Distributional Effects of Globalization in Developing Countries

We discuss recent empirical research on how globalization has affected income inequality in developing countries. We begin with a discussion of conceptual issues regarding the measurement of globalization and inequality. Next, we present empirical evidence on the evolution of globalization and inequality in several developing countries during the 1980s and 1990s. We then examine the channels through which globalization may have affected inequality discussing theory and evidence in parellel. We conclude with directions for future research.

The Evolution of Price Discrimination in the European Car Market

Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U. K. systematically representing the most expensive markets. (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U. K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France and the U. K.. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results we conjecture that the EMU will substantially reduce the year-to-year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences. ZUSAMMENFASSUNG - (Die Entwicklung der Preisdiskriminierung im europäischen Automobilmarkt) Die Autopreise in Europa sind durch große und beständige Unterschiede zwischen Ländern gekennzeichnet. Ziel dieses Beitrages ist es, diese Preisstreuung zu erklären. Anhand eines Paneldatensatzes für den Zeitraum von 1980 bis 1993 wird erstens aufgezeigt, daß signifikante Unterschiede in qualitätsangepaßten Peisen zwischen den Ländern bestehen, wobei Italien und Großbritannien die teuersten Märkte aufweisen. Zweitens lassen sich beträchtliche Schwankungen von Jahr zu Jahr feststellen, die vor allem auf Wechselkursveränderungen und unvollständige Reaktionen bei der lokalen Preissetzung zurückzuführen sind. Diese Sachverhalte werden im Rahmen eines Mehr-produkt-Oligopol-Modells mit Produktdifferenzierung analysiert. Das Modell identifiziert drei potentielle Quellen für internationale Preisunterschiede: Preiselastizitäten, die unterschiedliche Gewinnspannen erzeugen, Kosten- und Importquotenbeschränkungen. Inwieweit diese Ursachen im einzelnen zutreffen, wird für die verschiedenen Länder ausführlich erörtert. Insgesamt lassen die Ergebnisse darauf schließen, daß sich im Gefolge der europäischen Währungsunion die von Jahr zu Jahr zu beobachtenden Schwankungen der Automobilpreise verringern dürften; sie verdeutlichen aber auch, daß ohne weitere Maßnahmen in Richtung europäische Integration die existierenden Preisunterschiede zwischen den einzelnen Ländern nicht vollständig verschwinden werden.

A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application

The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of markup adjustment by manufacturers and retailers, local-cost non-traded components, and nominal price rigidities, in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that on average, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.currency prices, exchange rates

How rigid are producer prices?

Conventional wisdom suggests that producer prices are more rigid than consumer prices and therefore play less of a role in the allocation of goods and services. Analyzing 1987-2008 microdata collected by the U.S. Bureau of Labor Statistics for the producer price index, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as consumer prices that include sales and substantially less rigidity than consumer prices that exclude them. Moreover, large firms change prices two to three times more frequently than small firms do, and by smaller amounts, particularly in the case of price decreases. Longer price durations are associated with larger price changes, although there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, although the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together and so cancel one another out

The evolution of price discrimination in the European car market

"Die Autopreise in Europa sind durch große und beständige Unterschiede zwischen Ländern gekennzeichnet. Ziel dieses Beitrages ist es, diese Preisstreuung zu erklären. Anhand eines Paneldatensatzes für den Zeitraum von 1980 bis 1993 wird erstens aufgezeigt, daß signifikante Unterschiede in qualitätsangepaßten Peisen zwischen den Ländern bestehen, wobei Italien und Großbritannien die teuersten Märkte aufweisen. Zweitens lassen sich beträchtliche Schwankungen von Jahr zu Jahr feststellen, die vor allem auf Wechselkursveränderungen und unvollständige Reaktionen bei der lokalen Preissetzung zurückzuführen sind. Diese Sachverhalte werden im Rahmen eines Mehrprodukt- Oligopol-Modells mit Produktdifferenzierung analysiert. Das Modell identifiziert drei potentielle Quellen für internationale Preisunterschiede: Preiselastizitäten, die unterschiedliche Gewinnspannen erzeugen, Kosten- und Importquotenbeschränkungen. Inwieweit diese Ursachen im einzelnen zutreffen, wird für die verschiedenen Länder ausführlich erörtert. Insgesamt lassen die Ergebnisse darauf schließen, daß sich im Gefolge der europäischen Währungsunion die von Jahr zu Jahr zu beobachtenden Schwankungen der Automobilpreise verringern dürften; sie verdeutlichen aber auch, daß ohne weitere Maßnahmen in Richtung europäische Integration die existierenden Preisunterschiede zwischen den einzelnen Ländern nicht vollständig verschwinden werden." (Autorenreferat)"Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U.K. systematically representing the most expensive markets. (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U.K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France and the U.K. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results we conjecture that the EMU will substantially reduce the year-to-year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences." (author's abstract

Trade and Informality in the Presence of Labor Market Frictions and Regulations

We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show the following: 1) Trade openness unambiguously decreases informality in the tradable sector but has ambiguous effects on aggregate informality. 2) The productivity gains from trade are understated when the informal sector is omitted. 3) Trade openness results in large welfare gains even when informality is repressed. 4) Repressing informality increases productivity but at the expense of employment and welfare. 5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. 6) The informal sector works as an “unemployment buffer” but not a “welfare buffer” in the event of negative economic shocks