Procyclical prices: a demi-myth?

This paper critically reevaluates recent claims that the postwar U.S. price level exhibits countercyclicality. While overall countercyclicality is confirmed, temporal disaggregation suggests a shift from pro- to countercyclicality in the early 1970s. Furthermore, the countercyclicality is markedly more pronounced for negative than for positive output innovations. The evidence thus casts doubt on single-source business cycle explanations.Prices ; Business cycles

The savings collapse during the transition in Eastern Europe

The authors assess the presence and extent of involuntary savings by comparing the predicted savings rates of market economies with those of the pre-transition economies. On balance, predicted savings rates fell short of actual savings rates, especially for the former Soviet Union and the Baltics -- providing some support for the notion of excessive pre-transition savings. Comparing the savings behavior of market economies and transition economies, they found substantial similarities, except for a negative link between savings and GDP growth. As the fastest-growing transition economies are at the bottom of the adjustment J-curve, the finding is consistent with consumption smoothing. Finally, they explored whether differences in the extent of economic liberalization affected savings rates in the cross-section of transition economies. They found that liberalization is associated with lower savings, with a one-year lag. To the extent that liberalization is perceived as an indicator of likely future growth, this behavior is consistent with smoothing in the face of a J-curve change in output.Insurance Law,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Insurance&Risk Mitigation,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Insurance&Risk Mitigation,Rural Poverty Reduction

The Law of One Price - A Case Study

We use retail transaction prices for a multinational retailer to examine the extent and permanence of violations of the law of one price (LOOP). For identical products, we find typical deviations of twenty to fifty percent, though there is muted evidence for convergence over time. Such differences might be due to differences in local costs. If so, relative prices of similar products (round versus square mirrors) should be equal across countries. In fact, relative prices vary significantly across very similar goods within a product group; indeed, the ordering of common currency prices often differs for similar products. The finding suggests that differences in local distribution costs, local taxes, and probably tariffs do not explain the price pattern, leaving strategic pricing or other factors resulting in varying markups as alternative explanations for the observed divergences.Law of one price, arbitrage, exchange rate passthrough, price setting

Geographical and Sectoral Shocks in the U.S. Business Cycle

We examine whether the aggregate U.S. business cycle is driven mainly by geographical" shocks (affecting all sectors within a state), or by sectoral shocks (affecting the same sector in all" states). We find that, at the level of an individual sector in an individual state growth are driven by the sector, not by the state: textiles in Texas moves more with textiles" elsewhere in the U.S. than with other sectors in Texas. But shocks to sector growth rates exhibit" a lower correlation across sectors compared to the correlation of shocks to state growth rates" across states. As a result, geographical shocks gain greater importance at higher levels of" aggregation. Finally, we find that changes in the volatility of the aggregate U.S. business cycle" reflect, to a roughly comparable degree, both changes in the volatility of state and sector business" cycles, and changes in their correlation across sectors and states.

Pricing in International Markets: Lessons From The Economist

Export firms are often assumed to stabilize destination market prices in the face of nominal exchange rate changes in order to protect market share. We show that standard tests of such pricing to market fail to discriminate against the alternative hypothesis of menu costs. As a case study, we examine the characteristics and determinants of changes in the cover prices of The Economist magazine in a sample of twelve countries over the floating rate period. We find that, while the law of one price fails, there is no evidence of systematic attempts to offset nominal exchange rate movements. Instead, the findings are consistent with menu cost driven pricing behavior.

Household savings in transition economies

During the transition from central planning to market economies now under way in Eastern Europe, output levels first collapsed by 40 to 50 percent in most countries, then staged a modest recovery in the last two years. Longer-term revival of growth requires a resumption of investment and thus, realistically, of domestic savings. To explore the determinants of household savings rates in transition economies, the authors studies matching household surveys for three Central European economies: Bulgaria, Hungary, and Poland. They find that savings rates strongly increase with relative income, suggesting that increasing income inequality may play a role in determining savings rates. Savings rates are significantly higher for households that do not own their homes or that own few of the standard consumer durables-possibly because, with no retail credit or mortgage markets, households must save to purchase houses and durables. The influence of demographic factors broadly matches earlier findings for developing countries. Perhaps surprisingly, variables associated with the household's position in the transition process-including either sector of employment (public or private) or form of employment-do not play a significant role in determining savings rates.Environmental Economics&Policies,Services&Transfers to Poor,Economic Theory&Research,Banks&Banking Reform,Payment Systems&Infrastructure,Safety Nets and Transfers,Rural Poverty Reduction,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research

Patterns of Intra- and Inter-State Trade

Recent studies suggest that intranational trade is "excessive' compared to international trade. An intuitive explanation for this home bias is provided by national trade barriers. A dataset of trade between US states, however, reveals that home bias extends to subnational units. The data suggest three additional stylized facts. First, shipment distances are shorter for intermediate than for final goods. Second, states located close to each other tend to have similar production patterns. Third, trade flows are higher among states with similar production patterns. The stylized facts are consistent with a complementary explanation of home bias resulting from a spatial clustering of production driven by natural and created comparative advantage.

Anti-Tax Revolutions and Symbolic Prosecutions

We extend the traditional tax evasion model to take account of the interaction between individual compliance decisions and perceived detection probabilities. The generalization provides a rationale for "anti-tax revolutions" characterized by a sudden shift of a significant fraction of the tax paying citizenry from compliance to tax evasion with unchanged fundamentals and monitoring rules. We establish, with an application to hyperinflation, the possibility of multiple compliance equilibria with lock-in effects. Finally, we demonstrate the potential cost effectiveness of "symbolic prosecution" as an equilibrium shifting device in preference to permanent changes the monitoring process.

Is Real Exchange Rate Mean Reversion Caused By Arbitrage?

The presence of purchasing power parity is often attributed to the exploitation of arbitrage opportunities in goods markets. We examine this presumption for a 1960-1996 monthly panel of bilateral exchange rates and trade for the G7 countries. The data exhibit strong mean reversion. However, despite allowing for substantial latitude in specification, we find very limited support for a simple arbitrage view. The deviations of real exchange rates and trade from trend are virtually uncorrelated. Large trade deviations neither trigger nor accelerate mean reversion. Large real exchange rate deviations do not lead to systematic changes in trade. Constricting the sample to eighteen-month episodes of notable mean reversion - large persistent depreciations starting from overvalued levels - does not reveal any systematic relation either. The timing of these episodes does point, however, to an alternative explanation of mean reversion: the majority of episodes occur during periods of nominal exchange rate regime instability, pointing towards exchange rate policy or speculation as the immediate cause of mean reversion. Both may, of course, reflect expectations of trade responses, opening an indirect role for incipient arbitrage in explaining mean reversion.