Measuring persistence of U.S. city prices: new evidence from robust tests

This article revisits the empirical analysis in Cecchetti et al. (Int Econ Rev 43:1081–1099, 2002) involving long-span U.S. city prices, who estimated the persistence of U.S. price differentials to be around 9 years. After controlling for the structural breaks in the data, we find that U.S. city price level differentials are I(0) stationary processes with the median half-life of convergence ranged between 1.5 and 2.6 years, estimates that are in accordance with what should be expected from a highly integrated economy as the United States. Our results are also robust to a pairwise test of price level convergence.     

Competition among auctioneers in large markets

We analyse a multistage game of competition among auctioneers. First, the auctioneers commit to some reserve prices; second, the bidders enter one auction, if any; and finally, the auctions take place. We show that for any finite set of feasible reserve prices, each auctioneer announces a reserve price equal to his production cost if the numbers of auctioneers and bidders are sufficiently large, though finite. Our result supports the idea that optimal auctions may be quite simple. Our model also confirms previous results for some “limit” versions of the model by McAfee (Econometrica 61 (1993) 1281-1312), Peters (Rev. Econ. Stud. 64 (1997) 97-123), and Peters and Severinov (J. Econ. Theory 75 (1997) 141-179).     

Sustainable growth in a model with dual-rate discounting

In an important model of growth and pollution proposed by Stokey [Int. Econ. Rev. 39 (1998) 1] neither the rate of economic growth nor the rate of growth of emissions depends on the time preference of the representative agent, which seems somewhat paradoxical. To resolve this paradox, we introduce into Stokey's model the assumption of dual-rate discounting, prove the existence of a sustainable balanced growth optimal path, and show that the growth rates of output and emissions are increasing in the proportion between the consumption and the environmental discount factors of the representative agent.     

Forecasting Bordeaux wine prices using state-space methods

Generic Bordeaux red wine (basic claret) can be regarded as being similar to an agricultural commodity. Production volumes are substantial, they are traded at high frequency and the quality of the product is relatively homogeneous. Unlike other commodities and the top-end wines (which represent only 3% of the traded volume), there is no futures market for generic Bordeaux wine. Reliable forecasts of prices can to large extent replace this information deficiency and improve the functioning of the market. We use state-space methods with monthly data to obtain a univariate forecasting model for the average price. The estimates highlight the stochastic trend and the seasonality present in the evolution of the price over the period 1999 to 2016. The model predicts the path of wine prices out of sample reasonably well, suggesting that this approach is useful for making reasonably accurate forecasts of future price movements.     

Unilateral Climate Policy: Harmful or Even Disastrous?

This paper deals with possible foreign reactions to unilateral carbon demand reducing policies. It differentiates between demand side and supply side reactions as well as between intra- and inter-temporal shifts in greenhouse gas emissions. In our model, we integrate a stock-dependent marginal physical cost of extracting fossil fuels into Eichner and Pethig’s (Int Econ Rev 52(3):767–805, 2011) general equilibrium carbon leakage model. The results are as follows: Under similar but somewhat tighter conditions than those derived by Eichner and Pethig (Int Econ Rev 52(3):767–805, 2011), a weak green paradox arises. Furthermore, a strong green paradox can arise in our model under supplementary constraints. That means a “green” policy measure might not only lead to a harmful acceleration of fossil fuel extraction but to an increase in the cumulative climate damages at the same time. In some of these cases there is even a cumulative extraction expansion, which we consider disastrous.     

Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition*

We consider a duopoly pricing game with a unique Bertrand–Nashequilibrium. The high‐price firm has a nonvanishing market share, however, and intuition suggests that observed prices may be positively related to this market share. This relationship is implied by a model in which players make noisy (logit) best responses to expected payoff differences. The resulting logit equilibrium model was used to design an experiment in which the high‐price firm's market share varies. The model accurately predicts the final‐period price averages. A naive learning model predicts the observed differences in the time paths of average prices.     

The Speed and Stability of Price Adjustment in Australian Manufacturing*

A model of industry speed of price adjustment is derived from firm pricing behaviour. The model is applied to quarterly two‐digit Australian manufacturing data for the period 1985 (Q3) to 2002 (Q3). The results suggest that the industry speed of price adjustment is positively related to the average size of large firms within the industry and is negatively related to industry concentration. We also find that import share has a role in attenuating the effects of industry concentration and that growth in a moving average of real gross domestic product reduces the speed of price adjustment. Calculated industry speeds of price adjustment are both stable across the period of examination and small, suggesting that manufacturing prices are sticky.     

Overreactions,Momentum, Liquidity,and Price Bubbles in Laboratory and Field Asset Markets

Laboratory asset markets provide an experimental setting in which to observe investor behavior. Over more than a decade, numerous studies have found that participants in laboratory experiments frequently drive asset prices far above fundamental value, after which the prices crash. This bubble-and-crash behavior is robust to variations in a number of variables, including liquidity (the amount of cash available relative to the value of the assets being traded), short-selling, certainty or uncertainty of dividend payments, brokerage fees, capital gains taxes, buying on margin, and others.

This paper attempts to model the behavior of asset prices in experimental settings by proposing a "momentum model" of asset price changes. The model assumes that investors follow a combination of two factors when setting prices: fundamental value, and the recent price trend. The predictions of the model, while still far from perfect, are superior to those of a rational expectations model, in which traders consider only fundamental value. In particular, the momentum model predicts that higher levels of liquidity lead to larger price bubbles, a result that is confirmed in the experiments. The similarity between laboratory results and data from field (real-world) markets suggests that the momentum model may be applicable there as well.     

Innovation and price: the case of digital cameras

This study examines a hedonic regression model of digital camera prices using data collected from an internet price comparison service. We find that a small number of product characteristics explains most of the variation in camera prices. In addition, the model demonstrates substantial downward pressure on camera prices during the time period considered. We also examine technological innovation shocks to determine their impact on product prices. We find that the corresponding price reaction exhibits gradual adjustment over time, providing evidence of some degree of anticipation of the innovation, as well as a post-innovation price shock. This study also demonstrates the power of web-based shopping services as a new and novel source of data for econometric analysis.     

Two further aspects of some new tests for structural stability

This paper presents two extensions to Hall and Sen’s [Hall, A.R. and Sen, A. 1999. Structural stability testing in models estimated via generalized method of moments. J. Bus. Econ. Stat., 17, 335–348.] analysis of their structural stability tests. First, we approximate the p-values for the non-standard asymptotic null distribution for the structural stability test statistics proposed by Hall and Sen (1999). The p-value response surfaces are approximated by a parametric function using the methodology proposed by Hansen [Hansen, B.E., 1997. Approximate asymptotic P-values for structural change tests. J. Bus. Econ. Stat, 15, 60–67.] Second, we show how Hall and Sen’s (1999) testing methodology can be used to diagnose the source of instability in Euler equation models. To illustrate this issue, we examine the stability of the dividend capital asset pricing model proposed by Hagiwara and Herce [Hagiwara, M. and Herce M.A., 1997. Risk aversion and stock price sensitivity to dividends. Am. Econ. Rev. 87, 738–745]. Hagiwara and Herce (1997) estimate the model using annual data from 1889–1994 and find the model is not rejected using the over-identifying restrictions test. Using the same data, we find some evidence of structural instability in the model. Interestingly, the tests reveal that the model appears to be correctly specified for the period up until 1942 but incorrectly specified in the post 1942 part of the sample.     

Price dynamics in an exchange economy

The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and price adjustment dynamics for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations in most experiment sessions adjust toward the competitive equilibrium in continuous double auction trading, though adjustment is much slower than in previous commodity flow (or perishable good) double auction market experiments. Price adjustment is evaluated by comparing its extent within each market replication (or trading period) to its extent across trading periods. More price adjustment occurs within trading periods than across trading periods, so price adjustment data are evaluated with the disequilibrium Hahn process model (Hahn and Negishi in Econometrica 30:463–469, 1962) of within-period trades. This paper introduces a stochastic version the Hahn process model and demonstrates that a linear approximation to this stochastic model yields an autoregressive process with a near unit root when the adjustment rate is low. In effect, the autoregressive price adjustment model studied extensively by time series econometricians over the past 30 years can be viewed as a reduced form of a stochastic disequilibrium exchange economy price adjustment model. Estimation of the model demonstrates that price adjustment in the exchange economy experiment is considerably slower than in economies without income effects, which suggests that the price discovery process may be a significant factor in the slow adjustment documented by applied econometricians.     

House Allocation with Transfers

We consider the Shapley–Scarf house allocation problem where monetary transfers are allowed. We characterize the class of mechanisms that are strategy-proof, ex post individually rational, ex post budget-balanced, and “collusion-proof.” In these mechanisms, the price of each object is fixed in advance, and the objects are reallocated according to the (unique) core assignment of the Shapley–Scarf economy associated with the prices. The special case in which all prices are zero is the core mechanism studied by Shapley and Scarf. Our mechanisms are compelling alternatives to the Groves mechanisms, which satisfy neither budget balance nor our condition of collusion-proofness. Journal of Economic Literature Classification Numbers: C71, C78, D71, D78, D89.     

Even more on monetary policy in a small open economy

It is well known that in a small open economy with full capital mobility and a fixed exchange rate, monetary policy is ineffective in influencing real output (e.g. the works of Fleming [Int. Monetary Fund Staff Pap. 9 (1962) 369.] and Mundell [Can. J. Econ. Polit. Sci. 29 (1963) 475.]). However, Wu [Int. Rev. Econ. Finance 8 (1999) 223.] finds that when the credit channel is added to this model, monetary policy can have real effects under a fixed exchange rate system. This conclusion hinges on the assumption that open market operations have no effect on foreign exchange reserves of the central bank when evaluating how a change in monetary policy affects the loan market. This assumption is incorrect because under a fixed exchange rate regime, the quantity of foreign reserves becomes endogenous in the model. It is shown that when this assumption is relaxed, monetary policy is still ineffective in influencing output under a fixed exchange regime, even with an operative credit channel.     

Futures basis,inventory and commodity price volatility: An empirical analysis

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.     

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

Product and process innovations in the life cycle of an industry

Filson [Rev. Econ. Dyn. 4 (2001)] uses industry-level data on firm numbers, price, quantity and quality along with an equilibrium model of industry evolution to estimate the nature and effects of quality and cost improvements in the personal computer industry and four other new industries. This paper studies the personal computer industry in more detail and shows that the model explains some peculiar patterns that cannot be explained by previous life-cycle models. The model’s estimates are evaluated using historical studies of the evolution of the personal computer industry and patterns that require further model development are described.     

Expected consumer’s surplus as an approximate welfare measure

Except for a knife-edge case of preferences, the percentage error from using the change in expected consumer’s surplus (ECS) to approximate the willingness to pay for a change in the distribution of a random price is unbounded, in contrast to Willig’s (Am Econ Rev 66:589–597; 1976) famous approximation result for nonrandom prices. If the change is smooth on the space of random variables, and either the initial price is nonrandom or state-contingent payments are possible, then the change in ECS locally approximates the willingness to pay well. Unfortunately, this smoothness fails in some important applications. I thank Hector Chade, Glenn Ellison, Peter Hammond, Manuel Santos, seminar participants at Arizona State, Stanford and Yale and participants of the Midwest Economic Theory meetings at Indiana University and the 2004 Summer Econometric Meetings for comments.     

Cross market predictions for commodity prices

This paper shows that commodity prices can be predicted from cross-market information by establishing long-run cross-market commodity price equilibrium models, which are characterized by a linear relation between prices across different markets. Using data from five representative commodity markets (oil, copper, gold, corn, and cattle) during the period 2005–2018, we demonstrate that oil and industrial metal markets have formed a long-run price equilibrium with other markets across different commodity families. However, agriculture and gold markets do not tend to have long-run price equilibrium relations with other commodity markets. Furthermore, we show that the absence of a price equilibrium is due to the cross-market liquidity interference effect. After we control for the liquidity effect, long-run cross-market commodity price equilibrium relations are reestablished for agriculture and gold markets. These results can aid in demonstrating that liquidity can capture most of the missing information that is not reflected in price dynamics in less liquid markets, such as agriculture and gold markets. Therefore, less liquid commodity price predictions require both prices and liquidity levels from cross-markets, while liquid commodity prices (oil and metal) can be predicted based solely on cross-market prices.     

Information revelation in competitive markets

This paper analyzes a market with multiple sellers and horizontally differentiated products. We investigate the sellers’ incentives to reveal product relevant information that affects the buyer’s private valuation. The main finding is that if the number of sellers is sufficiently large, there is a unique symmetric equilibrium with full information disclosure. Thus, unlike the results by Lewis and Sappington (Int Econ Rev 35:309–327, 1994) and Johnson and Myatt (Am Econ Rev 93:756–784, 2006) for monopoly, which state that the monopolist reveals either full information or no information, intense competition results in a single extreme with respect to information disclosure. We show that the market is always inefficient, but the magnitude of inefficiency converges to zero at a high rate as competition intensifies.     

Is the Engel curve approach viable in the estimation of alternative PPPs?

Conventional estimates of purchasing power parities (PPP) rely on cross-country price data. Using Engel curves, Almås (Am Econ Rev 102:1093–1117, 2012) was, however, able to show that PPPs contain substantial bias. Since constructing conventional estimates is expensive and time consuming, Almås’ idea of employing Engel curves is welcome. This article examines the viability of the Engel curve approach to PPP and its sensitivity to differences in relative prices and preferences by estimating Engel curves not only between countries but also for regions within a given country. My empirical evidence from the United States and Norway suggests that the differences can be problematic, but not sufficiently to discredit the new methodology. A pragmatic approach to PPP estimation between countries that are different is to compute a PPP band, rather than a point estimate. I present a practical example of this using expenditure data from 2001, which yields a band for NOK and US dollar.