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Research Recent Working Papers and Papers Recently Published
"The Law of One Price without the border: the role of
distance versus sticky prices," (with "Accounting
for persistence and volatility of good-level real exchange rates: the role of
sticky information," (with “The
Consumption Terms of Trade.” (with Martin Berka) ).
NBER Working Paper No. 15580. Forthcoming, in Commodity Prices and
Markets, East Asia Seminar on Economics, Volume 20, Takatoshi Ito and Andrew
K. Rose, editors, University of Chicago Press. "A
model of international cities: implications for real exchange rates,"
(with Hakan Yilmazkuday). NBER Working Paper No. 14834, April 2009. "What are the driving forces of international business
cycles?" (with Ayhan Kose and Christopher
Otrok). NBER Working Paper No. 14380, October 2008. Research
Narrative
Below I provide narratives of current and prior research organized by
topic. I have had the good fortune of
working with incredibly gifted scholars. Whether these individuals are
coauthors or not in the works described below, I have benefited from their
insights as well as from the comments and constructive critics of many other
economists. If you have work closely related to any of the themes below,
please make me aware.
Real
Exchange Rates
My recent work revisits two key
propositions in international macroeconomics and finance -- the
Law-of-One-Price and Purchasing Power Parity. The main novelty of my approach
is to collect micro-data on absolute prices of goods and use these data to
gain novel insights about key properties of international relative prices.
These projects are supported by NSF grants (SES-0524868, 2005-07,
SES-0136979, 2002-04) and all of the non-proprietary micro-data will be made
available to researchers on this site or through links from this site. Almost all existing literature studies of international
relative prices focus on relative PPP, the persistence and time series
variability of CPI-based real exchange rates. The consensus finding is that
the variance of real and nominal bilateral exchange rates are approximately
equal and that deviations of real exchange rates from their unconditional
sample means have half-lives of between three and five years. Less is known
about the absolute size of the deviations themselves or their patterns across
goods, bilateral locations or time periods. Collaborative work with Mototsugu
Shintani, Chris Telmer and Marios Zachariadis explores the microeconomic
structure of real exchange rates and LOP deviations using absolute retail
price data across cities, some of which are located across countries, some across
locations within a country. In joint work with Mototsugu Shintani and adjustment cannot replicate the time-series
properties of the Law of One Price deviations. We extend their sticky price
model by combining good-specific price adjustment with information stickiness
in the sense of Mankiw and Reis (2002). Our
framework allows for multiple cities within a country. Using a panel of
U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for
165 individual goods. Under a
reasonable assumption on the money growth process, we show that the model
matches the LOP persistence of the median good and accounts for approximately
one-half of its volatility when
information updates occur every 12 months. In joint work with Mototsugu Shintani
("Persistence in Law-of-One-Price
Deviations: Evidence from Micro-data", (Journal of Monetary
Economics, 2008), we study the dynamics of good-by-good real exchange rates
using a micro-panel of 270 goods prices drawn from major cities in 63
countries and 258 goods prices drawn from 13 major U.S. cities. We find the
half-life of deviations from the Law-of-One-Price for the average good is
about 19 months. The average half-life is very similar for cross-border pairs
in OECD to what we see across cities within the In "Understanding
European Real Exchange Rates," (with Chris I. Telmer, and Marios
Zachariadis), American Economic Review, June 2005, Vol. 95, No 23,
724-738" explores good-by-good deviations from the Law-of-One-Price for
over 5,000 goods and services between European Union countries for the years
1975, 1980, 1985 and 1990. We find that between most countries there are
roughly as many overpriced goods as there are underpriced goods so that PPP
holds to a good approximation, particularly after controlling for wealth
differences. These findings are robust across years, in spite of relatively
large movements in nominal exchange rates. Variation around the averages is
large but is found to be related to economically meaningful characteristics
of goods, namely: international tradeability and
the cost share of non-traded inputs into production. We measure both at
highly disaggregated levels. An earlier version of the paper used data on
product brands and found that product heterogeneity is at least as important
as geography in explaining relative price dispersion. Overall, our data
provide strong evidence that international goods markets are segmented, but (i) the evidence relies on absolute deviations from the
Law-of-One-Price, not deviations from PPP, (ii) some markets are much more
segmented than others, with the distinctions being consistent with economic
theory. To move to the site where the data and data appendix are posted, click
here. The companion paper, "Price
Dispersion: the Role of Borders, Distance and Location" (with Chris
I. Telmer, and Marios Zachariadis) uses the Economist Intelligence
micro-price survey to examine the relationship between the price dispersion
and income levels, distance and borders. Some earlier work in a similar vein focused
on the terms of trade, which while often correlated with the real exchange
rate is a very different object (both in terms of its empirical properties
and its theoretical role). In "Oil
Prices and the Terms of Trade" (Journal of International Economics,
2000) David K. Backus and I developed a three region, three good dynamic
model and use it to argue that much of the substantial variability of the
terms of trade and unstable correlation patterns of trade prices with output
and trade volumes can be accounted for by variation in oil prices and their
impact on world business cycles. In "Commodity Prices and the Terms of Trade"
(Review of International Economics, 2000). Prasad Bidarkota and I combine
data on individual commodity prices (e.g., petroleum, wheat, etc.) and the
national terms of trade and show that a few key international commodity
prices can account for much of the variation in the terms of trade of a
typical developing country. I have not published work on the
relationship between monetary variables and exchange rates (real or nominal),
but I view the linkages as important. I did have the pleasure of learning
something about "dollarization" at a conference on the topic
organized by the Federal Reserve Bank of International
Business Cycles
My publications in open economy
macroeconomics have challenged a number of conventional views of the extent
-- and national impact -- of international capital market integration. One of
the most stable empirical regularities observed in international
macroeconomic data is the fact that national savings and investment rates are
highly positively correlated. These observations were interpreted by many
economists as indicating a severe lack of international capital mobility
while at about the same time a consensus had emerged in the international
finance literature that the world was characterized by a high and increasing
degree of international capital market integration. The juxtaposition of
these views -- and the observations that motivated them -- was labeled the
Feldstein-Horioka puzzle. My co-authored
publication "Explaining
Saving/Investment Correlations," (with Marianne Baxter, American
Economic Review, 1993) was instrumental in resolving this puzzle by
demonstrating that positive savings and investment correlations are a robust
prediction of a model that assumed perfect financial market integration. Despite almost universal skepticism about
the assumption that individuals can hedge all idiosyncratic risks at zero
cost, it remains the predominant maintained assumption in general equilibrium
theory. Marianne Baxter and I examined the quantitative impact of alternative
assumptions about asset market structure in "Business Cycles and the Asset Structure of
Foreign Trade," (International Economic Review, 1995). We show that
in theory the asset market structure matters most when shocks to the economic
environment are very persistent (or contain unit roots). Given the difficulty
in distinguishing unit root from near unit root productivity it is not
obvious which modeling assumption is to be preferred, at least from the
perspective of business cycle statistics. The incomplete markets model does
allow one to study a broader set of issues than the complete markets model
such as the evolution of relative consumption across countries and the
dynamics of debt accumulation. The manuscript "On
International and National Dimensions of Risk Sharing," develops a
metric on which to base statements about the extent of risk sharing and
applies the metric in one of the first empirical studies to combine regional
and national consumption and production data. The results provide evidence
that financial market integration is imperfect at both the national and
international levels but the national capital market is more perfectly
integrated than the international capital market. My publication "Country
Size and Economic Fluctuations," (Review of International Economics,
1997) presents evidence that business cycles are more volatile in smaller
economies than in larger economies and develops a model to explain these
differences. The model shows that in a world of highly mobile capital
business cycle volatility will be highest in the smallest countries even when
population size is their only distinguishing economic feature. Thus greater
variability is intrinsic to small open economies even when the underlying
uncertainty that gives rise to the fluctuations is no different than that in
large open economies. Economic
History of the Interwar Period
I have four publications related to economic
history and tariffs. The paper "Tariffs
and Aggregate Economic Activity: Lessons From the Great Depression,"
(with James Kahn, Journal of Monetary Economics, 1997) evaluates the
contribution of the tariff war to the international economic depression of
the 1930's. The policy implications drawn from this article were that I have one paper and one book review that
focus more on economic history. The article "Sources
of Variation in Real Tariff Rates: The United States, 1900 - 1940,"
(American Economic Review, 1994) shows that much of the variation in U.S.
tariff rates during the interwar period was induced by the impact of price
level fluctuations on nominally rigid specific duties rather than legislative
changes such as those attributed to the Smoot-Hawley Tariff Act of 1930.
Readers interested in the intellectual history of the commercial policy date
will find the book: "Against the Tide: An
Intellectual History of Free Trade," by Douglas Irwin (the link is
to my Southern Economic Journal review of his book). |
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