living and dying with hard pegs the rise and fall of argentina s currency board the rise and fall of argentina s currency board shows the extent to which the advantages of hard pegs have been overstated the currency board did provide nominal stability and boosted financial intermediation at the cost of endogenous financial dollarization but did not foster monetary or fiscal discipline the failure to adequately address the currency growth debt trap into which argentina fell at the end of the 1990s precipitated a run on the currency and the banks followed by the abandonment of the currency board and a sovereign debt default the crisis can be best interpreted as a bad outcome of a high stakes strategy to overcome a weak currency problem to increase the credibility of the hard peg the government raised its exit costs which deepened the crisis once exit could no longer be avoided but some alternative exit strategies would have been less destructive than the one adopted

word of mouth communication and percolation in social networks this paper develops a model of demand pricing and advertising in the presence of social learning via word of mouth communication between friends in the model consumers must receive information about a monopolist s product in order to consider purchasing it the presence of word of mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population i derive the comparative static results of connectivity mean preserving spread of friendships and clustering of friends on prices the optimal targets for advertising are not generically the individuals with the most friends jel l12 l14 a fundamental issue for economists is understanding the process by which demand is formed through social learning by consumers this article develops a framework based on random graphs for understanding the ways social learning via

cellular telephone new products and the cpi since their introduction in 1983 cellular telephones adoption has grown at 25 35 per year at year end 1997 about 55 million cellular telephones were in use in the united states the bureau of labor statistics bls did not know that cellular telephones existed at least in terms of calculating the consumer price index cpi until 1998 when they were finally included in the cpi omitting cellular telephones from the cpi created a significant bias i estimate a bias in the bls estimate of the telecommunications services index of between 8 1 9 per year because of the omission of the cellular telephone rather than telecommunications service prices increasing at about 1 1 per year the correct calculation has them decreasing at about 8 per year omission of new goods from the cpi for significant periods of time leads to important bias in the calculation of the cpi

alternative sources of the gains from international trade variety creative destruction and markups the modern theory of international trade identifies several additional sources of the gains from international trade beyond the gains from traditional comparative advantage these are the gains from importing new product varieties the gains from creative destruction as the relatively most productive firms expand their output by exporting while the less productive firms exit and the gains from competition between firms in different countries which can lead to reduced markups estimates of these various gains are provided for the united states and other countries

measuring the welfare gain from personal computers i introduction what is the welfare gain to consumers from the development of and improvements in personal computers pcs this is the question addressed here the answer offered is that welfare increased by somewhere between 2 and 3 measured in terms of total personal consumption expenditure due to the introduction of the pc and its subsequent price decline this finding is obtained by employing a model of consumer behavior based upon more or less standard preferences which is fit to aggregate national income and product account data using a direct and simple calibration estimation strategy to estimate the welfare gain from the introduction of a new product one must know what utility is in the absence of the good a conventional isoelastic utility function has two problems first at zero consumption the utility function returns a value of minus infinity whenever the elasticity of substitution is less than one in this case the welfare gain from the introduction of the new good is infinitely large second marginal utility at zero consumption is infinite so long as the elasticity of substitution is finite therefore consumers will always purchase some of the good in question no matter how high the price is albeit perhaps in infinitesimal quantities to avoid these problems a form for preferences will be adopted that gives a finite level for marginal utility and hence one for total utility at zero consumption with this utility function high prices may result in the consumer optimally choosing to buy none of the new good in addition the consumer s surplus associated with the introduction of a new good is generally finite this paper contributes to the growing literature on measuring the welfare gains from new goods a classic example is the work by hausman 1999 who studies the introduction of cellular telephones he finds that their tardy inclusion in the consumer price index cpi some 15 years after their debut results in a bias of up to 2 per year in the telecommunications services price index to obtain this estimate hausman 1999 effectively integrates back the estimated demand curve for cellular telephones to recover the indirect utility function for consumers this function can be inverted to obtain the expenditure function from which welfare measures can be calculated the procedure was developed earlier in work by hausman 1981 analytical solutions for the expenditure function can be obtained when the demand equation is ln linear when the demand equation is not linear the indirect utility function may have to be recovered by numerically solving a differential equation this procedure is dual to the one presented here which focuses on the consumer maximization problem some utility functions such as the one employed in the current work may not lead to a linear demand equation of the form that is conventionally estimated hausman 1999 also suggests an approximate measure of welfare based on a linear demand curve while he states explicitly that this measure of welfare is a lower bound this caveat is often forgotten in applied work it may work well in the cell phone example that he studies as illustrated in the pc example studied here however this approximate demand curve method can lead to a serious underestimate of the welfare gains arising from the introduction of a new product similarly the use of conventional price indices such as the fisher ideal and tornqvist price indices may lead to inaccurate estimates of the consumer surplus that arises from the introduction of a new good and or the good s subsequent price decline the accuracy of such methods will depend on how fast the marginal utility for a new good rises as the quantity consumed goes to zero figuring this out is part and parcel of the new goods problem that is what utility function or demand equation should be used for estimating the welfare associated with the introduction of a new good

the ambiguous effect of new and improved goods on the cost of living abstract i show that the income share weighted average of individual cost of living indexes can diverge sharply from the equally weighted ordinary average when quality improvements are embodied in discrete goods it is possible for the income share weighted mean to decline while the ordinary mean rises

relation between market model prediction errors and omitted variables a methodological note a number of accounting studies have examined market model prediction errors to evaluate the share price effects of various events such as voluntary or mandatory accounting changes a common approach is to examine the prediction errors around the event date of a portfolio of potentially affected firms this approach has been extended recently through the use of cross sectional regressions e g leftwich 1981 holthausen 1981 collins rozeff and dhaliwal 1981 sepe 1982 and chow 1983 in which prediction errors or raw returns are regressed on firm specific variables such as size the purpose of this paper is to examine the implications of some recent findings in finance for the various finance based empirical accounting studies in general two types of omitted variables from the standard capital assets pricing model have been identified first several studies have reported that certain firm specific variables such as size banz 1981 and reinganum 1981 earnings yield basu 1975 1983 and dividend payout ratio litzenberger and ramaswamy 1979 may be omitted variables from the standard capm in addition other studies have found some special time series characteristics of stock returns such

exact consumer s surplus and deadweight loss consumer s surplus is a widely used tool in applied welfare economics both economic theorists and cost benefit analysis often use consumer s surplus despite its somewhat dubious reputation the basic idea is to evaluate the value to a consumer or his willingness to pay for a change in price of a good from say pricep to pricep because price changes affect consumer welfare an evaluation of this effect is often a key input to public policy decisions yet consumer s surplus is probably the most controversial of widely used economic concepts both paul samuelson and ian little conclude that the economics profession would be better off without it it is my feeling of the situation that substantial agreement exists on the correct quantities to be measured the amount the consumer would pay or would need to be paid to be just as well off after the price change as he was before the price change the quantities correspond to john hicks compensating variation measures an alternative measure which takes ex post price change utility as the basis of comparison is hicks equivalent variation the controversy arises in the measurement of these quantities the usual measurement procedure is to use the area to the left of the marshallian market demand curve between two price levels jules dupuit originated this measure of welfare change and alfred marshall and hicks derived appropriate conditions for its use the primary condition for the area to the left of the demand curve to correspond to the compensating variation is to have constant marginal utility of income marshall gave this condition and if it holds the same quantity will be derived as the area to the left of the compensated hicksian demand curve this area to the left of the compensated demand curve is exactly what the compensating variation and equivalent variation measure thus the constant marginal utility of income is a sufficient condition for marshallian consumer s surplus to be equal to hicks consumer s surplus in this case arnold harberger s plea to use the welfare triangle as one half times the product of the price change times the quantity change to measure deadweight loss corresponds to the correct theoretical amount of welfare change in a recent paper robert willig derives bounds for the percentage difference between the correct measure of either the compensating or equivalent variation and the marshallian measure derived form the market demand curve his bounds which depend on the income elasticity of demand for the single good in the region of price change being considered as well as the proportion of the consumer s income spent on the good demonstrate that the marshallian consumer s surplus is often a good approximation to hicks consumer s surplus the fact that the proportion of the consumer s income spent matters as well as the income elasticity was first pointed out by harold hotelling willig contends that the approximation error will be less than the errors involved in estimating the demand curve thus he hopes to remove the need for apology that applied economists often need to give to theorists who remark on the inappropriateness of using marshallian consumer s surplus to measure welfare change however in this paper i show that for the case primarily considered by willig of a single price change which is also the situation in which consumer s surplus is often used in applied work no approximation is necessary professor of economics massachusetts institute of technology and research associate national bureau of economic research i would like to thank peter diamond erwin diewert daniel mcfadden robert merton robert solow hal varian joel yellin and the referees for help and comments research support from the national science foundation is acknowledged the reason that we still have two rather than one of samuelson s six measures of consumer s surplus arises from an index number problem of the correct basis for the welfare comparison i will give both measures but plan to concentrate on the compensating variation

hedonic imputation and the price index problem an application to housing in this study we show how use of the hedonic imputation method complicates the price index problem in addition to the usual choice between formulas such as fisher and tornqvist the fact that index compilers have some discretion over which prices are imputed implies that it is necessary to choose as well between different varieties of each formula the functional form of the hedonic model must also be taken into account we illustrate the importance of these issues in a housing context using house price data for three regions in sydney over a 3 yr period jel c43 e31 o47 r31

measuring consumerwelfareinthe cpu market anapplication of the pure characteristics demand model in this article i estimate demand for the personal computer central processing unit and measure consumer welfare using the pure characteristics demand model the model is based on a quasilinear utility function with multiplicative random variables and does not have the idiosyncratic logit error term so that consumer welfare directly reflects consumers valuation of product characteristics welfare calculations show that consumer surplus comprises approximately 90 of total social surplus and that large welfare gains have resulted from the introduction of new products

valuing consumer products by the time spent using them an application to the internet for some goods the main cost of buying the product is not the price but rather the time it takes to use them only about 0 2 of consumer spending in the u s for example went for internet access in 2004 yet time use data indicates that people spend around 10 of their entire leisure time going online for such goods estimating price elasticities with expenditure data can be difficult and therefore estimated welfare gains highly uncertain we show that for time intensive goods like the internet a simple model in which both expenditure and time contribute to consumption can be used to estimate the consumer gains from a good using just the data on time use and the opportunity cost of people s time i e the wage the theory predicts that higher wage internet subscribers should spend less time online for non work reasons and the degree to which that is true identifies the elasticity of demand based on expenditure and time use data and our elasticity estimate we calculate that consumer surplus from the internet may be around 2 of full income or several thousand dollars per user this is an order of magnitude larger than what one obtains from a back of the envelope calculation using data from expenditures this abstract was borrowed from another version of this item

financial dollarization and systemic risks new empirical evidence abstract this paper explores the persistence of financial dollarization in a group of 79 economies with different levels of development our main hypothesis is that a high level of domestic debt combined with default risk explains this persistence even after a decline in inflation rates using the generalized method of moments gmm in a panel data analysis our results show that inflation risks caused by increasing probability of default account for financial dollarization more than inflation rate itself after the decrease in inflation rates the foreign currency denominated deposits remain large because of the high debt to gdp ratios particularly in speculative grade economies high public indebtedness leads to expectations of default dollarization is a rational response to the future inflation associated with investors expectations of default observed in highly indebted economies

quality adjusted price indexes and the willig condition abstract this paper provides a graphical explanation of willig s condition for developing consistent price indexes for quality change the framework also describes how the single crossing condition generalizes the willig condition

toward a cost of living index progress and prospects a lmost anyone with an interest in consumer price trends wants to know how those trends affect consumers and in principle that effect is best captured by an appropriate cost of living index it therefore seems curious that so few of the statistical offices around the world have adopted the cost of living index objective for their consumer price indexes accurately tracking the cost of purchasing a fixed market basket of goods and services no doubt offers a more comfortable standard for a statistical agency to aspire to than accurately tracking the cost of living but if the latter is what one really would like to measure it seems better just to say so for some years the theory of the cost of living index has guided bureau of labor statistics bls decisions about the consumer price index cpi and in the recent past the agency has stated more explicitly that the goal for the cpi program is to approximate a conditional cost of living index that is an index that measures changes in the cost of living that are due to changes in prices of goods and services conditional on other outside influences that affect the standard of living remaining unchanged it may be that a true cost of living index is unattainable as a practical matter still the consumer price index surely can be moved closer to that ultimate objective and the theory of the cost of living index has the considerable advantage of offering a unified framework for the evaluation of the methods used to produce the cpi

sources of bias and solutions to bias in the consumer price index four sources of bias in the consumer prices index cpi have been identified the most discussed is substitution bias which creates a second order bias in the cpi three other changes besides prices changes create first order effects on a correctly measured cost of living index coli i explain in this paper that a pure price based approach of surveying prices to estimate a coli cannot succeed in solving the 3 problems of first order bias i discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques

insurer pricing and consumer welfare evidence from medigap this article examines the welfare impact of imperfect competition in the medicare supplement insurance medigap market two firms control nearly three fourths of the medigap market and premiums exceed claims by over 25 i find that a low price elasticity and consumers brand preferences lead firms to engage in substantial marketing and price above cost therefore the strategic behavior of insurers facing relatively inelastic demand is critical in explaining poor market performance i also find that insurers do not capture all of the rents in this market rents also accrue to actors who perform marketing functions including agents and brokers

the consumer price index conceptual issues and practical suggestions a national academy of sciences panel recently made a number of recommendations to the bls for improving the consumer price index while also suggesting some cautions to be observed when considering the adoption of new concepts and techniques this paper discusses the panel s analyses in four areas should a cost of living index be the measurement objective of the cpi should the index attempt to capture the effect on living costs from changes in environmental conditions how can hedonic techniques be best applied for measuring quality changes should the bls attempt to measure the consumer surpluses accompanying the introduction of new goods

sampling frequency and the comparison between matched model and hedonic regression price indexes matched model price indexes generally overestimate quality adjusted prices because the price performance ratio of models sold in consecutive periods is worse than that of new models this unrepresentativeness of the sample potentially might be reduced by obtaining higher frequency data thus increasing the fraction of models that are matched we propose a set of comformable indexes to test this hypothesis using computer prices from the buy direct press we find contrary to initial expectations that the bias in the matched model price index increases with the sampling frequency the bias is reduced if the high frequency index is constructed using only long lived models these results suggest that models that last for only a brief time are models for which the price performance ratio has deteriorated very rapidly thus increasing the sampling frequency without purging short lived models actually increases the selection bias

getting prices right what should be done much of the profession accepts that the cpi likely overstates the rate of increase of the cost of living it is less clear that there are sound and feasible steps that the bls can adopt to improve matters in the short run there are unresolved conceptual and identification problems in the measurement of quality superlative price indexes are not feasible and feasible approximations are not superlative and may not even be better the need for a single index that aggregates over heterogeneous consumers with different incomes tastes and needs casts serious doubt on the cost of living approach

is there a quality bias in the canadian cpi evidence from micro data rising consumer prices may reflect shifts by consumers to new higher priced products mostly for durable and semi durable goods i apply bils 2009 methodology to newly available canadian consumer price data for non shelter goods and services to estimate how price increases can be divided between quality growth and price inflation

quality corrected price indices the case of the dutch new passenger car market 1990 1999 market dynamics and technological developments constitute a major challenge to the proper measurement of the price evolution of durable goods in this study hedonic methods are used to estimate quality corrected price indices of new passenger cars in the netherlands 1990 1999 use is made of a huge set of price quantity and quality information about 11 000 car models obtained from different sources during the observation period the nominal price level of all available car models increased about 20 on average while the shares of car models with airbags tinted glass and power steering increased from almost nothing to about 90 matched model price indices and the official cpi for new passenger cars which partially account for quality adjustments estimate the price increase to be equal to 10 6 14 2 respectively 11 2 for the 1990 1999 period by contrast the hedonic fisher like price indices based on the preferred annually estimated brand weighted semi log hedonic model lead to price changes var

working to improve the consumer price index he recent report of the advisory commission appointed by the u s senatefinance committee begins with one overarching recommendation thebls should establish a cost of living index coli as its objective in mea suring consumer prices u s senate 1996 p 2 this seems basically right to us indeed the bls has long said that the cost of living framework guides operationaldecisions about the construction of the index gillingham 1974 u s bureau oflabor statistics 1984 1988 1992 1997a putting things slightly differently if thebls staff or other technical experts knew how to produce a true cost of living indexon a monthly production schedule that would be what we would produce althoughwe have no fundamental disagreement with the commission about what the objec tive of the cpi program ought to be we may disagree to some extent about theapproaches and methods that are appropriate and feasible in working toward thatobjective this is a point to which we will return below our rst purpose in the present paper is to comment on the advisory com mission s report and the recommendations it contains