market share and exchange rate pass through in world automobile trade abstract using a bertrand differentiated products model we show that pass through should be high for exporters based in a country with a very large share of total destination market sales for source countries with small and intermediate market shares the relationship is potentially nonlinear and sensitive to assumptions about demand and firm interactions the model is estimated using a panel data set of automobile exports from four source countries to 12 destination markets over the period 1970 1988 the relationship between pass through and market share is significantly nonlinear pass through is lowest when the source country s market share is around 40 percent and highest when market share approaches 100 percent

is our everyday comfort for sale preferences for demand management on the electricity market in a european perspective the electricity markets have been experiencing major changes via deregulation new technologies and changes in the production mix together with the daily and seasonal peak hours on the demand side the changing markets put pressure on increased flexibility to handle and sustain balance in the grid systems this paper focuses on the demand side and analyzes preferences related to demand management of swedish households energy use in a web based choice experiment respondents were faced with three hypothetical electricity contracts the choices of preferred contracts revealed preferences for attributes related to external control of heating household electricity and information dissemination integrity the results show that people put a substantial value on not being controlled illustrated by compensations up to thousands of sek for accepting a contract characterized by external control of energy use in various dimensions in addition the results show that household composition age gender and income play a role for the perceived discomfort from the external control and information dissemination

national price levels purchasing power parity and cointegration a test of four high inflation economies abstract the time series properties of exchange rates and wholesale prices from four high inflation countries show some evidence in support of purchasing power parity tests for stationarity of real exchange rates and cointegration among price and exchange rate variables are presented for argentina brazil chile and israel during the 1970s and 1980s error correction models describe the mechanism of adjustment to long run equilibrium

incidents of gray market activity among u s exporters occurrences characteristics and consequences each year the value of gray market products sold throughout the world runs into the billions of dollars past research has stated that exporters of manufactured goods can hardly afford to ignore the possibility of this phenomenon due to the often severe effects on their sales volume margins and relationships with distributors and end users through a survey of export managers of manufacturing firms coupled with a series of qualitative interviews this study investigates how organizational specific control specific and market specific factors drive gray market activity and in turn explores the effects of unauthorized distribution on export performance several factors are shown to evaluate the potential of unauthorized distribution in their export markets namely the centralization of decision making the degree to which the product is standardized channel integration and channel control international experience market volatility and the number of markets served were found to have no effect on gray market activity this contrary to traditional thinking furthermore the effects of gray market activity on strategic versus economic performance is shown to be significantly different each of these issues is discussed in detail along with the implications for export managers

accounting for elimination by aspects strategies and demand management in electricity contract choice in this paper we report on a discrete choice experiment aimed at eliciting swedish households willingness to accept a compensation for restrictions on household electricity and heating use during

elimination and selection by aspects in health choice experiments prioritising health service innovations priorities for public health innovations are typically not considered equally by all members of the public when faced with a choice between various innovation options it is therefore possible that some respondents eliminate and or select innovations based on certain characteristics this paper proposes a flexible method for exploring and accommodating situations where respondents exhibit such behaviours whilst addressing preference heterogeneity we present an empirical case study on the public s preferences for health service innovations we show that allowing for elimination by aspects and or selection by aspects behavioural rules leads to substantial improvements in model fit and importantly has implications for willingness to pay estimates and scenario analysis

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

pricing exports a cross country study abstract this paper applies cointegration and error correction analysis to estimate the long run steady state and short run dynamic relationships between the exchange rate and export prices in industrial and newly industrializing economies the data coherent analysis allowing the endogeneity of domestic cost and the exchange rate shows that the exchange rate has smaller effects on the export price than previous studies would indicate it contradicts some widely accepted relationships e g smaller more open countries have greater coefficients of pass through the results also exhibit important differences among the usa japan and germany in their export pricing behavior jel f30 f31

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

capacity constraints and the dynamics of underwriting profits paul d thistle the presence of an underwriting profit cycle in property liability insurance has become a stylized fact models of this underwriting cycle imply that the insurance market is governed by two regimes as capacity is constrained or not we apply the smooth transition regression model to insurance industry data for 1934 1993 to test for a regime shift we find a rapid shift between two distinct regimes with different dynamics when capacity is not restricted we find no evidence of a cycle the cycle is present in periods when capacity is restricted immediately following world war ii and after 1968 the underwriting cycle appears to be a recent phenomenon jel g22 c32 i introduction it is well known that the property liability insurance industry is subject to cycles in premiums and underwriting profits the main features of the underwriting cycle are also well known in a soft market coverage is readily available while premium revenue and underwriting profits are low in a hard market coverage becomes difficult to obtain while premium revenue and profits increase the onset of a hard market is typically quite rapid and is followed by the erosion of premium revenue and profits as market conditions return to a soft market 1 it is also generally accepted that the cycle has a period of approximately six years although there is some variation across lines and among countries this approximate period for the underwriting cycle is based on time series estimates of second order autoregressive models e g venezian 1985 and cummins and outreville 1987 understanding the causes of the property liability underwriting cycle is important for public policy and insurance regulation sof t markets may contribute to insurer insolvencies if firms price and underwrite too aggressively while high prices and restrictive underwriting in hard markets may disrupt the flow of goods and services a number of alternative theories have been proposed to account for the cycles in premiums and profits in the property liability insurance market initially attention focused on aspects of the process for determining insurance rates e g harrington and danzon 1991 1994 simmons and cross 1988 stewart 1981 venezian 1985 and wilson 1981 more recent research has developed equilibrium models of the underwriting cycle financial pricing models based on discounted cash flows imply that insurance prices are equal to policy expenses plus the expected present value of future claims under the policies issued 2 financial pricing models implicitly or explicitly assume perfect capital markets in the absence of capital market imperfections there should be no cycles and prices and profits should vary inversely with interest rates cummins and outreville 1987 and doherty and kang 1988 argue that if insurers have rational expectations then as a result of insurance accounting practices and inst itutional features of insurance markets underwriting profits follow an autoregressive data generating process which gives the appearance of a cycle the capacity constraint hypothesis developed by cummins and danzon 1991 gron 1994a b and winter 1988 1991a b 1994 is based on the fact that an insurer must have sufficient policyholders surplus capacity to support the policies it writes 3 capital market imperfections lead firms to rely on internal capital as the source of underwriting capacity this in turn implies that hard markets must be temporary and that soft markets will persist the capacity constraint hypothesis implies that premiums and profits will depend on interest rates and are negatively correlated with surplus or capacity in the short run in the long run capital enters the industry until the constraint is not binding so profits and surplus are not correlated in the long run cagle and harrington 1995 and cummins and danzon 1997 add the assumption that policyholders are willing to pay more for policies with higher financial quality lower insurer default risk and that insurer default risk is endogenous

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

measurement of monopoly behavior an application to the cigarette industry a simple scheme is proposed to measure monopoly pricing behavior the coefficient of the tax rate term in a price equation identifies the ratio of price to marginal cost no direct measurement of costs is required so a major problem for other empirical studies of monopoly is avoided empirical results for cross section time series data support rejection of atomistic competition but also provide evidence against the operation of an effective cartel in the cigarette industry the model represents an alternative interpretation of related results in a recent paper by barzel application of the methodology to other markets is feasible

why do the free trade gain numbers differ so much the role of industrial organization in general equilibrium a small general equilibrium model calibrated approximately to match the canadian tradeable goods sector is used to examine the implications of a range of assumptions about pricing behaviour and entry barriers for the impact of free trade with the united states it turns out that only a model with an extreme combination of non competitive product market and free entry as well as unexploited scale economies can generate substantial gains from free trade other assumptions modelled include monopolistic competition market share pricing an economist s model and a mainstream industrial organization approach the predicted welfare gains range from zero to more than 7 per cent of gnp pourquoi est ce que les evaluations numeriques des gains derives de l accord de libre echange different tellement le role de l organisation industrielle dans l analyse d equilibre g6neral l auteur utilise un petit modele d equilibre general calibre pour approximer le secteur canadien des biens echangeables avec l exterieur dans son analyse des implications d un ensemble de postulats quant a la tarification et aux barrieres a l entree sur l impact du libre echange avec les etats unis il appert que seul un modele impliquant une combinaison extreme de marches de produit non concurrentiels et d entree libre ainsi que d economies d echelle non exploitees peut engendrer des gains substantiels comme resultat du libre echange on examine aussi d autres postulats concurrence monopolistique tarification pour maintenir une part du marche un modele a saveur economiste et 1 approche standard d organisation industrielle les gains de bien etre qu on predit selon les postulats de base couvrent un eventail de zero a 7 pour cent du pnb

exchange rate hysteresis large versus small policy misalignments abstract using a monetary model in the spirit of dornbusch 1976 and a sunk cost model of trade hysteresis we show that a sufficiently large policy misalignment can induce hysteresis in the trade balance and thereby alter the steady state real exchange rate hence exchange rate dynamics are path dependent since hysteresis in our model can entail industrial dislocation and the scrapping of sunk assets we suggest that these factors constitute a welfare cost of large policy misalignments that have not been considered formally additionally since the long run exchange rate is path dependent standard empirical tests of exchange rate models may involve a misspecification

price reactions to new competition a study of us luxury car market 1986 1997 abstract this paper examines the questions of whether the incumbent responds to entry and which firms respond to entry in an industry by using a data sample of the us luxury car market during the period of 1986 and 1997 the statistical analysis finds that the incumbent s response varies across firms but some group of firms responds to entry similarly in particular this paper finds that the german exporters of luxury cars respond significantly to the entry of a japanese rival in the us market similarly by reducing their prices and mark ups the extent to which they respond to entry become greater as the japanese firm s market share increases the statistical test accepts the hypothesis of the equality of coefficients among the german firms but rejects the hypothesis when both the german and british firms are included in the sample

testing the market integration process in the european car sector evidence from pricing to market behaviour in this study we investigate the process of the european car market integration by analysing the evolution of cross country differences in the degree of pricing to market behaviour of united kingdom exporters we estimate these country differences by exploiting statistical information for pre tax retail prices and for export unit values conclusions from both independent data sets are in general quite consistent results support the claim that in the period before the block exemption regulation 1400 2002 came fully into force international price discrimination was an important source of car price dispersion within the euro area for a more recent period we found that estimated deviations in pricing to market behaviour across destinations have become lower this convergence suggests that car market integration was progressively improved at the end of the last decade

purchasing power parity over two centuries abstract this paper re examines the purchasing power parity hypothesis for the dollar sterling exchange rate using the two centuries of data from lothian and taylor lt 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 3 488 509 unlike lt we conclude that the dollar sterling rer is nonstationary implying a rejection of the long run ppp hypothesis the differences in our conclusions are explained by 1 sensitivity of adf unit root tests to the choice of lag length and or 2 the presence of significant time trends in the adf or phillips perron unit root test equations

ppp strikes back aggregation and the real exchange rate we show the importance of a dynamic aggregation bias in accounting for the ppp puzzle we prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics established time series and panel methods fail to control for this using eurostat data we find that when heterogeneity is taken into account the estimated persistence of real exchange rates falls dramatically its half life for instance may fall to as low as eleven months significantly below the consensus view of three to five years

considerations of cost trade offs in insurance solvency surveillance policy abstract we propose a process for identifying potentially insolvent insurers on a cost effective basis a loss cost function is developed such that the effectiveness of monitoring is maximized relative to a cost constraint the loss cost function is supported by a model that provides a rank ordering of financial institutions according to their probability of insolvency when tested against a full sample of property liability insurance companies the procedure provides information critical to maximizing the effectiveness of regulatory resources available for solvency surveillance and performs well as a predictor of insolvency likewise the rank ordering of insurers overcomes an estimation problem critical to establishing risk adjusted guaranty assessments

an empirical model of mark ups in a quality differentiated export market abstract this paper develops an empirical model to allow for imperfect competition in the market for traded goods a simultaneous equation model incorporating the demand for and supply of taiwanese footwear exports to the united states is specified and estimated the model allows the identification of two separate sources of mark ups in export prices the first comes from the u s imposed quantitative restriction on these exports the second comes from imperfect competition in the international market for these exports the results suggest competitive behavior by taiwanese footwear exporters the quantitative restriction resulted in a 16 9 percent mark up of prices over marginal cost

exchange rate pass through at the product level we use a detailed database to investigate exchange rate pass through at the product level for a large number of countries the empirical analysis suggests that pricing behaviours are dichotomous with complete pass through in around 25 of sectors and significant pricing to market in the remaining ones average long run pass through coef ficient is close to 80 this result hides a strong heterogeneity of pass through behaviours across sectors even when composition effects are controlled for average pass through varies across importing countries the econometric analysis shows that pass through tends to be higher in volatile environments in less developed countries in weakly integrated markets jel classification f12 f31 f41

the growth of network computing quality adjusted price changes for network servers in this paper we investigate the evolution of quality adjusted prices for servers motivated by two facts first the productivity acceleration in the us economy since the mid 1990s is closely linked to spread of information technology of which networked computing is a large component second the growth of network computing itself has been fostered by the rapid growth in the quality and quantity of the network server market like pakes 2003 analysis of the pc market we show that our preferred version of the hedonic price index complete hybrid fell much more rapidly than the standard matched model price index the hedonic index fell on average by about 30 per annum compared to 17 p a for the matched model this difference is mainly due to the selection bias in the standard matched model price index due to the exit of obsolete models which would have had the fastest price falls

is price adjustment asymmetric evaluating the market share and marketing bottlenecks hypothesis abstract export price adjustment is asymmetric with respect to currency fluctuations in at least two circumstances if firms face capacity constraints in distribution networks or quantitative trade restrictions then pricing to market may be greater during depreciations of the exporter s currency if firms attempt to build market share subject to the threat of trade restrictions then pricing to market may be greater during appreciations of the exporter s currency this paper tests for asymmetries using panel data on german and japanese 7 digit industry exports the data seldom reject the hypothesis of a symmetric response of prices to exchange rates

measuring the intensity of competition in export markets abstract this paper develops an approach to measuring the intensity of competition in international markets using readily available data on destination specific values and quantities of exports at the seven digit industry level the intensity of competition a group of exporters faces in a particular export market is measured by the residual demand elasticity the group faces this elasticity is identified by exchange rate shocks which rotate the supply relation of the source country export group relative to competitors located in other countries we apply this method to german exports of beer and us exports of linerboard paper the resulting estimates of market power appear to be plausible and consistent with other indicators of competition e g market shares the number of competitors providing support for the applicability of our framework in measuring competition in international markets

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

hyteresis in import prices the beachhead effect this paper shows that temporary real exchange rate fluctuations can have persistent hysteretic effects on trade specifically when market entry costs are sunk sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis this simple result has strong implications for exchange rate theory t rade policy and estimation of trade equations empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in u s import prices namely the aggregate pass through equation of exchange rates to import prices shifted in the 1980s the shift s nature and timing is broadly consistent with the hysteresis hypothesis copyright 1988 by american economic association

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

declining exchange rate pass through to u s import prices the potential role of global factors this paper documents a robust and sustained decline in exchange rate pass through to u s import prices from well above 0 5 during the 1970s and 1980s to around 0 2 over the last decade we attribute this decline to the rising prominence of competition from china a shift in import pricing behavior since the asian financial crisis and the reduced share of material intensive goods in u s imports we also find evidence that foreign exporters are increasingly setting their prices with an eye on u s prices these results in turn suggest a new and more general hypothesis linking the decline in pass through to the evolving nature of competition in global markets and structural changes in international production patterns

cross border integration in the european electricity market evidence from the pricing behavior of norwegian and swiss exporters abstract this paper examines the electricity market integration process in two european areas based on the pricing behavior of norwegian and swiss exporters the aim is to gain evidence for the period after the adoption of the second legislative package 2003 the pricing behavior of norwegian exporters indicates that the wholesale markets for denmark and sweden are highly integrated moreover results are fully compatible with the existence of a very competitive marketplace for electricity this clearly contrasts with the evidence provided by swiss exporters in this last case analysis revealed differences in pricing to market behavior between italy france and germany which indicates that exporters take advantage of international market segmentation and divergences between market structures this outcome provides a reasonable explanation as to why price differences between countries cannot be fully attributed to transmission costs as has been claimed in previous research we also found cross country convergence in levels of markups and in pricing to market behavior of the swiss exporters for the first part of the period that was analyzed the evidence is fully consistent with an initial impulse toward market integration originated by reforms implemented at the beginning of the last decade

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

did the strong dollar increase competition in u s product markets sunk cost models of new trade theory have demonstrated that large unanticipated swings in currency values can have permanent effects on trade flows by altering market structure in imperfectly competitive markets the author tests an implication of these models using panel data on export unit values from germany and japan to a number of foreign markets including the united states he finds weak evidence in support of the thesis that u s product markets became more competitive as a result of the large dollar appreciation of the 1980s although the results vary by industry and comparison country copyright 1994 by mit press

price discrimination in the context of vertical differentiation an application to canadian wheat exports this study examines the ability of the canadian wheat board cwb to price discriminate in bread wheat exports this study models wheat as a vertically differentiated intermediate good and modifies the model of vertical differentiation by mussa and rosen to the realities of wheat import demand the conceptual model isolates the bases of price discrimination and demonstrates that the cwb s ability to exploit cost differences in pricing depends on the extent of the differentiation between canadian and u s wheat this model is implemented using monthly confidential price data provided by the cwb for exports to japan the united kingdom and two markets aggregating remaining exports through canada s west and east coasts for 1982 1994 the data indicate that the cwb charges different prices to different countries for wheat of the same grade and protein content results from the model indicate that the price difference between any two markets is not completely explained by elements of perfect competition however the evidence is mixed regarding the ability of the cwb to utilize all the instruments available to price discriminate thus the cwb s pricing strategy may be more complex and dynamic than the prescription for static producer surplus maximization derived in this study

a note on the effect of cost changes on prices in a recent article in this journal sumner 1981 took an ingenious approach to estimating the level of monopoly power in the cigarette industry he noted that differences in marginal costs exist in the industry due to varying levels of state taxes the sales prices established will satisfy the equation p i liq l mr mc where p price and q the elasticity of demand for the product in question if elasticity is a constant observing the change in marginal cost and the change in price enables one to infer the elasticity of demand perceived by the firm elasticity could then be used as a proxy for the firm s market power this technique turns out to be of very limited applicability however because it is extremely sensitive to the functional form assumed for the demand curve consider the general problem of a firm facing constant marginal costs of c in maximizing profits the firm solves

exchange rates and market power evidence from the petrochemical industry abstract this paper takes a microeconometric approach to the study of exchange rate pass through in imperfectly competitive markets we provide evidence for the hypothesis that incomplete exchange rate pass through can be attributed to non competitive conduct by foreign firms a unique feature of our approach is the use of highly disaggregated industry data which is compatible with the behavioral assumptions of a homogeneous product oligopoly model we employ a panel data set consisting of location and product specific price and cost data for 29 traded petrochemicals for the us germany and japan during 1982 to 1993 our empirical estimates indicate that german and japanese firms exercised statistically significant market power in the us petrochemical market during our sample period

incomplete exchange rate pass through and imperfect competition the effect of local production extent to which product prices respond to exchange rate induced changes in costs this research has revealed that the percentage change in the prices of imported goods is smaller than the percentage change in exchange rates of the exporting country and that price responses differ across destinations a phenomenon termed pricing to market this finding may indicate market imperfections in international trade for example those that may arise in the case of segmented markets alternatively these empirical facts may reflect the sale of products whose production occurs in multiple locations when firms are able to shift their production across borders or alter their location of sourcing their costs will not change one for one with home country exchange rate movements and therefore their prices are unlikely to change one for one with exchange rate movements however this possibility has not been addressed empirically in the literature on pricing to market this study contributes to the literature by estimating exchangerate pass through while controlling for local production in the destination market we focus on the u s automobile market and the pricing of u s and japanese firms in particular for several reasons first we have product level information on pricing and content and there is substantial variation in destination country production across products and over time second existing studies have found evidence of pricing to market and incomplete exchange rate passthrough in automobile markets providing a useful comparison for our results and making this an appropriate market in which to study the effect of local production on exchange rate passthrough consistent with other studies we find that japanese firms partially pass through japanese cost changes to their u s customers in addition we find that this partial pass through characterizes not only japanese cost shocks but cost shocks that these japanese firms experience in their u s production this finding persists in a sample that includes both u s and japanese firms automobile firms generally do not pass through cost shocks in their entirety our data also show that those japanese auto

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

exchange rate expectations and market shares abstract we consider an asymmetric duopoly comprised of a domestic and a foreign firm we derive optimal collusion equilibria and examine how market shares vary in response to changes in the exchange rate our analysis implies some surprising results first a temporary depreciation has a greater impact on market shares than a permanent depreciation second if the change in the expected future rates is of sufficient magnitude then the domestic firm s market share may decrease following a depreciation of the home currency a seemingly perverse effect 1997 elsevier science s a

cost pass through in the u s automobile market we study cost pass through in the u s automobile market using a framework that incorporates the effects of cost changes on input decisions we find that accounting for firms factor market decisions significantly increases measured cost pass through although we reject the hypothesis of full cost pass through and constant markups in addition our evidence suggests that cost shocks common to all manufacturers have a greater effect on prices than do model specific cost shocks finally we examine how pass through varies with manufacturer nationality finding that u s firm cost pass through exceeds that of european and asian firms

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

the property liability insurance cycle a comparison of alternative models the objective of this paper is to compare alternative models of insurance pricing as theories of the property liability underwriting cycle the existing literature has focused on comparing two models the financial pricing and capacity constraint models however these are not the only relevant models we show that six alternative models imply the same general form of the pricing equation we apply the model to data on stock property liability insurers for the period 1935 1997 we find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data

the evolution of price dispersion in the european car market car prices in europe are characterized by large and persistent differences across countries the purpose of this paper is to document and explain this price dispersion using a panel data set extending from 1980 to 1993 we first demonstrate two main facts concerning car prices in europe i the existence of significant differences in quality adjusted prices across countries with italy and the u k systematically representing the most expensive markets 2 substantial year to year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations these facts are analysed within the framework of a multiproduct oligopoly model with product differentiation the model identifies three potential sources for the international price differences price elasticities generating differences in markups costs and import quota constraints local currency price stability can be attributed either to the presence of a local component in marginal costs or to markup adjustment that is correlated with exchange rate volatility the latter requires that the perceived elasticity of demand is increasing in price we find that the primary reason for the higher prices in italy is the existence of a strong bias for domestic brancs that generates high markups for the domestic firm fiat in the u k higher prices are mainly attributed to better equipped cars and or differences in the dealer discount practices the import quota constraints are found to have a significant impact on japanese car prices in italy france and the u k with respect to local currency price stability a large percentage of the documented price inertia can be attributed to local costs and a smaller fraction to markup adjustment that is indicative of price discrimination based on these results we conjecture that the emu will substantially reduce the year to year volatility observed in the car price data but without further measures to increase european integration it will not completely eliminate existing cross country price differences

pass through of exchange rates and purchasing power parity abstract in this paper we develop and test two hypotheses about purchasing power parity ppp the first is that changes in the price of traded goods relative to domestic substitutes will affect the ppp relation due to the partial pass through of exchange rates the second is that ppp should hold on forward rather than spot exchange rates due to hedging by firms which implies that the interest rate differential should enter the ppp relation for spot rates using quarterly data for several countries we find support for both these hypotheses though the magnitude of the interest rate effect is very small

broker monitoring of premium adequacy the role of contingent commissions contingent commissions which are payments made by an insurer to brokers based on the volume and profitability of insurance placed with the insurer have been criticized as damaging to the relationship between the insured and its broker the argument is made that contingent commission payments encourage brokers to select insurers for their clients based on the potential to earn contingent commissions rather than on the needs of the insured we argue that contingent commission payments which while directly paid by the insurer are ultimately paid by the insured through higher premiums are beneficial to insureds because they provide an incentive for the broker to place their coverage with an insurer that is charging an adequate premium we contend that although inadequate premiums are perhaps good for the insured in the short term in the longer term inadequate premiums will result in price hikes or coverage restrictions that are harmful to the insureds our empirical analysis demonstrates that insurers

the competitive structure of u s agricultural exports the competitive structure of u s agricultural exports is examined using a model of exporter behavior based on pricing decisions across destination markets market power is revealed in the adjustment patterns of export prices in response to exchange rate movements the results reject the hypothesis that the export pricing decisions by u s firms are consistent with price discrimination across destination markets for cotton corn and soybeans the strongest evidence against the competitive market structure is obtained for international trade in wheat where results indicate that the two largest importers soviet union and prc may exert market power to obtain lower prices

what are we learning about the long run an attempt is made to link together earlier definitions of the long run found in micro and macro economics with recent developments in econometrics specifically cointegration it is suggested that the links are not strong and that most of the previou s work in econometric theory has been unnecessarily overprecise the possibility of embedding cointegration theory into a very general nonlinear theory is suggested an example uses a nonlinear relationship between u k short and long run interest rates proposed by frank paish 1966 copyright 1993 by royal economic society

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

solvency regulation and the property liability insurance cycle i introduction the supply of property liability insurance in the u s appears to be extraordinarily cyclical liability insurance lines in particular fluctuate between soft markets of stable premiums and low returns to insurers and tight markets or insurance crises of rising premiums cut backs on availability and tight limits on coverage the soft markets of the early 1970s and early 1980s were followed in 1975 and late 1984 by sudden premium increases of hundreds of percent for some policies 1 in mid 1987 early july according to some reports the market began to turn around again premiums fell by as much as 40 percent and coverage limits increased up to 500 percent compared to the previous year 2 in a previous paper winter 1988 i addressed the puzzle of why some lines of insurance are apparently so vulnerable to fluctuations when conventional economic theory predicts that premiums will change only one for one with the present value of expected claims this paper examines a specific allegation raised during the most recent insurance crisis that existing regulation of property liability insurance exacerbates market fluctuations the principal enforcement role of state insurance commissions is to monitor the financial condition of insurers commissioners ensure that financial solvency standards are met so that policyholders are protected from the consequences of bankruptcy more precisely the regulations protect state guarantee funds which assume the liabilities of bankrupt insurers the regulators examine a number of financial ratios but the dominant measure of financial leverage is the ratio of the current volume of business to net worth or surplus insurers are restricted by state commissioners from writing more insurance than considered justified by their current net worth in order that realized policy claims can be met even if they turn out to be substantially higher than revenues would cover in determining the ratio of quantity of insurance to net worth regulators face an aggregation problem a sensible measure of the total quantity of insurance sold by a firm does not exist the total number of policies sold for example is meaningless insurance commissioners therefore use premium revenues as a measure of the volume of business historically insurers were allowed a value of two for the ratio of premiums to net worth before attracting the scrutiny of insurance commissioners according to a standard text on insurance published in 1982 for more than 40 years insurance commissioners have used the 2 1 rule as an indicator of the maximum safe premium volume that property and liability insurers might write the rule is that the premium volume should not exceed two times policyholder surplus that is net worth huebner et al 1982 the 2 1 rule was referred to as the kenney rule after the commissioner who first proposed it the standard for a safe premium to net worth ratio has changed over time insurers in most states are now considered to meet solvency requirements when the ratio of premiums to net worth does not exceed three or four as a measure of financial leverage in solvency regulation the premiums to net worth ratio has perverse effects suppose that demand is inelastic and that a supply shock to the market leads to an increase in premiums and hence revenue because the ratio of premiums to net worth has increased regulatory pressures on insurers to maintain safe solvency standards will lead to even tighter supply this regulatory pressure will lead to a further increase in premiums and revenue instead of signalling a more conservative leverage position the ratio of premiums to net worth increases leading to a more negative assessment by the regulator of the insurers financial viability and hence to further pressure to raise premiums

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

long run price effects of exchange rate changes in finnish pulp and paper exports this paper presents long run exchange rate elasticities of finnish newsprint and pulp export prices in the united kingdom uk and germany over the period 1980 94 the elasticities were estimated for a markup pricing model using johansen s cointegration method the magnitudes of the elasticity estimates obtained by imposing price homogeneity indicate that pass through of exchange rate changes to export prices has been incomplete in both markets for newsprint the pass through elasticity was 0 60 in the uk and 0 46 in germany which means that about one half of the changes in the exchange rates is reflected in prices as expressed in the destination countries currencies and about a half in prices measured in finnish markka instead in pulp exports the pass through elasticities differed from each other between the two destination countries more clearly than in newsprint exports indicating a different pricing behaviour of finnish pulp exporters in the uk and germany when exchange rate changes pass throug

the response of the us export prices to changes in the dollar s effective exchange rate further evidence from industry level data the relationship between the dollar s effective exchange rate and the export price indexes for 13 two digit us manufacturing industries is analysed to determine i which industry adjusts its dollar export price to dampen or amplify the effect of the exchange rate fluctuations on the foreign currency price of its exports and ii whether the response of the export price index to appreciation and depreciation of the exchange rate is asymmetric for several industries evidence consistent with dampening the foreign currency price of exports in an asymmetric fashion is found the implications of the results for the price competitiveness of the industries studied is discussed

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

exchange rate pass through for strategic pricing and advertising abstract this paper builds a model in the new empirical industrial organization framework bresnahan t 1989 industries and market power in schmalensee r willig r eds handbook of industrial organization north holland amsterdam to estimate exchange rate pass through in price and advertising price cost margins market structure and firm conduct are estimated endogenously allowing for precise estimation of the degree of and reasons for incomplete pass through i demonstrate that price and advertising pass through are functions of demand cost and market conduct in the short run in the long run the market conduct and cost technologies are in turn determined by the exchange rate movements 1997 elsevier science b v

real exchange rates and macroeconomics evidence and theory since the early 1980s a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates the authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment many studies have established the pertinence of long run purchasing power parity ppp and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations a reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates which emphasizes short run price stickiness but long run ppp but a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the law of one price an example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations

linear and nonlinear exchange rate exposure abstract this paper presents a new methodological approach to examine exchange rate exposure which takes account of the role of the market portfolio and macroeconomic variables in exposure regressions exchange rate regimes based on periods of depreciation and appreciation and nonlinear exposure within each regime we show that the stock market s own exposure to exchange rates should be taken into account before considering industry exposure in addition we adjust the exchange rate and the stock market for common economy wide factors that are unrelated to exchange rates within this framework we show that exposure to bilateral exchange rates is statistically and economically important and that industries with extensive international trade are more often exposed than industries with low levels of international trade the signs of exposure coefficients in each regime are consistent with the extent to which an industry exports we also show that nonlinear exposure is often statistically and economically significant interestingly there is little evidence that industries are exposed to a currency basket

the law of one price for transitional ukraine five commodity prices in kiev ukraine are examined for their movements relative to us counterparts during ukraine s early transition period of 1991 1992 panel unit root tests are applied to the resulting commodity real exchange rates although the law of one price did not hold during the period the commodity real exchange rates appear to have possessed deterministic trends that were in the direction of closing the initial considerable price gap

pricing to market behaviour of india s high value agri food exporters an empirical analysis of major destination markets the pricing behaviour of india s high value agricultural and food exporters in their major destination markets is examined using a pricing to market ptm model for noncompetitive and exchange rate related pricing behaviour the analysis was undertaken in a context where india is showing high commodity concentration in agricultural trade the econometric analysis employed is panel corrected standard errors pcse estimation technique the results indicated evidence of a greater degree of imperfect competition either through price discrimination across destinations or through imperfect exchange rate pass through the analysis of exchange rate effects showed that the local currency price stabilization by the indian exporters were more prominent than the amplification of exchange rates the analysis of the asymmetric effects of exchange rates on export prices showed that in most cases the depreciation of indian rupee had a greater impact than the appreciation moreover the results showed that the exchange rate pass through is sensitive to the kind of exchange rate index utilised in our analysis we found that the commodity specific exchange rate better predicts the pricing to market behaviour in most cases

exposure and markups this article examines how to properly specify and test for factors that affect exchange rate exposure starting from theoretical underpinnings and a sample of u s manufacturing industries between 1979 and 1995 we find that 4 of 18 industry groups are significantly exposed to exchange rate movements through the effect of industry competitive structure export share and imported input share on average a 1 appreciation of the dollar decreases the return of the average industry by 0 13 consistent with our model s predictions as an industry s markups fall rise its exchange rate exposure increases decreases exchange rate movements are an important source of risk for a firm they affect a firm s expected cash flows and or change the terms of competition for exporters importers and multinationals hung 1992 estimates that during the 1980s u s manufacturing industries lost approximately 23 billion year or 10 of total profits due to the dollar s movements surprisingly early studies which assume exchange rate exposure to be constant e g jorion 1990 bodnar and gentry 1993 and amihud 1994 find that exchange rates have no effect on the stock returns of u s multinationals exporters or manufacturing industries recently however allayannis 1997 and bodnar dumas and marston 1998 examine time varying exposure of industry returns 1 in particular the former article focuses on the effect the variation of u s industries import and export shares have on exposure while the latter focuses on pass through and exposure in a sample of japanese export oriented industries besides trade shares and pass through exchange rate exposure also depends on the markup of an industry specifically in industries with

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

emerging differences in state grain trading australia and canada the australian wheat board awb and canadian wheat board cwb have attracted attention recently because they are two of the largest state trading enterprises stes engaged in agricultural trade they have traditionally been viewed as nearly sister agencies among major stes in the world market these two agencies historically had similar characteristics including price pooling cost pooling export sales monopolies monopoly powers within domestic markets grain quality control and government underwriting of initial producer prices and export credit however during the past 6 years similarities between the awb and cwb have begun to diverge and the importance of their differences is becoming increasingly apparent this paper identifies major emerging differences between the awb and cwb and explores potential explanations hypotheses for these dissimilarities a major point is that reforms in institutional design and legislative changes have given rise to emerging differences in key aspects of the marketing systems and performance

exchange rate shocks and the speed of trade price adjustment 1 introduction theoretical and empirical work in the international trade literature dealing with the relationship between exchange rate and trade prices has been dominated and guided by the static pass through and profit markup model see e g feinberg 1986 mann 1986 fisher 1989 hooper and mann 1989 knetter 1989 gagnon and knetter 1995 feenstra gagnon and knetter 1996 and lee 1997 the shortcoming of such models is well captured by william branson 1989 p 333 difference in adjustment response signals to me the need for a reconsideration of the theoretical framework for the analysis of the pass through question by now we should be thinking about optimizing price policy for investors and exporters who know that they face an exchange rate that follows some sort of stochastic process over time these differences call for a revision of pass through theory along the lines of time series analysis our explicit incorporation of profit maximizing firms facing adjustment costs develops the model introduced by krugman 1987 it transforms the traditional markup and pass through model to explain from first principles a dynamic markup and a price adjustment speed both depending on fundamental characteristics of the firms involved krugman 1989 concludes his paper on pricing to market by calling for further research on the adjustment cost model regarding the adjustment cost approach he states krugman 1989 p 44 it is still a speculative idea not grounded in solid empirical tests but it is a good story and if it is correct it has extremely important implications for economic policy the present paper provides the quantity adjustment cost approach that krugman calls for as such it complements the work of gagnon 1989 and kasa 1992 while gagnon and kasa employ quantity adjustment cost models with many of the same features as the model developed here they provide only approximate solutions and focus on a quite different set of issues gagnon examines the effect of exchange rate variability on trade volume kasa investigates the importance of mean reversion in exchange rates as an explanation for the pricing to market hypothesis in contrast our focus is on the relation between adjustment speeds and pass through thus our contribution relative to gagnon 1989 and kasa 1992 is that we provide the passthrough issue in a dynamic context with exact analytical solutions that relate the degree of passthrough to adjustment speeds and identify the determinants of commodity specific adjustment speeds in response to exchange rate shocks the remainder of the paper is organized as follows in section 2 we develop a partial equilibrium model taking exchange rates as given of the pricing policies of a profit maximizing firm competing in foreign markets and subject to a convex quantity adjustment cost section 3 develops testable implications directly from the model section 4 discusses the data and empirical methodology for preliminary two stage time series and cross sectional tests section 5 provides the tentative estimation and section 6 concludes 2 a simple partial equilibrium model consider a representative firm producing fox export that maximizes the expected discounted value of infinite horizon real profits the firm generates its revenue abroad in foreign currency it has no influence on the exchange rate may adjust its price at any point in time but is subject to a convex cost of quantity adjustment the firm maximizes where x is the exogenously given real exchange rate at time t we define x as the units of domestic currency per unit of foreign currency multiplied by the export destination country s price index and divided by the home country s price index instantaneous profits are discounted at a rate r which is specific to the firm this rate accounts for a standard risk premium inherent in the riskiness of the firm s activities

exchange rate pass through and currency invoicing implications for monetary integration in east asia exporter s price setting behaviour and currency invoicing play a key role in the literature on the new open economy macroeconom ics this paper estimates exchange rate pass through coefficients for the exports of four asean

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null