the effect of distance on intercity retail price dispersion in us into transport and non transport cost components we find that distance contains more information than transport costs care should be taken in interpreting distance effect as transport costs only

the role of two frictions in geographic price dispersion when market friction meets nominal rigidity this paper empirically investigates and theoretically derives the implications of two frictions market friction and nominal rigidity on the dynamic properties of intra national relative prices with an emphasis on the interaction of the two frictions by analyzing a panel of retail prices of 45 products for 48 u s cities over the period 1985 2009 we make two major arguments first the effect of each type of friction on the dynamics of intercity price gaps is quite different while market frictions arising from physical distance and transportation costs have a positive impact on volatility and persistence of intercity price dispersion nominal rigidities have a positive impact on persistence but a negative impact on volatility this empirical evidence is different from what is predicted by standard theoretical cross country models based on price stickiness second complementarities exist between market frictions and nominal rigidities such that the marginal effect of a market friction dwindles as nominal rigidities increase we provide an alternative theoretical explanation for this finding by extending the state dependent pricing sdp model of dotsey et al 1999 and show that our two city model with nominal rigidity and market frictions can successfully explain the salient features of the dynamic behavior of intercity price differences that have not been captured in previous analysis