Market power and exchange rate pass-through

In this paper we provide new empirical evidence on the relationship between market power, as measured by market share, and incomplete exchange rate pass-through. The role of market power is examined in the context of a Cournot model, which is estimated with data relating to Japan's presence in the US market. To test for the existence of possible aggregation biases due to sectoral heterogeneity, estimations are carried out on time series data for the total economy and the manufacturing sector and on panel data for five manufacturing industries at the three-digit level of classification, using the Johansen multivariate cointegration technique and the recently developed by [Larsson, R., Lyhagen, J., & Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109–142] multivariate panel cointegration technique. Hypotheses about the degree of pass-through are tested as restrictions on estimated equilibrium pricing equations and robustness tests are performed. The empirical results indicate that Japanese firms have market power and this validates the use of an imperfect competition model. However, it appears that market power is not the only element on which to base the analysis of the incomplete exchange rate pass-through by Japanese firms.     

Market integration in US gasoline markets

This paper analyses the degree of market integration in the retail gasoline markets in the United States after it was completely deregulated in 1981. The monthly average prices of unleaded regular gasoline, excluding taxes, from January 1983 to December of 1998 for five US Petroleum Administration Defense Districts were considered in the analysis. There is evidence of a high degree of market integration in the gasoline markets as evidenced by the Engel and Granger and Johansen cointegration tests, but perfect market integration is rejected in all but a few cases.     

Estimation of a German money demand system – a long-run analysis

This study presents a multivariate analysis of the stability of long-run relationships between variables that influence the conduct and transmission process of the German monetary policy. The initial VAR comprises the variables real money M3, real GNP, the inflation rate, a long-term and a weighted short-term interest rate. A multivariate approach has been chosen, as this allows for more than one cointegration relationship and to test restrictions on the cointegration space. In contrast to most other studies on German monetary policy, three stable and economically plausible cointegration relationships are obtained simultaneously within the framework of the Johansen procedure: a money demand relationship, a long-run Fisher effect and a long-run relationship between the short- and the long-term interest rate. It is apparent that the structural break of German reunification can be modelled incorporating dummy variables in the model. First version received: October 1996/final version received: July 1997     

Long-Run Purchasing Power Parity and Structural Change: The Official and Parallel Foreign Exchange Markets For Dollars In Greece

This paper examines the Purchasing Power Parity theory from a long-run perspective in the presence of a parallel or 'black' market for US dollars in Greece using monthly data for the recent float. Johansen's FIML multivariate cointegration techniques is applied. Recent development associated with this procedure are considered. First, a formal test developed by Paruolo (1996) for the presence of I(2) and I(1) components in a ultivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius (1994) and Johansen (1995b). Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen (1993) are applied and it is shown that the dimension of the cointegration space is simple dependent while the estimated coefficients do not exhibit instability in recursive estimations. [F31 F33]     

Exchange rate pass-through, menu costs and threshold cointegration

This paper investigates exchange rate pass-through (ERPT) in the presence of menu costs. Assuming exports prices are negotiated in the exporter’s currency, menu costs give rise to two thresholds around (within) which incomplete ERPT is (not) observed. An error correcting process is triggered from a deviation in the ERPT cointegrating relation only when the deviation is large enough in absolute value to fall outside of a band defined by symmetric thresholds. Threshold autoregressive (TAR) cointegration techniques are used to investigate Quebec and Ontario pork meat export prices in the US and Japanese markets. Through Monte Carlo simulations, we find that our Equilibrium-TAR tests have greater power than a standard unit root test. Our empirical application suggests that Canadian pork exporters exercise market power in the US market. The evidence of incomplete ERPT in the Japanese market is weaker and differs across provinces. Evidence of thresholds is reported for both destinations, thus indicating the existence of significant menu costs for Canadian pork exporters in these markets.     

Market efficiency,purchasing power parity,and the official and parallel markets for foreign currency in Latin America

This paper examines the purchasing power parity (PPP) theory from a long-run perspective in the presence of a parallel or ‘black’ market for U.S. dollars in four Latin American countries, namely Argentina, Brazil, Chile, and Mexico, using monthly data for the recent float. Johansen's full information maximum likelihood multivariate cointegration technique is applied. Recent developments associated with this procedure are considered. First, a formal test developed by Johansen [Econometric Theory 8 (1992) 188, Econometric Theory 11 (1995) 25, Scand. J. Stat. 24 (1997) 433] for the presence of I(2) and I(1) components in a multivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found for any country, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius [J. Econometrics 63 (1994) 7] and Johansen [J. Econometrics 69 (1995) 111]. Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected for all countries. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen [Hansen, H., & Johansen, S. (1993). Recursive estimation in cointegrated VAR-models. Working Paper, University of Copenhagen, Institute of Mathematical Statistics; Econometrics J. 2 (1999) 306] are applied and it is shown that the dimension of the cointegration space is sample dependent while the estimated coefficients do not exhibit instability in recursive estimations.     

Are international value premiums driven by the same set of fundamentals?

This paper investigates the long-run behaviour of international value premium price indices for G7 countries using data from January 1975 to December 2002. We use Johansen [Johansen, S., 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59, 1551–1580; Johansen, S., 1995. Likelihood-based Inference in Cointegrated Vector Autoregressive Models, Oxford University Press] cointegration methodology and find one cointegrating vector for the period of December 1987 to December 2002. The results are robust to local currencies and a common currency. The cointegrating vector may reflect expectations about future economic activity since investors can adjust demand for either value or growth stocks depending on expected economic growth. Our results show that the cointegrating relationship can predict both future changes in the growth of logged industrial production and future stock market returns.     

Regulating Private Infrastructure Investment: Optimal Pricing for Access to Essential Facilities

This paper analyzes optimal pricing for access to essential facilities in a competitive environment. The focus is on investment incentive issues arising from regulation under complete information. To that end, examining the provision of a natural monopoly infrastructure with unlimited capacity, it is shown that the fixed component of a regulated access price can be structured so as to induce a race between market participants to provide the infrastructure. An appropriate pricing formula can ensure that a single firm chooses to invest at the socially optimal time (taking into account producer and consumer surplus) despite the immediate access granted to rivals and the non-existence of government subsidies. Under the optimal pricing formula, firms choose their investment timing based on their desire to pre-empt their rivals. This pricing formula is efficient (a two part tariff), implementable ex post, and robust to alternative methods of asset valuation (replacement or historical cost). When firms are not identical, the access pricing formula resembles, in equilibrium, a fully distributed cost methodology.     

Convergence among five industrial countries (1870–1994): Results from a time varying cointegration approach

In this paper, we check the hypothesis of a time varying cointegration relation between four industrial countries per capita GDPs and US per capita GDP on the period from 1870 to 1994. Park and Hahn (1999) give the methodology. Results confirm the hypothesis of time evolving cointegration in all cases. Tests on the parameters of these cointegration relations show that, from the 1980s onwards, we can accept the hypothesis of stochastic convergence between France, Germany and Japan, on one hand, and the United States on the other.First version received: December 2001 / Final revision received: September 2003     

Liquidity of secondary capital markets: Allocative efficiency and the maturity composition of the capital stock

Summary We investigate the function of liquid financial markets for the allocation of productive capital. We consider an economy where agents endogenously choose among capital production technologies with differing gestation periods. Long-gestation capital investments must be rolled-over in secondary capital markets. The use of such investment technologies therefore requires the support of liquid financial markets. We investigate how changes in the liquidity of these markets (i.e., in the costs of transacting) affect (a) the choice of capital production technology, (b) per capita income and the per capita capital stock, (c) the level of financial market activity, (d) the real return on savings and (e) welfare in a steady state equilibrium. Improvements in financial market liquidity raise rates of return on savings, and favor the increased use of long gestation capital investments. However, such improvements may or may not lead to higher levels of real activity or steady state welfare. We describe conditions under which various outcomes occur.We have benefited from the comments of seminar participants at the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Minneapolis, the International Monetary Fund, Berkeley, Boston College, Boston University, Brown, Chicago, Illinois, Miami, UC San Diego, Simon Fraser, University of British Columbia, University of Washington, Yale, the Canadian Macro Study Group Meetings, the Murrary S. Johnson Conference (University of Texas/Federal Reserve Bank of Dallas), and the Far West Rotating Economic Theory Conference. We would also like to thank John Bryant, Andreas Hornstein, Dan Peled, Bill Schworm, Karl Shell, Bart Taub and an anonymous referee for their comments on an earlier draft of the paper.     

Using threshold cointegration to estimate asymmetric price transmission in the Swiss pork market

This paper employs threshold cointegration tests that allow for asymmetric adjustment towards a long-run equilibrium relationship to examine the relationship between producer and retail pork prices in Switzerland. The short-run adjustments are also examined with asymmetric error correction models that are compared to the conventional symmetric error correction models. The results indicate that price transmission between the producer and retail levels is asymmetric, in the sense that increases in producer prices that lead to declines in marketing margins are passed on more quickly to retail prices than decreases in producer prices that result in increases in the marketing margins.     

A reassessment of the Feldstein-Horioka hypothesis of perfect capital mobility: evidence from historical data

This short paper explores the relationship between investment and saving rates in a sample of 13 OECD countries over the period 1885–1992. To this end, I employ panel cointegration tests based on the maximum likelihood approach developed by Johansen (J Economic Dynamics Control 12:231–254, 1988) instead of conventional panel cointegration residual based tests, in order to draw sharper conclusions. Using estimation techniques appropriate for heterogeneous panels I find a low degree of capital mobility for the sub-periods 1921–1992 and 1950–1992. The findings overwhelmingly support the hypothesis of perfect capital mobility in the short run.

Optimal Time-of-use Access Charges

This paper examines the setting of optimal time-of-use access charges in a deregulated network industry environment. Firms, which may include the incumbent, compete in the final retail market. The regulator sets an access fee for use of the essential facility, allowing the incumbent to recover fixed costs. If the retail market is perfectly competitive the optimal access charge varies with time-of-use according to the Ramsey–Boiteux elasticity rule. However, with downstream market power the regulator needs to correct retail price distortion, as well as recover fixed costs efficiently. As a result, the regulators initial impulse to set higher access charges during peak periods may be reinforced, moderated or even reversed — and optimal access charges diverge from a Ramsey–Boiteux pattern.I would like to thank John Panzar and Julian Wright for helpful comments. The helpful and detailed remarks of an anonymous referee have greatly improved this paper and are gratefully acknowledged.     

OPTIONAL REAL-TIME PRICING OF ELECTRICITY FOR INDUSTRIAL FIRMS

Abstract. This paper proposes a pricing mechanism, optional real-time pricing (RTP), with day-ahead hourly prices, that exploits the potential offered by a competitive wholesale power market. When an electric utility offers the option to its industrial customers, the retail prices are based on an existing Hopkinson tariff and expectations as to the wholesale market's next-day hourly spot prices. The proposed RTP mechanism is Pareto-superior to the tariff in that it assures both the utility and the customer of profits that will be at least as great as under the tariff.     

Determinants of retail wine prices: evidence from Cyprus

This study uses a detailed panel dataset for the Cyprus wine market and a fixed effects simultaneous equations model specification to investigate retail wine price determinants. Our results show that producers’ pricing policies tend to be influenced more by the level of market concentration in the wine and retail industries than by competitors’ price movements. We propose a sales response model to identify the impact of marketing drivers on sales. Wine consumption in Cyprus is unit elastic, but the impact of competitive prices and retail distribution coverage on sales is small.     

COINTEGRATION OF STOCK MARKETS BETWEEN NEW ZEALAND, AUSTRALIA AND THE G7 ECONOMIES: SEARCHING FOR CO-MOVEMENT UNDER STRUCTURAL CHANGE

This paper examines whether the New Zealand equity market is integrated with the equity markets of Australia and the G7 economies by applying both the Johansen (1988 ) and Gregory and Hansen (1996 ) approaches to cointegration. The Johansen (1988 ) test suggests that there is no long-run relationship between the New Zealand stock market and any of the other stock markets considered in the study. The Gregory and Hansen (1996 ) test finds that the New Zealand and United States stock market is cointegrated, but the New Zealand stock market is not cointegrated with the other stock markets in the study. This suggests that in order to avoid some of the risk through international portfolio diversification there is potential for investors to purchase shares in the New Zealand market and either the Australian market or most of the world's leading equity markets.     

Stationary solution to the overlapping generations model of fiat money: Experimental evidence

Overlapping generations model of fiat money yields an infinity of competitive equilibrium solutions, only one of which is stationary. Economies reported in this paper involved a sequence of overlapping generations of three or four individuals; each individual lived for two periods. In their young age individuals were endowed with chips that could be traded for fiat money wish the individuals of the old generation. In their old age, individuals could exchange their units o flat money for the consumption good. Results of the experiments exhibit some support for the stationary solution. The results are robust to two designs of exchange institutions (double oral auctior and supply schedule auction) and to two different endogenous ways of converting money into chips at the end of the game (average price prevailing during the last period the game is actually played and the average price forecast made during the last period the game is actually played).A preliminary version of this paper was presented at the meeting of the Economic Science Association and at the Federal Reserve Bank of Minneapolis. The authors are grateful for comments received from various participants at both presentations. Financial support was provided by the McKnight Foundation, the Honeywell Foundation, National Science Foundation (SES 89-12552), and Richard. M. and Margaret Cyert Family Funds.     

The demand for money in korea: Evidence from the cointegration test

This paper shows that there exists a long-run equilibrium relationship between M2 and its determinants, real income and the long-term interest rate, in Korea by using Johansen and Juselius maximum likelihood cointegration method. However, M1 does not have any meaningful cointegration relationships with its determinants. The long-term interest rate is a better proxy than the short-term rate to measure the opportunity cost of holding money. Based on the results, a broad definition of money is a better measure than a narrow definition of money in considering the long-run economic impacts of changes in monetary policy in Korea.     

Optimal new-product pricing in regulated industries

Intertemporal pricing issues faced by regulated monopolists in market settings characterized by high rates of innovation have received little attention in the regulatory economics literature. Most analyses of regulatory pricing have focused on monopolies characterized by a stable multiple-good product set. In a regulated industry characterized by technological change in the form of new products and services (such as telecommunications), optimal pricing decisions may also reflect intertemporal market and production factors. In this paper, two such intertemporal factors are modeled: learning curve effects on the firm's cost function, and customer demonstration effects on the demand side of the market. Inclusion of these factors leads to an intertemporal pricing rule that may conflict with the standard regulatory practice whereby each product or service must recoup its own resource costs period by period. Our results suggest that this regulatory practice can result in efficiency losses, since it results in a rate of technological diffusion that is too low.     

Is fixed-mobile substitution strong enough to de-regulate fixed voice telephony? Evidence from the Austrian markets

In this paper, we estimate own-price elasticities for fixed network voice telephony access and national calls services for private users as well as cross-price elasticities to mobile services using time series data from 2002 to 2007 from the Austrian markets. Using instrumental variable estimates and considering cointegration, we find that access is inelastic while calls are elastic. We conclude that the retail market for national calls of private users can probably be deregulated due to sufficient competitive pressure from mobile. Access-substitution on the other hand does not seem to be strong enough to justify de-regulation.