Firms, international money and prices: a survey of the literature

Sluggish price adjustments with respect to exchange rate shocks take essentially two forms. Firstly, prices do not adjust completely to neutralize the effects of nominal exchange rate shocks. Secondly, price adjustments after exchange rate shocks only take place in discrete time intervals, in other words they are discontinuous. These two features of price adjustments form our definition of international price rigidities. In this paper we shall present a survey of the empirical and theoretical literature on international price rigidities. We provide the underlying intuition of the theoretical research and present a brief summary of the empirical findings

Real Exchange Rates and Monetary Policy Effectiveness in EMU.

This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis.

Domestic money and US output and inflation

Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. This Version: August, 2001. Klassifikation: E3, E4, E

Liquidity, term spreads and monetary policy

We propose a model that delivers endogenous variations in term spreads driven primarily by banks' portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks' portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations

US fiscal indicators, inflation and output

In this paper we explore the information content of a large set of fiscal indicators for US real output growth and inflation. We provide evidence that fluctuations in certain fiscal variables contain valuable information to predict fluctuations in output and prices. The distinction between federal and state-local fiscal indicators yields useful insights and helps define a new set of stylized facts for US macroeconomic conditions. First, we find that variations in state-local indirect taxes as well as state government surplus or deficit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for inflation. Finally, state-local expenditures help predict US inflation. A set of formal and informal stability tests confirm that these relationships are stable. The fiscal indicators in questions are also among the ones that yield the best in-sample and out-of-sample performances

On the short and long term real effects of nominal exchange rates

In this paper we assess the implications of sunk costs and product differentiation on the pricing decisions of the multinational firms. For this purpose we use a modified version of Salop's spatial competition. The model yields clear-cut predictions regarding the effects of exchange rate shocks on the market structure and on pass-through. The main results are following: shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk- to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behaviour is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks a hysteresis result obtains if and only if sunk costs are non-zero. Klassifikation: C33, E3

An empirical investigation of US fiscal expenditures and macroeconomic outcomes

In addition to containing stable information to explain inflation, state-local expenditures have also a larger share of the forecast error variance of US inflation than the Federal funds rate. Non-defense federal expenditures are useful in predicting real output variations and, starting from the early 1980s, present also a larger share of the forecast error variance of US real output than the Federal funds rate

Non-linearities and unit roots in G7 macroeconomic variables

We carry out a meta-analysis on the frequency of unit-roots in macroeconomic time series with a dataset covering 249 variables for the G7 countries. We use linear tests and the three popular non-linear tests (TAR, ESTAR and Markov Switching). In general, the evidence in favour of the random walk hypothesis is weaker than in previous studies. This evidence against unit roots is stronger for real and nominal asset prices. Our results show that rejection of the null of a unit root in the macro dataset is substantially higher for non-linear than linear models. Finally, the results from a Monte Carlo experiment show that rejection frequencies are very close to the nominal size of the test when the DGP is a linear unit root process. This leads us to reject the hypothesis that overfitting deterministic components explains the higher rejection frequencies of nonlinear tests

Foreign Holdings of Dollars and Information Value of US Monetary Aggregates

Recent empirical research has found that the strong short-term relationship between US monetary aggregates and macroeconomic fundamentals, as outlined in the classical study of M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of B. Friedman and Kuttner (1992) information value approach we reevaluate the vanishing relationship between US monetary aggregates and macroeconomic fundamentals. By using the official US data constructed by Porter and Judson (1996) we find that the currency component of M1 corrected for the foreign holdings of dollars contains valuable information on US macroeconomic fundamentals, such as nominal and real income, as well as inflation. This correction for monetary aggregates is required because the rate of foreign holdings in total money creation is large and unstable. The statistical evidence provided in this paper suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates.foreign holdings, US monetary aggregates, information value, the Friedman-Schwartz's evidence.

U.S. Domestic Money, Inflation and Output

Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates.Foreign holdings, US monetary aggregates, information value, Friedman-Schwartz's evidence