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Working Paper
Real exchange rates: measurement and implications for predicting U.S. external imbalances
That international trade flows respond to changes in real exchange rates is beyond question. What is less clear is whether the measurement of real exchange rates matters for characterizing and predicting such responses. To identify the implications of choosing a given measure of the real exchange rate, I examine how the parameter estimates and the forecast performance of a given model vary in response to alternative measures of real exchange rates. I reject a given measure if its use (a) implies estimates inconsistent with economic theory; (b) contradicts the assumptions needed for ...
Working Paper
A framework for economic forecasting
This paper proposes a tripartite framework of design, evaluation, and post-evaluation analysis for generating and interpreting economic forecasts. This framework's value is illustrated by re-examining mean square forecast errors from dynamic models and nonlinearity biases from empirical forecasts of U.S. external trade. Previous studies have examined properties such as nonlinearity bias and the possible nonmonotonicity and nonexistence of mean square forecast errors in isolation from other aspects of the forecasting process, resulting in inefficient forecasting techniques and seemingly ...
Working Paper
Can debtor countries service their debts? Income and price elasticities for exports of developing countries
Interest in income and price elasticities for international trade has increased recently because of the debt crisis that many developing countries are experiencing. Estimates of income elasticities of import demand, however, range from a low of 1.3 to a high of 4.7. Such differences have important implications for debtor and creditor countries alike. Using quarterly data for the period 1973-1981, this paper estimates income and price elasticities for non-oil imports of five major industrial countries from non-OPEC developing countries. The empirical results suggest that the income elasticity ...
Journal Article
Productivity developments abroad
This article reviews recent productivity trends in foreign industrial countries. The focus of the analysis is on whether productivity abroad has accelerated to an extent comparable to that observed in the United States. The authors find that foreign labor productivity, unlike that of the United States, has not accelerated in the latter half of the 1990s and discuss the role played by information technology in influencing foreign productivity trends as well as cyclical and methodological factors that are important in the analysis of these trends.
Working Paper
An empirical analysis of inflation in OECD countries
One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the ...
Working Paper
Exchange rate pass-through to U.S. import prices: some new evidence
This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the ...
Working Paper
A century of trade elasticities for Canada, Japan, and the United States
Virtually all that is known about the behavior of imports rests on studies estimating income and price elasticities with postwar data. But anyone examining the evolution of trade over the last century cannot avoid asking whether the postwar period provides enough information to characterize that behavior. Indeed, the literature ignoring that past offers a large range of elasticity estimates suggesting that the role of income and prices in determining imports is not known with any precision. This paper offers the first analysis ofthat role using data since 1890 for Canada, Japan, and the ...
Working Paper
Trade elasticities for G-7 countries
This paper reports the results of a project to estimate and test the stability properties of conventional equations relating real imports and exports of goods and services for the G-7 countries to their incomes and relative prices. We begin by estimating cointegration vectors and the error-correction formulations. We then test the stability of these equations using Chow and Kalman-Filter tests. The evidence suggests three findings. First, conventional trade equations and elasticities are stable enough, in most cases, to perform adequately in forecasting and policy simulations. Equations for ...