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Working Paper
Quality pricing-to-market
We document that in the European car industry, exchange rate pass-through is larger for low than for high quality cars. To rationalize this pattern, we develop a model of quality pricing and international trade based on the preferences of Mussa and Rosen (1978). Firms sell goods of heterogeneous quality to consumers that differ in their willingness to pay for quality. Each firm produces a unique quality of the good and enjoys local market power, which depends on the prices and qualities of its closest competitors. The market power of a firm depends on the prices and qualities of its direct competitors in the quality dimension. The top quality firm, being exposed to just one direct competitor, enjoys the highest market power and equilibrium markup. Because higher quality exporters are closer to the technological leader, markups are generally increasing in quality, exporting is relatively more profitable for high quality than for low quality firms, and the degree of exchange rate pass-through is decreasing in quality.
AUTHORS: Auer, Raphael; Chaney, Thomas; Saure, Philip
DATE: 2012
Working Paper
Market structure and exchange rate pass-through
In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate pass-through. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the passthrough rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs.
AUTHORS: Schoenle, Raphael; Auer, Raphael
DATE: 2012
Working Paper
Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi
How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.
AUTHORS: Auer, Raphael
DATE: 2011
Working Paper
Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies
This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., ?proof-of-work.? Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via ?double-spending? attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ?mining? income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation.
AUTHORS: Auer, Raphael
DATE: 2019-02-01
Journal Article
International liquidity provision during the financial crisis: a view from Switzerland
The authors document the provision of liquidity in Swiss francs (CHF) by the Swiss National Bank (SNB) to banks located outside Switzerland during the recent financial crisis. What makes the Swiss case special is the size of this liquidity provision?at times, 80 percent of all short-term CHF liquidity provided by the SNB?and the measures adopted to distribute this liquidity. In addition to making CHF available to other central banks via swap facilities, the SNB also allows banks outside Switzerland to directly participate in its repurchase agreement transactions. Although this policy was adopted for reasons predating the 2007-09 financial crisis, it proved tremendously helpful during the crisis by providing the European banking system direct access to the primary funding facility for CHF.
AUTHORS: Auer, Raphael; Kraenzlin, Sebastien
DATE: 2011-11
Working Paper
International liquidity provision during the financial crisis: a view from Switzerland
We document the provision of CHF liquidity by the Swiss National Bank (SNB) to banks domiciled outside Switzerland during the recent financial crisis. What makes the Swiss case special is the size of this liquidity provision?making up 80 percent of all short term CHF liquidity provided by the SNB?and also the measures that were adopted to distribute this liquidity. In addition to making CHF available to other central banks via SWAP facilities, the SNB also allows banks domiciled outside Switzerland to directly participate in its REPO transactions. Although this policy was adopted for reasons that predate the financial crisis, during the crisis it proved tremendously helpful as it gave the European banking system direct access to the primary funding facility for CHF.
AUTHORS: Auer, Raphael; Kraenzlin, Sebastien
DATE: 2011
Working Paper
Embedded Supervision: How to Build Regulation into Blockchain Finance
The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market?s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled that replaces today?s intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market?s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger?s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
AUTHORS: Auer, Raphael
DATE: 2019-10-01
Working Paper
Trade linkages and the globalisation of inflation in Asia and the Pacific
Some observers argue that increased real integration has led to greater co-movement of prices internationally. We examine the evidence for cross-border price spillovers among economies participating in the pan-Asian cross-border production networks. Starting with country-level data, we find that both producer price and consumer price inflation rates move more closely together between those Asian economies that trade more with one another, ie that share a higher degree of trade intensity. Next, using a novel data set based on the World Input-Output Database (WIOD), we examine the importance of the supply chain for cross-border price spillovers at the sectoral level. We document the increasing importance of imported intermediate inputs for economies in the Asia-Pacific region and examine the impact on domestic producer prices of changes in costs of imported intermediate inputs. Our results suggest that real integration through the supply chain matters for domestic price dynamics in the Asia-Pacific region.
AUTHORS: Mehrotra, Aaron; Auer, Raphael
DATE: 2014-04-01
Working Paper
Export basket and the effects of exchange rates on exports–why Switzerland is special
Why has Swiss export performance been so strong during the past quarters despite the strong appreciation of the CHF? In this paper, we use historical data on exchange rates and trade at the sectoral level to document that a contributing factor behind the limited impact of the exchange rate is the unique composition of Swiss exports. In particular, we document that the Swiss export basket is heavily concentrated in price-insensitive goods such as machinery or pharmaceuticals, where prices and thus the exchange rate have relatively little importance for demand. This makes the aggregate volume of Swiss exports less responsive to exchange rate changes than exports of other OECD nations.
AUTHORS: Auer, Raphael; Saure, Philip
DATE: 2011
Working Paper
Globalization and inflation in Europe
What is the impact of import competition from other low-wage countries (LWCs) on inflationary pressure in Western Europe? This paper seeks to understand whether labor-intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, IV estimates predict that LWC import competition is associated with strong price effects. More specifically, when Chinese exporters capture 1 percent of European market share, producer prices decrease about 2 percent. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe.
AUTHORS: Fischer, Andreas M.; Degen, Kathrin; Auer, Raphael
DATE: 2010