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Discussion Paper
Real Inventory Slowdowns
Inventory investment plays a central role in business cycle fluctuations. This post examines whether inventory investment amplifies or dampens economic fluctuations following a tightening in financial conditions. We find evidence supporting an amplification mechanism. This analysis suggests that inventory accumulation will be a drag on economic activity this year but provide a boost in 2020.
Working Paper
Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada
Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all ...
Report
Pass-through of exchange rates to consumption prices: what has changed and why
In this paper, we use cross-country and time-series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods as well as to non-traded goods. We highlight three reasons for the change in pass-through into the retail prices of goods. First, pass-through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors, meaning that the costs of imported goods as well as home-tradable goods ...
Working Paper
A Quantitative Model of the Oil Tanker Market in the Arabian Gulf
Using a novel dataset, we develop a structural model of the Very Large Crude Carrier (VLCC) market between the Arabian Gulf and the Far East. We study how fluctuations in oil tanker rates, oil exports, shipowner profits, and bunker fuel prices are determined by shocks to the supply and demand for oil tankers, to the utilization of tankers, and to bunker fuel costs. Our analysis shows that time charter rates respond only slightly to fuel cost shocks. In response to higher fuel costs, voyage profits decline, as cost shocks are only partially passed on to round-trip voyage rates. Oil exports ...
Working Paper
The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes
We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending?a final digit, usually a zero or nine, used by a majority of prices in that store?and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for ...
Working Paper
Menu Costs, Trade Flows, and Exchange Rate Volatility
U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. Using trade flow data, I test models capable of replicating these trade price data. Even with significant pricing frictions, the models still imply a trade response to exchange rates stronger ...
Report
International shocks and domestic prices: how large are strategic complementarities?
How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firms? price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm?s price response both to its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level data set for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The ...
Discussion Paper
Why Hasn't the Yen Depreciation Spurred Japanese Exports?
The Japanese yen depreciated 30 percent from its peak in the fourth quarter of 2011 against its trading partners. This was expected to boost its exports as the lower yen makes Japanese goods more competitive on global markets. Instead, the volume of Japanese exports of goods actually fell by 0.6 percent over this same period, as can be seen in the chart below. Weaker external demand surely contributed to this poor export performance. Yet over the same period, U.S. goods exports grew by more than 6 percent, which suggests that other factors are also at play. In this post, we draw on our recent ...
Report
Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies
This paper examines the impact of exchange rates and import prices on the domestic producer price index and consumer price index in selected industrialized economies. The empirical model is a vector autoregression incorporating a distribution chain of pricing. When the model is estimated over the post-Bretton Woods era, impulse responses indicate that exchange rates have a modest effect on domestic price inflation while import prices have a stronger effect. Pass-through is larger in countries with a larger import share and more persistent exchange rates and import prices. Over 1996-98, these ...
Discussion Paper
The Exchange Rate Disconnect
Why do large movements in exchange rates have small effects on international goods prices? This empirical regularity is a central puzzle in international macroeconomics. In a new study, we show that the key to understanding this exchange rate disconnect is to take into account that the largest exporters are also the largest importers. This is important because when exporters import their intermediate inputs, they face offsetting exchange rate effects on their marginal costs. For example, a depreciation of the euro relative to the U.S. dollar makes exports in U.S. dollars cheaper?but it also ...