Using an extensive micro-price panel, we find a positive cross-sectional relationship between LOP persistence and the distribution margin, which we measure using sectoral U.S. data, as suggested by ...the classical dichotomy. The median level of persistence (across goods) is low, and there is no evidence of a border effect: the half-life of a deviation is about 19 months across OECD cities and just 1 month lower across cities in the U.S. Aggregating our micro-data using a variety of weighting methods shows PPP persistence to be in the range of 1–2 years, over the 1990–2005 period. These results challenge three widely held views: (i) the classical dichotomy is irrelevant; (ii) high persistence is a robust feature of aggregate real exchange rates; and (iii) border crossings necessarily generate greater real exchange rate persistence.
A unique panel of retail prices spanning 123 cities in 79 countries from 1990 to 2005 is used to uncover the novel properties of long-run international price dispersion. At the PPP level, almost all ...of price dispersion is attributed to unskilled wage dispersion. At the level of individual goods and services, the average contribution of these wages is significantly reduced, reflecting that good-specific sources of price dispersion, such as trade costs and good-specific markups, tend to average out across goods. At the LOP level, borders and distance contribute about equally to price dispersion that is rising in the distribution share.
•Long-run price dispersion is investigated at the good level.•Harrod–Balassa–Samuelson holds at the PPP level.•Borders and distance contribute about equally to price dispersion at the LOP level.•Long-run price dispersion is rising in the distribution share.
On What States Do Prices Depend? Answers From Ecuador BENEDICT, CRAIG; CRUCINI, MARIO J.; LANDRY, ANTHONY
Journal of money, credit and banking,
December 2020, 2020-12-00, 20201201, Letnik:
52, Številka:
8
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The frequency of retail price adjustment differs across goods, both in low inflationary environments, such has the United States, and in high inflationary environments typical of less developed ...countries. We develop a multishock menu cost model in which retailers intermediate trade between producers and consumers. Since the cost share of intermediate inputs varies across goods, the model produces a cross‐sectional distribution of frequency of price adjustment even though firms face a common menu cost. The model is evaluated using a rich micropanel of retail prices in Ecuador in a period spanning a financial crisis and subsequent dollarization.
One of the statements of purpose of the American Recovery and Reinvestment Act (ARRA) was “to assist those most impacted by the recession.” To consider this facet, the grants-in-aid portion of the ...ARRA is assessed from the perspective of fiscal federalism. We estimate a trend-stationary autoregressive model of county-level wage income dynamics where each county is subject to a common shock (with county-specific factor loading) and an idiosyncratic shock. We then ask if counties that experienced larger negative wage income shocks during the Great Contraction subsequently received more transfers per capita in the form of grants-in-aid. The fact that the negative business cycle shocks pre-date the passage of the ARRA and subsequent disbursements allows identification of the risk-pooling channel of the grants before fiscal multiplier effects confound these two channels. We find statistically significant and economically large risk-pooling effects.
•The classical dichotomy predicts that non-traded goods accounts for the variance in RER.•In stark contrast, Engel (1999) claimed the opposite: that traded goods accounted for the variance.•Using ...micro-data, our work re-establishes the conceptual value of the classical dichotomy.•Our work shows the role of aggregation, expenditure weighting and assignment of covariance terms.
The classical dichotomy predicts that all of the time-series variance in the aggregate real exchange rate is accounted for by non-traded goods in the consumer price index (CPI) basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) claimed the opposite: that traded goods accounted for all of the variance. Using micro-data and recognizing that final good prices include both the cost of the goods themselves and local, non-traded inputs into retail such as labor and retail space, our work re-establishes the conceptual value of the classical dichotomy. We also carefully show the role of aggregation, consumption expenditure weighting and assignment of covariance terms in the differences between our findings and those of Engel.
US micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between US cities. A standard two-city ...equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance. We show that if there is imperfect information about the state of nominal aggregate demand, with noisy signals that are asymmetric across cities, then distance and persistence will be positively correlated. Our main results are shown to be robust to the introduction of sticky prices and multiple cities.
•The persistence of the law of one price deviations across US cities is examined.•The persistence is rising in the distance between US cities.•We introduce noisy signals into the standard two-city equilibrium model.•Persistence and distance can be positively correlated in a noisy information model.
We examine the driving forces of G-7 business cycles. We decompose national business cycles into common and nation-specific components using a dynamic factor model. We also do this for driving ...variables found in business cycle models: productivity; measures of fiscal and monetary policy; the terms of trade and oil prices. We find a large common factor in oil prices, productivity, and the terms of trade. Productivity is the main driving force, with other drivers isolated to particular nations or sub-periods. Along these lines, we document shifts in the correlation of the common component of each driver with the overall G-7 cycle.
The elasticity of substitution between home and foreign goods is one of the most important parameters in international economics. The international macro literature, which is primarily concerned with ...short-run business cycle fluctuations, assigns a low value to this parameter. The international trade literature, which is more concerned with long-run changes in trade flows following a change in relative prices, assigns a high value to this parameter. This paper constructs a model where this discrepancy between the short- and long-run elasticities is due to frictions in distribution. Goods need to be combined with a local non-traded input, distribution capital, which is good specific. Home and foreign goods may be close substitutes, but if distribution capital is slow to adjust then agents cannot shift their consumption in the short run following a change in relative prices, and home and foreign goods appear as poor substitutes in the short run. In the long run this distribution capital can be reallocated, and agents can shift their purchases following a change in relative prices. Thus the observed substitutability gets larger as time passes.
•Trade models estimate that home and foreign goods are highly substitutable•International macro model need to assume a low elasticity of substitution•Frictions in distribution can help resolve these two literatures•Distribution bottlenecks slow quantity adjustment following price changes•In the short run distribution frictions make home a foreign goods poor substitutes
Understanding European Real Exchange Rates Crucini, Mario J.; Telmer, Chris I.; Zachariadis, Marios
The American economic review,
06/2005, Letnik:
95, Številka:
3
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We study good-by-good deviations from the Law-of-One-Price (LOP) for over 1,800 retail goods and services between all European Union (EU) countries for the years 1975, 1980, 1985, and 1990. We find ...that for each of these years, after we control for differences in income and value-added tax (VAT) rates, there are roughly as many overpriced goods as there are underpriced goods between any two EU countries. We also find that good-by-good measures of cross-sectional price dispersion are negatively related to the tradeability of the good, and positively related to the share of non-traded inputs required to produce the good. We argue that these observations are consistent with a model in which retail goods are produced by combining a traded input with a non-traded input.