Rebalancing in the eurozone : effects on the terms of trade, the real exchange rate and welfare

This thesis sets up and solves an intertemporal general equilibrium model of regional rebalancing. The world consists of two regions, each endowed with two goods -one tradable and one nontradable. The model is solved in closedform which makes the rebalancing process transparent. In particular, first order difference equations governing the price paths are established. Another benefit of the closed-form solution is that it allows for global analysis, and not just locally around the equilibrium. Further, the price of nontraded goods outside equilibrium are derived and the transfer effect is quantified. By linearization, the thesis obtains a rule of thumb for the misalignment in nontraded goods’ prices out of equilibrium. The thesis calculates the welfare costs associated with a suboptimal consumption allocation. Further, the thesis simulates the rebalancing of regional imbalances between the core and periphery in the Eurozone. The model predicts that current consumption is likely to deviate from the optimal allocation. The rebalancing leads to significant inflation differences between the core and the periphery. Finally, the welfare costs from the suboptimal consumption allocation seem to be relatively small. However, the costs differ significantly between the regions

Unemployment shocks, cyclical prices and shopping behavior

We use rich data from Norway’s biggest grocery chain to show how households and grocery stores react to changing economic conditions. We exploit the regional nature of a recession following the drop in the oil price in 2014 and find that when the local unemployment rate increases, households shift toward cheaper stores, and toward bulk and private label products. Households also buy more on sale and the average store level prices decreases. We then derive a novel decomposition of the changes in the prices households pay for products a in large number of product categories. The decomposition allows us to measure the relative importance of the different sources of price cyclicality. We find that a significant part of the cyclicality is explained by grocery stores responding to economic downturns by lowering their prices. Still, changes in household behavior are the main driver of price cyclicality, primarily through increased willingness to take advantage of sales

Unemployment shocks, cyclical prices and shopping behavior

We use rich data from Norway’s biggest grocery chain to show how households and grocery stores react to changing economic conditions. We exploit the regional nature of a recession following the drop in the oil price in 2014 and find that when the local unemployment rate increases, households shift toward cheaper stores, and toward bulk and private label products. Households also buy more on sale and the average store level prices decreases. We then derive a novel decomposition of the changes in the prices households pay for products a in large number of product categories. The decomposition allows us to measure the relative importance of the different sources of price cyclicality. We find that a significant part of the cyclicality is explained by grocery stores responding to economic downturns by lowering their prices. Still, changes in household behavior are the main driver of price cyclicality, primarily through increased willingness to take advantage of sales