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

definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

exchange rate pass through and the welfare effects of the euro this article explores the implications of the european single currency within a simple sticky price intertemporal model we focus on the question of how the euro may change the sensitivity of consumer prices in europe to exchangerate changes our central conjecture is that the acceptance of the euro will lead european prices to become more insulated from exchange rate volatility we find that this affects both the volatility and levels of macroeconomic aggregates in both the u s and europe we find that european welfare is enhanced and the u s shares in europe s good fortune

exchange rate target zones a survey of the literature this work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability we discuss the main contributions of the first and second generations of exchange rate target zone models in an attempt to reconcile the poor empirical performance of the krugman model with the reality of exchange rate target zone regimes this line of research integrates target zones with alternative underlying economic models such as imperfect credibility intra marginal interventions and sticky price models it was thus possible to understand the correlations observed between the exchange rate its fundamentals determinants and the interest rate differential and to explain the fact that the statistical distribution of the exchange rate is hump shaped rather than u shaped this implies that the initial emphasis of target zone models on nonlinearities honeymoon effect smooth pasting and marginal interventions has vanished exchange rate target zones are better described as similar to managed floating regimes with intra marginal interventions with some marginal interventions when the exchange rate reaches the edges of the floating band

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

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

nonlinear nonparametric nonessential exchange rate estimation a wide variety of empirical exchange rate mo dels have been estimated over the years but despite the considerable energies that have been devoted to this work the economics profession has remarkably little to show for itself there is little evidence that conclusively links the bilateral exchange rates of typical oecd countries to fundamental macroeconomic determinants of exchange rates such as money output relative prices or interest differentials coefficient estimates are notoriously unstable and frequently mis signed compared with theoretical predictions exchange rate equations do not fit particularly well and forecast no better than the simplest naive alternatives recently a new class of exchange rate models was introduced by paul krugman 1988 these models provide a potential reason for the poor performance of traditional exchange rate models because they are nonlinear if the exchange rate actually depends in a nonlinear way on exogenous macroeconomic fundamentals linear exchange rate models may work poorly even though the exchange rate is closely linked to fundamentals in this paper we provide a brief sketch of some of this work as well as some preliminary evidence on the actual performance of these nonlinear models in our empirical analysis we use a nonparametric estimator that can handle a wide variety of nonlinear phenomena we examine fixed exchange rate regimes where nonlinearities should be quite easy to detect however we do not find strong empirical support for the hypothesis that the incorporation of nonlinear effects significantly improves models of exchange rate determination in section i we briefly review the theoretical literature on nonlinear target zone exchange rate models linking this work to the tests for intrinsic bubbles we draw heavily on recent papers by kenneth froot and maurice obstfeld 1989a b our methodology and data are discussed in section ii section iii contains new empirical tests for nonlinearities in exchange rate models

openness and optimal monetary policy abstract we show that the composition of international trade has important implications for the optimal volatility of the exchange rate above and beyond the size of trade flows using an analytically tractable small open economy model we characterize the impact of the trade composition on the policy trade off and on the role played by the exchange rate in correcting for price misalignments contrary to models where openness can be summarized by the degree of home bias we find that openness can be a poor proxy of the welfare impact of alternative monetary policies using input output data for 25 countries we document substantial differences in the import and non tradable content of final demand components and in the role played by imported inputs in domestic production the estimates are used in a richer small open economy dsge model to quantify the loss from an exchange rate peg relative to the ramsey policy conditional on the composition of imports we find that the main determinant of the losses is the share of non traded goods in final demand

expenditure switching vs real exchange rate stabilization competing objectives for exchange rate policy this paper develops a view of exchange rate policy as a trade off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment we show that optimal nominal exchange rate volatility will reflect these competing objectives the key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness the elasticity of substitution between home and foreign goods and the amount of home bias in production quantitatively we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations moreover we find that the relationship between price stickiness and optimal exchange rate volatility may be non monotonic

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

exchange rate dynamics in a multilateral target zone this paper presents a model of exchange rate behaviour in a multilateral target zone the model produces new economic insights beyond the well known bilateral model of krugman 1991 which is obtained as a special case the paper also introduces a new class of stochastic processes in economics namely multidimensional reflected diffusion processes two main features characterize the economics of exchange rates in a multilateral target zone i the restrictions on interventions imposed by cross currency constraints when one country changes its money supply say because its exchange rate with a second country has hit its band all exchange rates involving the currency of that particular country will be affected regardless of their position within their respective bands ii cooperation in sharing the intervention burden in general the exchange rate between any two countries will depend on the fundamentals of third countries in a multilateral target zone this is because if the monetary authorities intervene together a shock in the fundamentals of any country will induce a revision of the expectation of future interventions of other countries the model reverts the counterfactual predictions of the bilateral model that the exchange rate steady state density should be u shaped and that its volatility should be a decreasing function of the distance of the exchange rate to the limits of its band thus accounting for the multilateral feature of real world target zones allows us to reconcile target zone models with the most salient empirical features of exchange rate behaviour

price stability with imperfect financial integration this paper studies whether the international monetary system can be affected by asymmetries in the cross country positions in the international financial markets i e the fact that some countries are large debtors while others are creditors an important channel that is explored is the interaction between international risk sharing and the stabilization role of monetary policy in each country the main finding is that the welfare costs of incomplete markets and the gains of deviating from a policy of price stability are increasing with the cross country asymmetries in the initial net international positions and in particular they become nonnegligible when the persistence of the shocks increases 1 of a permanent shift in steady state consumption for the welfare costs of incomplete markets and 0 2 for the gains of deviating from a policy of price stability when global imbalances become larger optimal monetary policy requires an increase in the volatilities of the real returns on assets and in particular of the nominal interest rates which should happen to be more correlated across countries

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

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

dynamic assortment with demand learning for seasonal consumer goods companies such as zara and world co have recently implemented novel product development processes and supply chain architectures enabling them to make more product design and assortment decisions during the selling season when actual demand information becomes available how should such retail firms modify their product assortment over time in order to maximize overall profits for a given selling season focusing on a stylized version of this problem we study a finite horizon multiarmed bandit model with several plays per stage and bayesian learning our analysis involves the lagrangian relaxation of weakly coupled dynamic programs dps results contributing to the emerging theory of dp duality and various approximations it yields a closed form dynamic index policy capturing the key exploration versus exploitation trade off and associated suboptimality bounds in numerical experiments its performance proves comparable to that of other closed form heuristics described in the literature but this policy is particularly easy to implement and interpret this last feature enables extensions to more realistic versions of the motivating dynamic assortment problem that include implementation delays switching costs and demand substitution effects

exchange rate bands with price inertia this problem by committing member states to taking suitable action to prevent cross parities from straying outside some given publicly announced range and williamson s proposal for target zones was explicitly aimed at preventing exchange rate misalignment among the principal industrial countries subsequently the louvre accord struck between members of the group of seven in i 987 involved unpublished commitments designed to constrain fluctuation between the u s dollar and the currencies of its major trading partners funabashi i988 given the obvious practical importance of understanding the implications of such policy commitments for the economy in general and the exchange rate in particular it is perhaps not surprising that the seminal work by krugman i 988 i989 on exchange rate determination within a band has aroused considerable interest under the assumption that the velocity of money follows a brownian motion process he obtains an explicit solution for the exchange rate as a function of the fundamental which shows that the presence of a commitment to intervene so as to defend the band exerts a stabilising influence on the exchange rate even before any such intervention takes place in their contribution to this emerging literature froot and obstfeld i989 note that krugman s minimalist stochastic specification can be derived from a monetary model of exchange rates where prices are perfectly flexible and full employment prevails where international interest differentials match expected exchange rate changes and the exchange rate preserves purchasing power parity cf mussa 1976 and they show that the behaviour of the rate inside a currency band can be obtained using results on regulated brownian motion processes cf harrison i985 using the same framework and techniques flood and garber i989 indicate how the rate will respond to noninfinitesimal intervention and svensson i 989 examines the effect of bandwidth on the stochastic behaviour of interest rates klein i989 considers the effects of uncertainty about the width of the band

international spillover effects and monetary policy activism this paper examines how the preferences of a large economy s central bank affect the trade off between output and inflation volatility faced by the central bank of a small open economy by analyzing the impact of a global cost push shock we demonstrate that under the assumption of producer currency pricing the trade off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilization relative to inflation stabilization but the opposite is true in the case of local currency pricing

target zones and the distribution of exchange rates abstract we develop a parsimonious parameterization of exchange rate density function under target zones that enables us to estimate the approximate shapes of density curves from the exchange rate data we find that the distributions of exchange rates can take several different shapes which may correspond to possibly widely different monetary and exchange rate intervention policies including the marginal and intramarginal intervention policies discussed in previous theoretical models

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

home bias exchange rate disconnect and optimal exchange rate policy abstract this paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations the paper first demonstrates in a two country dynamic stochastic general equilibrium dsge model that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data when home bias is high the shock to uncovered interest rate parity uip can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables such as gdp almost untouched the model predicts that the volatility of the real exchange rate relative to that of gdp increases with the extent of home bias this relation is supported by the data a second order accurate solution method is employed to find the optimal operational monetary policy rule our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations in particular when the central bank does not take a strong stance against the inflation rate exchange rate stabilization may induce substantial welfare loss the model does not detect welfare gain from international monetary cooperation which extends obstfeld and rogoff s obstfeld m rogoff k 2002 global implications of self oriented national monetary rules quarterly journal of economics may 503 535 findings to a dsge model

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

the inter war gold exchange standard credibility and monetary independence in this paper we analyze the operation of the inter war gold exchange standard to see if the evident credibility of the system conferred on participating central banks the ability to pursue independent monetary policies to answer this question we econometrically analyze two key parity or arbitrage conditions namely uncovered interest rate parity and a yield gap relationship we find that there were both long and short run deviations from the arbitrage conditions the use to which this policy independence was put is analyzed in the context of a multivariate system which includes reaction function variables

interest rate interactions in the classical gold standard 1880 1914 was there any monetary independence this paper examines an hypothesis of svensson 1994 journal of monetary economics 33 157 199 that a credible target zone can confer on a country a degree of independence in the operation of its monetary policy even when exchange rates are fixed we test this hypothesis for the classical gold standard using a newly created monthly data base for the period 1880 1913 building on the recently noted finding that the classical gold standard represented a credible well behaved target zone system we propose a number of ways of testing the svensson model our main finding is that the classical gold standard did indeed confer some independence in the operation of monetary policy for participating countries this would seem to have an important bearing on the kind of institutional framework required for a modern day target zone to function effectively and in particular to weather speculative attacks

multivariate nearest neighbour forecasts of ems exchange rates exchange rate modelling has been a persistent puzzle for international economists forecasts from popular models for the exchange rate generally fail to improve upon the random walk out of sample while a multivariate nonparametric approach provides useful information about exchange rates the model produces forecasts superior to the random walk for only one of the three ems currencies examined using a statistic developed in mizrach 1991 i find that the forecast improvement a 4 5 percent reduction in mean squared error for the lira in daily returns is not statistically significant a cross validation exercise suggests that the improvement is also not robust

exploring international differences in inflation dynamics abstract standard closed economy dsge models have difficulty replicating the persistence of inflation we use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 135 countries since 1993 we find both persistence and volatility to be low high in developed developing countries relative to the full sample average this pattern is also observed in low high inflation countries we then employ a two country dsge framework to investigate the extent to which structural open economy features such as incomplete exchange rate pass through the existence of nontraded goods and international financial market incompleteness can help in replicating the persistence and volatility of consumer prices our simulation results indicate that the model can replicate the degree of inflation persistence seen in the data for both developed and developing countries but cannot generate the low levels of volatility observed in developed economies

testing the basic target zone model on swedish data 1982 1990 the swedish exchange rate band is studied using daily data on exchange rates and interest rate differentials for the 1980s applying a number of different statistical and econometric techniques it is found that the first generation of target zone models cannot provide an adequate explanation of swedish data the main reasons are probably intra marginal interventions by the swedish central bank and time varying devaluation expectations

robust portfolio choice with learning in the framework of regret single period case in this paper we formulate a single period portfolio choice problem with parameter uncertainty in the framework of relative regret relative regret evaluates a portfolio by comparing its return to a family of benchmarks where the benchmarks are the wealths of fictitious investors who invest optimally given knowledge of the model parameters and is a natural objective when there is concern about parameter uncertainty or model ambiguity the optimal relative regret portfolio is the one that performs well in relation to all the benchmarks over the family of possible parameter values we analyze this problem using convex duality and show that it is equivalent to a bayesian problem where the lagrange multipliers play the role of the prior distribution and the learning model involves bayesian updating of these lagrange multipliers prior this bayesian problem is unusual in that the prior distribution is endogenously chosen by solving the dual optimization problem for the lagrange multipliers and the objective function involves the family of benchmarks from the relative regret problem these results show that regret is a natural means by which robust decision making and learning can be combined this paper was accepted by dimitris bertsimas optimization

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

a pitfall in computing exchange rate density in the ems band abstract it is not enough to look at the distance of a currency from its intervention limits against the dm to determine whether or not it is close to the edge of the ems band in practice currencies often come up against a limit with another currency before reaching a limit against the dm we show that taking account of multilateral obligations most currencies did not spend a disproportionate amount of time near the middle of the available fluctuation band especially before 1987

ramsey policies in a small open economy with sticky prices and capital this paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices we allow for trade in consumption goods under perfect international risk sharing we consider balanced budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate first as long as a symmetric equilibrium is considered the steady state in an open economy is isomorphic to that of a closed economy second whereas sticky prices allocations are almost indistinguishable from flexible prices allocations the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes fluctuations in terms of trade implied by complete international financial markets affect i consumption through changes in the consumption price index cpi ii hours through changes in the cpi based real wage and iii capital accumulation through the relative price of capital goods these wedges affect the volatility and persistence of optimal tax rates and resulting allocations are quite different as compared to a closed economy

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

stuck on gold real exchange rate volatility and the rise and fall of the gold standard 1875 1939 abstract did the gold standard diminish macroeconomic volatility supporters thought so critics thought not and theory offers ambiguous messages hard regimes like the gold standard limit monetary shocks by tying policymakers hands but exchange rate inflexibility compromises shock absorption in a world of real disturbances and nominal stickiness a model shows how lack of flexibility affects the transmission of terms of trade shocks evidence from the late nineteenth and early twentieth century exposes a dramatic change the classical gold standard did absorb shocks but the interwar gold standard did not supporting the view that the interwar gold standard was a poor regime choice

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

interest rate parity and foreign exchange risk premia in the erm abstract in this paper we evaluate uncovered interest rate parity in the erm by testing market efficiency and zero risk premia in a general asset pricing framework the overidentifying conditions derived from the model are not rejected but we strongly reject risk neutrality nevertheless estimated risk premia between erm currencies are moderate to low therefore due to the diversifiability of foreign exchange risk the standard uip relation between exchange rates and interest rates is a reasonable approximation within the erm

haircuts or hysteresis sources of movements in real exchange rates abstract we empirically assess the importance of two sources of real exchange rate movements in models where ppp holds only among traded goods real exchange rate variation results from relative price movements within countries an alternative explanation relies on hysteretic price setting and nominal exchange rate changes using disaggregated price data from 11 oecd nations we find some support for the non traded goods models for example prices of haircuts in canada and the united states are unrelated in the long run we find stronger evidence to support models that emphasize sticky prices transportation costs or other impediments to frictionless trade

robust multiarmed bandit problems the multiarmed bandit problem is a popular framework for studying the exploration versus exploitation trade off recent applications include dynamic assortment design internet advertising dynamic pricing and the control of queues the standard mathematical formulation for a bandit problem makes the strong assumption that the decision maker has a full characterization of the joint distribution of the rewards and that arms under this distribution are independent these assumptions are not satisfied in many applications and the out of sample performance of policies that optimize a misspecified model can be poor motivated by these concerns we formulate a robust bandit problem in which a decision maker accounts for distrust in the nominal model by solving a worst case problem against an adversary nature who has the ability to alter the underlying reward distribution and does so to minimize the decision maker s expected total profit structural properties of the optimal worst case policy are charac

monetary policy in the open economy revisited the case for exchange rate flexibility restored abstract this paper revisits the sticky price pricing to market model of devereux and engel devereux m b engel c 2003 monetary policy in the open economy revisited price setting and exchange rate flexibility review of economic studies 70 4 765 783 in which fixed exchange rates are optimal even in the face of country specific nonmonetary shocks we show that this result hinges critically on the devereux engel model s prediction that international consumption levels are perfectly synchronized under flexible prices realistic modifications of the model that produce nonsynchronous consumption movements such as the presence of nontraded goods upset the fixed exchange rate prescription even in the absence of an expenditure switching role of exchange rate changes

to be or not to be in monetary union a synthesis article i nfo monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks but it also carries costs as some stabilization may be feasible even in the absence of credibility and this may be more than what an individual country can hope for in a monetary union in this paper we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements we produce examples where monetary union may be welfare improving even for low modest levels of inflation bias 2 3 as long as business cycles are not too a synchronized across countries

the responses of prices at different stages of production to monetary policy shocks this paper examines the responses of prices at different stages of production to monetary policy shocks in aggregate price analysis the var of christiano et al 1996a 1996b is used to identify the policy shock as the federal funds rate innovation and trace out the responses of prices in disaggregate price analysis the adjustment of prices is examined by comparing inflation before and after a recent policy tightening identified by romer and romer 1989 1992 at early stages of production a monetary tightening causes input prices to fall more rapidly and by a larger amount than output prices

target zone models with price inertia solutions and testable implications many recent papers suggest that the basic flex price target zone model does not perform well empirically this paper investigates the testable implications of a sticky price target zone model and finds that to a limited extent it has a better empirical performance than the simplest flex price model however in terms of nominal variables the sticky price model is found to be observationally equivalent to the flex price model when the latter is extended to include intramarginal intervention and realignments copyright 1994 by royal economic society

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

forecasting ecb monetary policy accuracy is a matter of geography abstract monetary policy in the euro area is conducted within a multi country multi cultural and multi lingual context how does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the european central bank ecb using a database of surveys of professional ecb policy forecasters in 24 countries we find remarkable differences in forecast accuracy and show that these have important repercussions on market behaviour explaining the differences in forecast accuracy we provide evidence that they are partly related to geography and clustering around informational hubs as well as to country specific economic conditions in large part this heterogeneity can be traced to differences in forecasting models

exchange rate target zones realignments and the interest rate differential theory and evidence abstract this paper develops a target zone model for the exchange rate where the expected realignment is an increasing function of the distance of the exchange rate from the central parity as a percentage of the width of the band in this framework the interest rate differential increases with the deviation of the exchange rate from the central parity when the exchange rate is close to the central parity and it decreases when the exchange rate is close to the edges of the band finally the paper looks at the evidence from the ems and finds partial support for the implications of the model

target zones for exchange rates and policy changes abstract we extend a target zone model to allow for occasional changes in the stochastic process driving fundamentals a key implication is that seeming speculative attacks may be triggered by market perceptions that macroeconomic policy has switched say from tight to loose this fundamental based explanation for large exchange rate changes accompanied by no discernible contemporaneous change in the fundamental is an alternative to theories based on self fulfilling expectations without relying on intra marginal intervention this model is better able to reproduce empirical exchange rate distributions with more mass at the center and less at the edges of the band

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

devaluation risk in target zones evidence from the nordic countries in this paper the authors estimate devaluation risk in denmark finland norway and sweden the target exchange ra te is modeled as a censored variable a shadow peg that is only observed when the equilibrium floating rate is too far from the prevailing peg using a two step procedure the authors are able to calculate time series of the probability and expected size of devaluations th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock industrial production foreign exchange reserves and the prevailing central parity copyright 1993 by royal economic society

the role of intermediate goods in international monetary cooperation abstract this paper investigates the implications of intermediate goods for optimal monetary policy in open economies and particularly focuses on the welfare gains that result from monetary cooperation in a relatively standard two country dynamic stochastic general equilibrium model with input output relations this paper demonstrates that introducing intermediate goods can amplify the welfare gains caused by cost push shocks by an order of magnitude larger a detailed analysis of equilibrium dynamics highlights a new channel that is absent in the previous literature non cooperative central banks respond differently to shocks in the intermediate goods market versus shocks in the final goods market even if these shocks generate the same distortions when the two central banks cooperate furthermore it is demonstrated that increasing the degree of openness in the intermediate goods market can reduce the welfare gains from monetary cooperation this casts doubt on whether the recent trend in international economic integration justifies the potential need for international monetary cooperation

intramarginal interventions bands and the pattern of ems exchange rate distributions the authors document an empirical puzzle for european monetary system exchange rates during a period in which the bands on these exchanges rates were almost credible i e exchange rate distributions are hump shaped rather than u shaped as predicted by the standard target zone model the authors offer an explanation of this puzzle that is based on the combination of two realistic features namely the presence of intramarginal interventions and wage price sluggishness

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

on the mean reverting properties of target zone exchange rates one key prediction of the target zone model is that the exchange rate should be mean reverting within the band although this property is widely referred to in the target zone literature little work has been done to test it in this paper we seek to remedy this important lacuna in the literature by examining the time series properties of the seven currencies participating in the exchange rate mechanism erm of the european monetary system for the period 13 march 1979 to 9 april 1992 using standard univariate unit root tests we find little evidence of mean reversion however using variance ratio test statistics which control for heterogeneity in the distribution of exchange rate behaviour we find much more evidence of mean reversion another part of our work includes implementing a panel unit root test

intramarginal intervention in the ems and the target zone model of exchange rate behavior abstract exchange rate data produced by the european monetary system ems contradict important predictions made by the standard target zone model we show that the contradictions reflect a misinterpretation of policies pursued by the ems countries they intervened intramarginally to keep exchange rates will within their bands not at the edges of the bands to keep rates from crossing them in the basle nyborg agreement of 1987 however they agreed to make fuller use of the band and exchange rates behave differently thereafter the effect appears clearly in the behavior of the french franc and less decisively in the behavior of the italian lira we conclude by examining and rejecting other explanations for the observed difference in exchange rate behavior