INFLATION AND PRICE DISPERSION IN EQUITY MARKETS AND IN GOODS AND SERVICES MARKETS

An empirical link between inflation and price dispersion has been well established in goods and services markets – both across time periods and across countries. However, the economic interpretation of this link has been typically frustrated by the observational equivalence of the predictions of the prominent theories. This prompts us to take a new approach. Specifically, we examine the link between inflation and price dispersion in an empirical setting patently lacking the market characteristics central to these theories (i.e., menu costs, or relative/aggregate confusion). In particular, we benchmark the inflation-dispersion link in goods and services markets with a matched panel of equity market prices. Surprisingly, we find that a link – comparable to that found in markets for goods and services – does exist in the equity market. Moreover, we find that our results are not due to a potentially important, but generally overlooked, bias that is present in many existing studies. Our results suggest that the debate over the factors responsible for the inflation/price dispersion link should be broadened to account for the asset market links we document.relative price variability, stock markets, goods markets, inflation

What Macroeconomic Conditions Best Explain Southeast Asian Capital Flows?

The paper examines the capital flows of seven Southeast Asian emerging economies over the last decade and a half. It first evaluates the role of economic conditions within a country itself, including the country's domestic financial conditions and the openness of its financial markets to international capital flows. Then, the role of the counties' own domestic conditions is compared with regional influences and with the importance of macroeconomic conditions elsewhere, such as in Europe, and in the largest single recipient of the outflows, the United States. Key results include: (1) domestic capital market conditions are the best predictors (among the variables that we examine) of the capital flows of these countries; (2) capital market openness is of little use in predicting changes in capital flows; and, (3) while the macroeconomic conditions of the United States are strong predictors of subsequent GDP growth in the region, they are not, by themselves, good predictors of the region's capital flows.Global Imbalances, Financial Market Capitalization, Productivity

Exchange Rate Pegs and Foreign Exchange Exposure in East Asia

This paper shows that many East Asian firms are significantly exposed to foreign exchange risk. Their exposure appears to be much more widespread than is typical for the large, western industrialized economies. The paper also shows that exchange rate pegs appear to do little to alleviate this widespread exposure against currencies other than the peg. The East Asian firms studied here are most exposed to fluctuations in the U.S. dollar, and the mark and yen are important in a few countries. The extent of their exchange rate exposure has varied, but not diminished, over the last decade. The most widespread exchange rate sensitivity (not just the most exchange rate fluctuation) occurred during the Asian Crisis period; this is evident even after accounting for the local macroeconomic conditions that affect aggregate local returns.foreign exchange exposure, exchange rate pegs, east asia

Is There a Beijing Consensus on International Macroeconomic Policy

Some commentators have claimed that there is a growing Beijing Consensus among emerging and developing economies concerning the merits of ChinaÕs economic policies. Within an analytical framework provided by the well known international trilemma, this paper investigates the empirical evidence concerning this claim with specific reference to the adoption of international macroeconomic policies. We document ChinaÕs high degree of exchange rate stability and monetary independence and low degree of financial openness. We then find that there are substantial differences between what China does and what is done in other emerging and developing economies. While we discover some regional and inter-temporal variations, there seems to be little or no support for the existence of a Beijing Consensus on international macroeconomic pol- icy. The proximity of ChinaÕs policies to those in the rest of the developing world may increase in the future; but this is may reflect changes in China rather than elsewhere.Trilemma, China

Trilemma Stability and International Macroeconomic Archetypes in Developing Economies

In this paper, we examine the stability of international macroeconomic policies of developing countries in the post-Bretton Woods period. We use the simple geometry of the classic, open-economy trilemma to construct a new, univariate measure of inter- national macroeconomic policy stability, and to characterize international macroeconomic arrangements in terms of their semblance to definitive policy archetypes; and, we use the trilemma constraint to provide a new gauge of monetary sovereignty. Using these measures, we find that the greatest international macroeconomic stability among developing economies exists where there are capital controls and limited exchange rate flexibility. The least stable policies occur in the economies with flexible exchange rates and open financial markets. We also find that official holdings of foreign exchange re- serves seem to be weakly linked to greater policy stability, and their link is further weakened where financial markets are open.Trilemma, Foreign Exchange Rate Regimes, International Reserves, Financial Openness, Fear of Floating, Monetary Sovereignty

International capital flows : do short-term investment and direct investment differ?

The authors examine the behavior of four major components of international capital flows in 15 developing and industrial countries. Striking differences in the behavior of the component flows arise in general specifications that allow the flows to interact. For example, the behavior of international short-term investment appears to be sensitive to changes in all the other types of international capital flows, including direct investment, but direct investment appears to be insensitive to such changes. In finding that short-term investment appears to respond more dramatically to disturbances in other capital flows and in other countries than does direct investment, the authors provide empirical support for the conventional notion that short-term investment is"hot money"and direct investment is not.International Terrorism&Counterterrorism,Economic Theory&Research,Payment Systems&Infrastructure,Fiscal&Monetary Policy,Capital Markets and Capital Flows,Financial Intermediation,International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Capital Flows

The Exchange Rate Exposure of U.S. and Japanese Banking Institutions

In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.Foreign Exchange Risk, Banking, Market Risk

GDP Synchronicity and Risk Sharing Channels in a Monetary Union: Blue State and Red States

We examine state GDP comovement and consumption risk-sharing channels within the United States as a whole, and among states whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We document three facts: (1) state GDP growth is asynchronous, and Blue and Red states are particularly out of sync; (2) at the same time, interstate consumption risk-sharing is very high{it is high even across the political divide, and it is high even where the role of fiscal flows is minimal; and (3) the channels of risk sharing across Blue, Red, and Swing states are quite different

Understanding Real Exchange Rate Movements with Trade in Intermediate Products

We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter

Understanding Real Exchange Rate Movements with Trade in Intermediate Products

We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter