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Begin New Search Topic Emerging Markets Publishing Institution Board of Governors of the Federal Reserve System

31. Macroeconomics of International Price Discrimination

Author:
Giancarlo Corsetti and Luca Dedola
Publication Date:
07-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper builds a baseline two-country model of real and monetary transmission under optimal international price discrimination. Distributing traded goods to consumers requires nontradables; because of distributive trade, the price elasticity of export demand depends on the exchange rate. Profit-maximizing monopolistic firms drive a wedge between wholesale and retail prices across countries. This entails possibly large deviations from the law of one price and incomplete pass-through on import prices. Yet, consistent with expenditure-switching effects, a nominal depreciation generally worsens the terms of trade. Moreover, the exchange rate and the terms of trade can be more volatile than fundamentals. For plausible ranges of the distribution margin, there can be multiple steady states, whereas large differences in nominal and real exchange rates across equilibria translate into small differences in consumption, employment and the price level. Finally, we show that with competitive goods markets international policy cooperation is redundant even under financial autarky.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

32. Identifying VARs Based on High Frequency Futures Data

Author:
Jonathan H. Wright, Jon Faust, and Eric Swanson
Publication Date:
02-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using the prices of federal funds futures contracts, we measure the impact of the surprise component of Federal Reserve policy decisions on the expected future trajectory of interest rates. We show how this information can be used to identify the effects of a monetary policy shock in a standard monetary policy VAR. This constitutes an alternative approach to identification that is quite different, and, we would argue, more plausible, than the conventional short-run restrictions. We find that the usual recursive identification of the model is rejected, but we nevertheless agree with the literature's conclusion that only a small fraction of the variance of output can be attributed to monetary policy shocks.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

33. Inflation Targeting and Nominal Income Growth Targeting: When and Why Are They Suboptimal?

Author:
Dale W. Henderson and Jinill Kim
Publication Date:
02-2002
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We derive optimal monetary stabilization rules and compare them to simple rules under both full and partial information. The nominal interest rate is the instrument of monetary policy. Special attention is devoted to inflation targeting and nominal-income-growth targeting. We use an optimizing-agent model of a closed economy which features monopolistic competition in both product and labor markets. A stabilization problem exists because there are one-period nominal contracts, either for wages alone or for both wages and prices, and three shocks that are unknown when contracts are signed. In order to highlight basic theoretical results, we deliberately keep our model simple enough that we can obtain exact solutions. Optimal rules maximize the expected utility of the representative agent subject to the information set of the policymaker. A key result, possibly surprising at first, is that even with monopolistic competition, the optimal full information policy makes the economy mimic the hypothetical equilibrium with flexible prices and wages. We explain why strict versions of inflation targeting, nominal income growth targeting, and other such simple rules are suboptimal under both full and partial information and derive flexible versions that are optimal under certain partial information assumptions. Nominal income growth targeting dominates inflation targeting for plausible parameter values.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

34. The Use of Cyclical Indicators in Estimating the Output Gap in Japan

Author:
Jane Haltmaier
Publication Date:
04-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The paper uses capital and labor utilization rates to derive estimates of the Japanese output gap and potential output. Two techniques are used. The first uses the cyclical indicators to adjust potential output estimates derived from a Hodrick-Prescott filter over the most recent period when such estimates are generally considered to be unreliable. The second estimates equilibrium levels of the cyclical indicators and uses an Okun's Law-type relationship to derive output gaps and potential output. The second method is also applied to the components of potential output to derive a third estimate. These methods suggest that the current Japanese output gap is considerably larger than a simple Hodrick-Prescott filter would suggest.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States and Japan

35. Home Bias and High Turnover Reconsidered

Author:
Francis E. Warnock
Publication Date:
04-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Tesar and Werner (1995) finding of very high turnover rates on foreign equity portfolios is based on an underestimation of cross-border equity positions. Foreign turnover rates calculated using information from comprehensive benchmark surveys on cross-border holdings are much lower than previously reported and comparable to domestic turnover rates. However, the basic intuition from the Tesar-Werner study, that transaction costs do not help explain the observed home bias, is confirmed using data on transaction costs in 41 markets.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

36. A Retrospective on J. Denis Sargan and His Contributions to Econometrics

Author:
Neil R. Ericsson, Esfandiar Maasoumi, and Grayham E. Mizon
Publication Date:
03-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This retrospective provides a biographical history of Denis Sargan's career and reviews his contributions to econometrics, emphasizing the breadth of his work in both theoretical and applied econometrics. We include a complete bibliography for Denis and a list of PhD theses that he supervised--students were a substantive facet of his professional life. Finally, two of Denis's previously unpublished manuscripts on model building now appear in print.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

37. Border Effects within the NAFTA Countries

Author:
John H. Rogers and Hayden P. Smith
Publication Date:
03-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using consumer price indexes from cities in the U.S., Canada and Mexico, we estimate the "border effect" on U.S.-Mexican relative prices and find that it is nearly an order of magnitude larger than for U.S.-Canadian prices. However, during a very stable sub-period in Mexico (May 1988 to November 1994), the "width" of the U.S.-Mexican border falls dramatically and becomes approximately equal to the U.S.-Canadian border. We then show that when consideration is limited to cities lying geographically very close to the U.S.-Mexican border--San Diego, Los Angeles, Houston, Dallas, Tijuana, Mexicali, Juarez, and Matamoros--the border width falls compared to that estimated with the full sample of U.S. and Mexican cities, but falls only very slightly. We also present evidence that the border effect in U.S.-Mexican prices is not primarily due to the border effect in U.S.-Mexican wages. Finally, using the prices of 276 highly dis-aggregated goods and services, we estimate the variability of relative prices of different items within Mexican cities. This measure of relative price variability declines during the stable peso sub-period, but by less than the decline in nominal and real (i.e., CPI-based) exchange rate variability. Our results are strong evidence of a "nominal border effect" in relative prices within NAFTA, but also indicate that real side influences are important.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States, Canada, North America, and Mexico

38. Price Level Convergence, Relative Prices, and Inflation in Europe

Author:
John H. Rogers
Publication Date:
03-2001
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs "one-size-fits-all" monetary policy. I present direct evidence on price level convergence in Europe, using a unique data set, and then investigate how much of the recent divergence of national inflation rates can be explained by price level convergence. I show that between 1990 and 1999 prices did become less dispersed in the euro area. Convergence is especially evident for traded goods, and more in the first half of the 1990s than the second half. By some measures, traded goods price dispersion across the euro area is now close to that across U.S. cities. Despite an on-going process of convergence, deviations from the law of one price are large. Finally, I find a statistically-significant and robust negative relationship between the 1999 price level and 2000 inflation rate in Europe, and that the contribution of price level convergence to explaining inflation differentials is often quite important economically. Still, factors other than price convergence explain most of the cross-country inflation differences.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
Europe