state dependent exchange rate pass through behavior abstract we estimate a bayesian threshold vector autoregression tvar to study the relationship between exchange rate pass through and economic activity in canada and mexico both the model comparison and the analysis of impulse response functions provide strong evidence of a nonlinear relationship and suggest that the exchange rate pass through is dependent on the state of the economy in particular the pass through coefficient is higher when the growth rate of output is large and this difference is statistically significant across regimes for both countries furthermore the results show that the degree of pass through is complete in the case of import prices and that it falls along the distribution chain of goods

the canadian border and the us dollar the impact of exchange rate changes on us retailers this paper provides a micro level investigation into the impact of changes in the uscanada nominal exchange rate on retailers in us regions lying close to the uscanada border using a large data set on product level retail prices and sales in the united states over a nine year period we explore the links between changes in exchange rates cross border travel and the price and quantity responses of us retailers this allows us to assess the importance of geography and distance in affecting the pass through of exchange rate changes into prices and quantities at the level of the consumer we develop a two stage theoretical model of cross border travel and industry equilibrium for retail sales at the border our empirical results accord well with the implications of the model

exchange rate pass through in developing and emerging markets a survey of conceptual methodological and policy issues and selected empirical findings abstractglobal integration has increased the international linkages of financial markets for emerging market countries a key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices known as exchange rate pass through erpt this article reviews the conceptual methodological and policy issues connected with erpt in emerging market and developing countries and critically surveys selected empirical studies a key contribution is to categorise and compare the heterogeneous methodologies used to extract erpt measures in the empirical literature single equation models and systems methods are contrasted frequent misspecifications that produce unreliable erpt estimates are highlighted the discerning policy maker needs to ascertain by which methods erpt measures were calculated the controls and restrictions applied and the time frame and stability of the estimates

fluctuations in the foreign exchange market how important are monetary policy shocks abstract we study the effects of u s monetary policy shocks on the bilateral exchange rate between the u s and each of the g7 countries we also estimate deviations from uncovered interest rate parity conditional on these shocks the analysis is based on a structural vector autoregression in which monetary policy shocks are identified through the conditional heteroscedasticity of the structural disturbances unlike earlier work in this area our empirical methodology avoids making arbitrary assumptions about the relevant policy indicator or transmission mechanism in order to achieve identification at the same time it allows us to assess the implications of imposing invalid identifying restrictions our results indicate that the nominal exchange rate exhibits delayed overshooting in response to a monetary expansion depreciating for roughly ten months before starting to appreciate the shock also leads to large and persistent departures from uncovered interest rate parity variance decomposition results indicate that monetary policy shocks account for a non trivial proportion of exchange rate fluctuations

pass through exchange rates and monetary policy this conference is devoted to examining the forces that lead to incomplete pass through of exchange rates into domestic prices my comments are divided into two separate parts first i will examine whether and to what extent monetary policy should be concerned with pass through second i will ask whether monetary policy should pay attention to exchange rates beyond concern about their effect on local nominal prices

exchange rate pass through and credit constraints abstract the macroeconomic evidence of the short term impact of exchange rates on exports and prices is notoriously weak this paper examines the microfoundations of this disconnect i study the response of firms export and price setting decisions to fluctuations in exchange rates and credit conditions using firm level survey data financially constrained firms pass through exchange rate changes to prices at almost twice the rate of unconstrained firms similarly their export volumes are about twice as sensitive to exchange rate fluctuations the effect of borrowing constraints is particularly strong during the recent financial crisis

durability and tests of the permanent income hypothesis using partially disaggregated consumption data since goods classified as non durable may in fact have a durable component random walk tests of the permanent income hypothesis using non durable data series may yield incorrect results this paper investigates this problem by first simulating a model of consumption to show the effects of durability on statistical tests of non durable consumption models and then by applying these tests to various disaggregated consumption series to determine the effect in practice the paper finds that there are significant differences in the behaviour of the series within the non durables and services catagories and that these differences may be related to durability the effect of this on standard tests of consumption is discussed

the role of expenditure switching in the global imbalance adjustment abstract in theory nominal exchange rate movements can lead to expenditure switching when they generate changes in the relative prices of goods across countries this paper explores whether the expenditure switching role of exchange rates has changed in the current episode of significant global imbalances we develop a multi sector two country model for the united states and the g6 countries with the rest of the world captured by exogenous price and demand shocks and estimate the model over two sub samples which cover the periods before and after the early 1990s our results indicate that both u s imports and exports have become much less responsive to exchange rate movements in recent years mainly due to changes in firms pricing behavior and global trade pattern these findings suggest that the exchange rate would have to move by a much larger amount now than in the 1970s and 1980s to reduce the u s trade deficit by a given amount

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

productivity gains from unemployment insurance this paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs and by encouraging rms to create those jobs we use a quantitative model to investigate whether this eect is comparable in magnitude to the standard moral hazard eects of unemployment insurance our model economy captures the behavior of the u s labor market for high school graduates quite well with unemployment insurance more generous than the current u s level unemployment would increase by a magnitude similar to the micro estimates but because the composition of jobs also changes total output and welfare would increase as well

real option value and random jumps application of a simulation model this article studies how sensitive real option valuations are to incorrect assumptions about the stochastic process followed by the state variables we design a valuation model which combines monte carlo simulation and dynamic programming and provides an appropriate framework to evaluate the effect of estimation errors on both the value of real options and their critical frontier although the model is flexible enough to value american type options contingent on a wide range of stochastic processes we focus on the analysis of the effect of stochastic jumps we apply our model to the valuation of an investment in the car parts industry documented in previous literature our results clearly show that underestimating this type of jumps might lead to substantial misjudgements in a firm s decision making processes for instance it may lead to profitable projects being rejected when jump diffusion is low or negative expanded net present value projects being accepted

do central banks respond to exchange rate movements some new evidence from structural estimation l auteure etudie l incidence des mouvements du taux de change sur la conduite de la politique monetaire en australie au canada en nouvelle zelande et au royaume uni elle elabore et estime un modele structurel d equilibre general a deux secteurs dans lequel les prix et les salaires sont rigides et les variations du taux de change se repercutent de facon limitee

the exchange rate in a dynamic optimizing business cycle model with nominal rigidities a quantitative investigation this paper studies a quantitative dynamic optimizing business cycle model of a small open economy with staggered price and wage setting the model exhibits exchange rate overshooting in response to money supply shocks the predicted variability of the nominal and especially of the real exchange rate is noticeably higher than in standard real business cycle models with flexible prices and wages a positive domestic money supply shock is predicted to lower the domestic interest rate raise gdp and trigger a depreciation of both the nominal and real exchange rate increases in domestic productivity and in the world interest rate are also predicted to induce a nominal and real exchange rate depreciation 2001 elsevier science b v all rights reserved

explaining business cycles a multiple shock approach abstract aiyagari 1992 and prescott 1986 1991 claim that a large fraction of the variance of united states quarterly detrended real gnp is attributable to an unobservable shock to total factor productivity this paper argues that the importance of a productivity shock in explaining the variance of output is fundamentally indeterminate any model that is in accord with the several time series that make up united states macroeconomic data must feature multiple shocks that are correlated at all leads and lags sorting out the separate effects of these various shocks on a single variable such as real gnp is impossible we illustrate this argument using a multiple shock version of the king plosser rebelo 1988 benchmark real business cycle model

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

an estimated canadian dsge model with nominal and real rigidities this paper develops a dynamic stochastic general equilibrium dgse model for the canadian economy and evaluates the real effects of monetary policy shocks to generate high and persistent real effects the model combines nominal frictions in the form of costly price adjustment with real rigidities modelled as convex costs of adjusting capital and employment

exchange rate pass through in emerging countries do the inflation environment monetary policy regime and central bank behavior matter abstract in this paper we estimate the exchange rate pass through erpt to import and consumer prices for a sample of 14 emerging countries over the 1994q1 2015q3 period to this end we augment the traditional bivariate relationship between the nominal effective exchange rate and inflation by accounting for monetary stability proxied by the inflation environment monetary policy regime and central bank behavior we show that both the level and volatility of inflation as well as adopting an inflation target or the transparency of monetary policy decisions clearly reduce erpt to consumer prices however uncertainty about domestic monetary policy seems less relevant in explaining the pass through to the price of imports

revisiting the exchange rate pass through a general equilibrium perspective abstract a large literature estimates the exchange rate pass through to prices erpt using reduced form approaches whose results are an important input for central banks we show two shortcomings of these empirical measures for monetary policy analysis which are quantitatively important and may lead to imprecise and biased inflation predictions first while the literature describes a single erpt which we will label unconditional there are different erpt conditional on each shock that hits the economy second these crucially depend on expected monetary policy so that empirical erpt measures should not be taken as given in evaluating policy actions we use a simple model of a small and open economy to understand the intuition behind these two critiques showing that these results seem to hold under many alternative specifications we then highlight the quantitative relevance of these distinctions using a large scale dsge model of a small open economy

real options as a component of the market value of stocks evidence from the spanish stock market this paper aims to examine how investors expectations about the value of a firm s real options are reflected in the price of its stocks if the real option approach is correct then the efficient

real options and demographic decisions empirical evidence from east and west germany iyer and velu 2006 have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman or a couple will choose to postpone childbirth and in particular to consider the role of uncertainty in this regard they have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth however they did not present empirical evidence since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions a positive insurance effect and a negative option value effect it is not easy to reject the theory on the basis of empirical analysis when one of these effects offsets the other we construct such a test for east and also west germany during that country s reunification which takes advantage of the fact that because of the country s strong welfare system the insurance effect should be dominated by the option value effect thereby suggesting that the net relationship should be negative the results provide rather strong support for the real options link especially for eastern germany

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

pricing to market currency invoicing and exchange rate pass through to producer prices abstract in this paper we examine producer prices to shed light on a number of outstanding issues in the understanding of price adjustment in the face of fluctuating exchange rates first we provide results that link two closely related literatures on firm characteristics and exchange rate pass through and currency of invoicing and pass through we show that there is significant within and across industry heterogeneity in the currency of invoice of exports of canadian goods to the u s and further in the degree of pass through to producer prices next we exploit the fact that we observe firms that sell the same good to both the domestic and export markets often in different currencies to difference out the common marginal cost component of the prices this allows us to relate markups to exchange rate movements and we find evidence that pricing to market is most prominent when firms are setting export prices in u s dollars

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

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

accounting for incomplete pass through recent theoretical work has suggested a number of potentially important factors in causing incomplete pass through of exchange rates to prices including markup adjustment local costs and barriers to price adjustment we empirically analyze the determinants of incomplete passthrough in the coee industry the observed pass through in this industry replicates key features of pass through documented in aggregate data prices respond sluggishly and incompletely to changes in costs we use microdata on sales and prices to uncover the role of markup adjustment local costs and barriers to price adjustment in determining incomplete pass through using a structural oligopoly model that nests all three potential factors the implied pricing model explains the main dynamic features of short and long run pass through local costs reduce long run pass through by a factor of 59 relative to a ces benchmark markup adjustment reduces pass through by an additional factor of 33 where the extent of markup adjustment depends on the estimated super elasticity of demand the estimated menu costs are small 0 23 of revenue and have a negligible eect on long run pass through but are quantitatively successful in explaining the delayed response of prices to costs we nd that delayed passthrough in the coee industry occurs almost entirely at the wholesale rather than the retail level

has exchange rate pass through really declined evidence from canada several empirical studies suggest that exchange rate pass through has declined in recent years among industrialized countries results for canada also indicate that import and consumer prices have become less responsive to exchange rate movements in the 1990s these findings are based on reduced form regressions that are typically motivated by partial equilibrium models of pricing this paper uses instead a structural general equilibrium approach to test the premise that exchange rate pass through has decreased in canada our approach consists in estimating a dynamic stochastic generalequilibrium model for canada over two sub samples which cover the periods before and after the adoption of inflation targeting by the bank of canada we then use impulseresponse analysis to assess the stability of exchange rate pass through across the two sub samples our results indicate that pass through to canadian import prices has been rather stable while pass through to canadian consumer prices has declined in recent years counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

putting the new open economy macroeconomics to a test abstract this paper explores one way to extend the new open economy macroeconomics in an empirical direction adapting maximum likelihood procedures it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer price stickiness seems to be an important element as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer the benchmark model does a better job explaining some variables than others in particular it does a poor job explaining exchange rate movements