Exchange Rates,Domestic Prices,and Central Bank Actions: Recent U.S. Experience

Central banks that are primarily concerned with the behavior of prices will use monetary policy to try to insulate prices from exchange rate changes. Prices then appear unresponsive to changes in the exchange rate. The observed relationships between prices and the exchange rate will reflect central bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determining the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using three different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts to mitigate the effects of exchange rate fluctuations on domestic prices.     

An Investigation of the Effects of Prices and Exchange Rates on Trade Flows in East Asia

This paper investigates the dynamic response of imports and exports to changes in domestic prices, foreign prices and real effective exchange rates for Korea, the Philippines, Singapore and Thailand. A vector autoregressive model and cointegration analysis are used to study the long-run relationships and the short-run dynamics of these variables. The vector error-correction model indicates that in almost all cases, domestic and foreign prices have a larger impact on the trade flows than the real effective exchange rates. We cannot find any significant difference in the response time of import demand to shocks in prices and exchange rates; however, the response time for export supply varies among countries.     

Bartlett adjustments for systems of linear equations with linear restrictions

Simple matrix formulae are derived for calculating a Bartlett adjustment to the likelihood ratio test statistic for testing linear parameter restrictions in a system of linear equations. For the special case of column and/or row restrictions on the matrix of coefficients the adjustment is a simple function of matrix dimensions being invariant to sample observations and the error covariance matrix. An example of testing for homogeneity and symmetry in a demand system is given.     

Volatility Estimation with Price Quanta

Volatility estimators based on high, low, opening and closing prices have been developed, and perform well on simulated data, but on real data they frequently give lower values for volatility than the simple open–close estimator. This may be due to the fact that for real data, the maximum (or minimum) price is often at the beginning or end of the day. While this could not happen if the observed process was log Brownian, it could happen if the observed process were log Brownian, but observed only to the nearest penny. We develop the theory of such approximations to derive the corrected versions of the basic estimators.     

Political Business Cycles and Endogenous Elections

Empirical research of political business cycles (PBCs) may suffer from endogeneity bias when incumbent governments have discretion to call for an early election. Using an instrumental variable (IV) routine on data from Japan and the U.K., we find strong evidence to support the notion that election timing is a function of the economy rather than the macroeconomy being driven by elections as assumed in PBC. In single-equation regressions, no evidence of political cycles are found, but Hausman tests suggest elections are endogenous in our regressions. A monetary cycle in Japan and an inflation cycle in the U.K. are uncovered through IV estimation.     

An Antidumping Law Can Be procompetitive

Home and foreign duopolists collude in the absence of an antidumping (AD) law because competition law makes renegotiation of collusion more costly than imposition of punishment for defection. Introduction of an AD law with a weak injury standard can undermine collusion by providing a low-cost mechanism for renegotiation. This induces dumping by the foreign firm and defection by the home firm. An AD law can be procompetitive, in contrast to recent literature suggesting that an AD law can facilitate collusion. The law is asymmetric, providing a greater incentive for home-firm than foreign-firm deviation.     

ADOPTION OF MODERN VARIETIES AND FERTILIZER USE ON RICE IN THE EASTERN TARAI OF NEPAL

Factors influencing the adoption of MV (modern variety) rices and fertilizer in the Tarai of southeastern Nepal were examined through multivariate probit (varietal adoption) and tobit (fertilizer adoption and use rates) regression models. This study reaffirms the finding that the adoption of modern rice technology is highest where irrigation exists. Tenure status and access to credit were significantly related to varietal adoption but family and farm size and the operator's education were not. Similar variables, in addition to fertilizer price, influenced the probability of fertilizer adoption and use rates on rice.