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Begin New Search Publishing Institution Board of Governors of the Federal Reserve System Author John H. Rogers

1. Border Prices and Retail Prices

Author:
David Berger, Jon Faust, John H. Rogers, and Kai Steverson
Publication Date:
04-2009
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We analyze retail prices and at-the-dock (import) prices of speciÖc items in the Bureau of Labor Statisticsí(BLS) CPI and IPP databases, using both databases simultaneously to identify items that are identical in description at the dock and when sold at retail. This identiÖcation allows us to measure the distribution wedge associated with bringing traded goods from the point of entry into the United States to their retail outlet. We Önd that overall U.S. distribution wedges are 50-70%, around 10 to 20 percentage points higher than that reported in the literature. We discuss the implications of this for measuring the size of the "pure" tradeables sector, exchange rate pass-through, and real exchange rate determination. We Önd that distribution wedges are very stable over time but there is considerable variation across items. There is some variation across the country of origin for the imported item, for our major trading partners, but not as much as the cross-item variation. We also investigate the determinants of distribution wedges, Önding that wedges do not vary systematically with exchange rates, but are related to other features of the micro data.
Topic:
Economics and Exchange Rate Policy
Political Geography:
Global Focus

2. Exchange Rates and Fundamentals: A Generalization

Author:
James M. Nason and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian--U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar--U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks.
Topic:
Economics, Finance, and Exchange Rate Policy
Political Geography:
Global Focus

3. Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

Author:
Charles Engel and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.
Topic:
Economics, Finance, Interest Rates, and Credit
Political Geography:
Global Focus

4. The U.S. Current Account Deficit and the Expected Share of World Output

Author:
John H. Rogers and Charles Engel
Publication Date:
04-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which a country's current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries – more modest than the growth over the past 20 years – the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. Two empirical analyses of current account sustainability using actual data suggest that the U.S. is not keeping on a long-run sustainable path. One is a direct test of our model, which finds that the dynamics of the U.S. current account – the increasing deficits over the past decade – are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender – though not the only legitimate contender – for explaining the U.S. current account deficit.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
United States

5. The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects

Author:
John H. Rogers and James M. Nason
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the “usual suspects” of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We con firm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a “canonical” RBC model moves closest to the data when it features exogenous world real interest rate shocks.
Topic:
Conflict Resolution, International Relations, Economics, and International Trade and Finance

6. The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements

Author:
John H. Rogers, Jonathan H. Wright, Jon Faust, and Shing-Yi B. Wang
Publication Date:
10-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.
Topic:
International Relations, Economics, Government, and International Trade and Finance
Political Geography:
United States

7. Revisiting the Border: An Assessment of the Law of One Price Using Very Disaggregated Consumer Price Data

Author:
John H. Rogers, Shing-Yi B. Wang, and Charles M. Engels
Publication Date:
09-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We reexamine the evidence for border effects in deviations from the law of one price, using data for consumer prices from Canadian and U.S. cities. The study parallels Engel and Rogers (1996), except that this study uses actual price data rather than price index data. We find evidence of border effects both in the levels of prices and the percentage change in prices. Even accounting for distance between cities and relative population sizes, we find that the absolute difference between prices in the U.S. and Canada in our data (annual from 1990 to 2002) is greater than seven percent. This difference exists among tradables and nontradables, though for some categories of tradables (clothing and durables) the difference is smaller. The findings are similar for annual changes, though the magnitude is smaller: the border accounts for a difference in 1.5 percent in annual (log) price changes. Relative population sizes and distance are helpful in explaining price level differences (between Canadian and U.S. cities) for traded goods, but are less helpful in explaining price level differences for nontraded goods or for accounting for differences in price changes for either traded or nontraded goods.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
Canada and North America

8. Monetary Union, Price Level Convergence, and Inflation: How Close is Europe to the United States?

Author:
John H. Rogers
Publication Date:
10-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In light of 50 years of economic policies designed to integrate Europe -- culminating in the elimination of euro zone national currencies in early 2002 -- and a vast academic literature on international economic integration, it is of interest to assess how far European integration has come in practice. Using a unique data set, I document the pattern of price dispersion across European and U.S. cities from 1990 to 2001. I find a striking decline in dispersion for traded goods prices in Europe, most of which took place between 1991 and 1994. The level of traded goods price dispersion in the euro area is now quite close to that of the United States. A decline in dispersion of non-tradeables prices in Europe has also taken place, but to a smaller extent. For U.S. cities, there is no evidence of a decline in price dispersion, even for tradeables. I examine several possible explanations for the decline in European price dispersion, including harmonization of tax rates, convergence of incomes and labor costs, liberalization of trade and factor markets, and increased coherence of monetary policy. I also investigate how much of the variation in national inflation rates in Europe can be explained by price level convergence. Finally, after showing that prices in likely next-round entrants into the euro zone are well below prices in Western Europe, I discuss the potential inflationary consequences of accession into monetary union for Eastern Europe.
Topic:
Economics and International Trade and Finance
Political Geography:
United States and Europe

9. Identifying the Effects of Monetary Policy Shocks on Exchange Rates Using High Frequency Data

Author:
John H. Rogers, Jonathan H. Wright, Jon Faust, and Eric Swanson
Publication Date:
10-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper proposes a new approach to identifying the effects of monetary policy shocks in an international vector autoregression. Using high-frequency data on the prices of Fed Funds futures contracts, we measure the impact of the surprise component of the FOMC-day Federal Reserve policy decision on financial variables, such as the exchange rate and the foreign interest rate. We show how this information can be used to achieve identification without having to make the usual strong assumption of a recursive ordering.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

10. An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules

Author:
John H. Rogers, Jonathan H. Wright, and Jon Faust
Publication Date:
08-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States