exchange rate adjustment and oligopoly pricing behaviour this paper sets out a general theoretical structure for analyzing price adjustments to cost changes within asymmetric oligopolistic markets the theory implies that contrary to the usual assumption exchange rate changes may leave prices unaltered this is explored by an empirical examination of the european car market intracountry changes in car prices and the huge differences in u k and european car prices are both examined the empirical results are in line with the theoretical implications changes in relative supply costs are more likely to be converted into changes in price cost margins than prices within a national oligopolistic market copyright 1989 by oxford university press

monopoly pricing of capacity usage under asymmetric information the design of monopoly pricing strategies is examined in a general framework with an unknown population distribution of consumer characteristics and downward sloping multi unit consumer demand in addition the monopolist has increasing marginal cost three pricing strategies are shown to implement the profit maximizing allocation reference point pricing multi unit competitive bidding with variable outputs and generalized priority service the analysis of pricing also is extended to include random capacity copyright 1993 by blackwell publishing ltd

the interaction of foreign exchange and market power effects on german domestic prices this paper illustrates the importance of international influences on domestic markets a model is presented in which changes in a country s terms of trade pass through to industrial prices in varying degrees depending on import penetration and seller concentration empirical results suggest that the 8 4 percent decline in the real external value of the deutsche mark from 1977 to 1983 allowed upward movement of about 2 percent in domestic producer prices of traded goods relative to the gnp price deflator increased market concentration led to a reduced effect while increased import penetration led to some increase in the exchange rate passthrough standard industrial organization models stress the impact of market power and entry conditions on economic performance with particular interest in price effects at the industry level greater concentration is expected to lead to higher prices ceteris paribus while greater ease in entry or a larger competitive fringe implies lower prices the international economics literature indicates that in the absence of trade barriers transactions and transportation costs and market power foreign exchange rate changes will be fully passed through to import and export prices implying that domestic prices of traded goods for an appreciating currency will be adjusted downward by the full amount of the exchange rate change the dramatic changes in exchange rates since the early 1970s provided exporters with new opportunities to enter markets of nations that had a strong currency west germany has been regarded as one such country this paper investigates the effect of exchange rate movements on particular german industrial prices i test to see whether the prominence of imports

dominant interest and inflation differentials within the ems a comment abstract in a recent article in this review koedijk and kool 1992 k k have argued that the ems has not functioned as a dm zone they use a modified version of the principal components analysis to show that deviating movements in inflation and interest rates have always existed and still exist between germany and the netherlands on the one hand and belgium france and italy on the other they conclude that germany has in practice not dominated the ems bloc and that the participating countries have enjoyed some freedom in setting their monetary policy in this comment we challenge their conclusion we use cluster analysis to show that the ems has gradually evolved into a dm zone we also disagree with another conclusion of k k that the united kingdom in practice always belonged to the dm group indeed we show that this is only true for a few years

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

optimal nonlinear pricing and contingent contracts rationing of output may be required to allocate resources when it is costly to operate a system of spot markets in electric power markets for example interruptible service is the most frequently used form of capacity sensitive allocation after time of use pricing this paper examines the welfare properties and ease of implementation of alternative rationing rules and the pricing of contracts based on rationing rules the model allows for both demand and supply shocks the theoretical analysis is illustrated by application to curtailment rules and pricing in electric power markets rationing rules are a means of sharing risk and joint costs insurance provides a means of sharing the financial costs of random events however there are additional welfare gains to be obtained from pooling physical quantities of goods in the presence of random demand and supply see spulber 1985 by rationing goods the common costs of production or productive capacity can be reduced while also reducing individual risk this explains in part the extensive attention devoted to rationing of electric power electric power is subject to significant randomness in both supply and demand allocation mechanisms based on prices that adjust in real time on complete contingent contracts or on renegotiation of contracts in response to new information can involve prohibitive transaction costs avoidance of the need to ration would require inefficiently high capacity investment electric utilities must therefore employ rationing rules these rules must be

a re examination of real interest rate parity empirical investigation based on consumer price index based real interest rates is used to conclude that real interest rate parity is not supported in this paper the authors employ three panel based unit root tests provided by andrew levin and chien fu lin 1992 kyung so im hashem m pesaran and yongcheol shin 1995 and g s maddala and shaowen wu 1996 to examine the stationarity of real interest differentials using monthly observations on euro market rates they support the mean reverting property of real interest differentials and hence the real interest rate parity this finding is consistent with the observation that international integration of financial markets has increased dramatically since 1979

monopolistic provision of congested service with incentive based allocation of priorities because of the uncertainty associated with capacity availability as well as demand all consumers in a public utility face a chance of not getting the service however small that chance may be in electric utilities for example the reserve margin the percent excess capacity over the peak demand determines the reliability of service to the consumer we will show in this paper that utilities can employ a priority service scheme i e offer a menu of prices and priorities that can work to the advantage of consumers as well as the utility unreliability in service obviously results in shortage costs to consumers and these shortage costs can vary a lot among consumers depending on how the consumers value the service and how well they are prepared to cope with any interruptions since it is uneconomical to provide a highly reliable service to everyone it would be desirable to have a scheme by which those with higher shortage costs get a higher priority of service two major points arise when we consider allocating service by priorities first the utility can not know the shortage cost to each consumer but only a distribution of the shortage costs in the population perhaps through a sample survey the utility thus is not in a position to determine what priority a consumer should have and has to let the consumer choose the priority from a menu of prices and priorities second the utility must have a mechanism by which consumers may be cut off in their priority order if priority service is to be feasible

is there a connection between monetary unification and real economic integration evidence from regime switching stationarity tests abstract we investigate the extent of real convergence among g7 economies in terms of long run real interest parity a novel approach is applied where unit root tests of real interest differentials are embedded within a markov regime switching framework whereas standard univariate unit root tests provide little support for parity we find real convergence is present after allowing for regime switches in real interest misalignments however differentials across members of the euro zone are likely to exhibit greater persistence despite nominal convergence it is non sequitur to infer from monetary unification that nominal convergence is necessarily conducive to real interest realignments or preventive of misalignments

modeling non linearities in real effective exchange rates abstract the aim of this paper is to test for and model non linearities in the real effective exchange rates of 10 major industrial countries the g 10 to exploit non linear dependencies in exchange rates we apply the star smooth transition autoregressive family of models these non linear models imply the existence of two distinct regimes in exchange rates with potentially different dynamic properties but the transition between the regimes is smooth tests reject linearity for eight exchange rates the real exchange rate process is cyclical in both regimes for almost all countries and there appears to be some evidence of asymmetry star models outperform hamilton s markov regime switching model in an out of sample forecasting contest

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

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

markup adjustment and exchange rate fluctuations evidence from panel data on automobile exports abstract this paper uses data on bilateral automobile export prices from the usa germany and japan to gauge the importance of markup adjustment driven by exchange rate movements across several destination markets we find that japanese exports are characterized by a high degree of markup adjustment designed to stabilize the price measured in the buyer s currency there is weak evidence for such behavior on the part of german exporters and no evidence of markup adjustment by us exporters where it exists markup adjustment tends to be highly persistent the dynamic pattern of markup adjustment is consistent with invoicing in the exporter s currency except for exports to the usa and canada

real interest rate equalization and the integration of international financial markets abstract this paper argues that conventional regression tests of real interest rate equality may be misleading because they neglect to consider transactions costs a transactions cost band may inhibit the one to one correspondence between changes in real rates in alternative countries that is presumed by conventional tests statistical problems which may lead to incorrect inferences in conventional tests are also discussed alternative tests which overcome these limitations are developed and applied to real interest rates for ten different countries the alternative tests generate much stronger support for interest parity than is found in the existing literature

regime switching and interest rates in the european monetary system this paper examines the impact that a currency target zone has on short term interest rates for a number of countries in the european monetary system we characterize the short rate using a regime switching model that allows fbr a differently parameterized mean reverting square root process in each regime we find that the volatility the level and the speed of adjustment are all higher in the regime that is operative during speculative attacks and currency crises moreover we allow the conditional probability of being in each regime to be state dependent so the model can be used to examine questions relating to the likelihood of realignments and the stability of the target zone system c 1999 elsevier science bn all rights reserved jel classification e43 g12

why are real interest rates not equalized internationally 1 introductioninternational financial economists are intensely concerned with several parity conditions that relate goods prices and asset returns across countries these include purchasing power parity ppp interest rate parity irp and variations of these two such as relative ppp ex ante ppp and real interest rate parity rip each of these parity conditions measures a degree of integration between the economies of the world the greater the economic integration across countries the greater the likelihood that the more restrictive of these parity conditions will have empirical support for example the strict ppp hypothesis implies that aggregate price levels will be equal in terms of a common currency this condition is very stringent because it does not allow for even temporary deviations from the equilibrium condition 1 a less restrictive version is long run ppp where price levels measured in a common currency across countries converge over some period of time may be a very long period of time recognizing all of the impediments that keep strict ppp from holding economists have put their efforts in studying the long run version of this equilibrium condition there is a relatively large literature examining the equality of real interest rates internationally 2 in all of these studies the real interest rate is defined by the fisher equation these studies then go on to estimate and test for the simultaneous existence of uncovered interest parity uip which is also called the open economy fisher relation and ex ante ppp eappp the other conditions sufficient for rip the problem in this strategy is that the fisher equation may not hold many studies have been devoted to examining the validity of the fisher relationship for both the u s and other economies 3 the results of this line of inquiry have been decidedly mixed even if the fisher relation does hold it is unlikely that the fisher effect will be one for one as implied by defining the real interest rate from the simple fisher equation both mundell tobin and tax effects can drive a wedge between inflation expectations and the effect on nominal interest rates 4 it would seem more appropriate to treat the fisher relation as another testable parity condition than as an assumption in this study we examine the underlying parity conditions sufficient for rip treating them as hypotheses to be tested the four parity conditions or equilibrium relationships upon which rip is predicated uncovered interest parity uip ex ante ppp eappp the fisher relation in each country i e the fisher relation in country a and the fisher relation in country b imply time series implications for the observable variables specifically if any of the nominal interest rates or inflation rates can be characterized as integrated variables evidence of which we will provide then the four parity conditions imply one common stochastic trend between them therefore an initial examination of the sufficient conditions for rip should include a test for a unit root in the observable variables and then a test for the number of common stochastic trends in a given rip system because the power of univariate unit root and stationarity tests is notoriously low many exploit the power gains available by using panel tests however there are serious drawbacks to some of these panel unit root tests for example o connell 1998 taylor and sarno 1998 and breuer mcnown and wallace 2001 we overcome these drawbacks by taking advantage of recent innovations in univariate and multivariate unit root tests that have substantially greater power to reject a false null but are not subject to the size distortions associated with some popular panel based tests our use of these methods leads us to conclude that each rip system analyzed can be characterized to some degree as a system of integrated variables that share more than one common trend

a multi country study of the information in the shorter maturity term structure about future inflation abstract empirical analysis of data from ten oecd countries indicates that except for france the united kingdom and germany the shorter maturity term structure does not contain a great deal of information about the future path of inflation on the other hand except for the united kingdom there is a great deal of information in the term structure of nominal interest rates at shorter maturities about the term structure of real interest rates these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes for the different countries

a multicountry comparison of term structure forecasts at long horizons abstract this paper extends previous work on the information in the u s term structure at longer maturities to britain west germany and switzerland we find strong evidence that the term structure does have significant ability to forecast changes in inflation particularly at long maturities on the other hand the ability of the term structure to forecast changes in one year interest rates is somewhat weaker only at the very longest horizon five years is there significant forecasting ability for interest rate changes

exchange rate pass through abstract the resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass through relationship so far there has not been a comprehensive survey of this literature the paper aims to fill this gap in two ways first it pieces together the theoretical literature on exchange rate pass through second it provides a critical survey of the empirical literature on exchange rate pass through emphasis is placed on the data and methodology employed in previous work this is done in order to guide future work in this growing area of research

the persistence of real interest differentials abstract this paper applies kalman filtering techniques to estimate the persistence of ex ante real interest differentials identification results for state space models applicable in other contexts are presented and exploited in the model estimation ex ante real interest differentials for the period 1973 1987 are found to be relatively short lived and mean reverting to zero thus providing empirical support for theoretical models of economic interdependence characterized by real rate equality in the long run steady state for the sample considered the variability of the differentials relative to the u s is found to be larger than that relative to germany

regime non stationarity in the us uk real exchange rate abstract using a markov switching extension of the adf regression we find evidence that the us uk real exchange rate is stationary in periods when it is in a low volatility regime and nonstationary when it is in a high volatility regime

real exchange rates and real interest differentials implications of nonlinear adjustment in real exchange rates abstract this paper investigates the relationship between real exchange rates and real interest differentials while sticky price exchange rate theories predict a relationship empirical evidence on the hypothesized link has proved elusive our conjecture is that the empirical difficulty is due to a failure to recognize nonlinearity in real exchange rate adjustment when we introduce threshold nonlinearity into a traditional model to take account of a transaction cost induced band of inaction for price adjustment only outside the band will the real exchange rate exhibit mean reversion and bear an association with real interest differentials our estimated nonlinear models provide evidence supporting this view

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

a long run view of german dominance and the degree of policy convergence in the ems i introduction when the european monetary system ems was established in march 1979 the member countries agreed to gradually move to a european monetary union emu at the maastricht summit on december 9 10 1991 the member nations signed an agreement outlining the requirements and a timetable for monetary union building upon the framework specified in the 1989 delors report the maastricht agreement outlines a three stage transition to a common european monetary policy 1 the achievement of a high degree of monetary policy convergence among the member countries is crucial if a common monetary policy is to be initiated the ems already provides a framework in which monetary policy actions can be coordinated but have member nations actually coordinated their actions or have they conducted independent policies some have claimed that the bundesbank has dominated monetary policy in the ems one explanation is that by tying domestic monetary policy to that of germany other countries policymakers enhance their own credibility for instance giavazzi and pagano 1988 have argued that because the bundesbank is known to follow a consistent credible anti inflation policy tying policy to that of germany should enhance one s reputation a natural question to ask therefore is to what degree have monetary policies in the ems converged to that conducted by germany a finding of complete convergence among ems monetary policies would imply that the member countries have converged to one common monetary policy in studies examining the credibility hypothesis which clearly is linked to the notion of monetary policy convergence fratianni and von hagen 1990c and burdekin westbrook and willett 1993 rejected this hypothesis 2 to consider the prospects for the success of emu one must know whether and to what degree there has been a transmission of policy actions within the ems the question of whether germany has set the direction of monetary policy for the ems is a natural focus and has been the subject of recent study fratianni and von hagen 1990a 1990b 1990c von hagen and fratianni 1990 and kutan 1991 1992 all reject the hypothesis that german monetary policy actions dominate the monetary policy decisions of other ems countries 3 while germany is found to be an important player in setting monetary policy its actions are not independent of other members in contrast to this conclusion karfakis and moschos 1990 and macdonald and taylor 1991 argue that non german ems members policies are related closely to german policy changes and that german policy actions do not respond to those taken by the central banks of other ems countries this study tests for policy convergence among ems countries within a long run framework using cointegration procedures using both short term interest rates and the monetary base as measures of monetary policy our aim is to determine the number of shared common stochastic trends among ems monetary policies and test whether a complete convergence of policies has been achieved in the ems rejection of complete convergence a finding of two or more shared common trends indicates that some countries policies are set independently at least in the long run if this is true then the notion that the bundesbank dominates ems policy is rejected such a result also suggests that any credibility gain from tying policy to that of germany is probably outweighed by other considerations such as domestic growth or international competitiveness looking ahead our results indicate that ems monetary policies have not converged we also investigate the short run connection among policy measures using a longer sample than in previous work our results from this analysis indicate that while german policy actions influence monetary policy in other ems countries in the short run there is substantial policy interaction among ems members the format of the paper is as follows section ii discusses some methodological issues concerning the use of interest rates and the monetary base as indicators of policy actions