Comparing apples and oranges
Tracking prices over time is easy when the object in question doesn't change much-say, an orange. But the process is difficult when there are frequent changes in the quality of the item-say, an Apple computer. Hedonics provides the solution.
Excluding items from personal consumption expenditures inflation
Core inflation measures constructed by excluding particularly volatile items from the price index have a long history. The most common such measures are indexes excluding the prices of food and energy items. This paper attempts to shed some statistical light on the impact of excluding certain items from the personal consumption expenditures (PCE) price index. In particular, I am interested in the trade-off between reducing shortrun volatility (relative to the volatility of the headline index) and possibly distorting the measurement of inflation over longer horizons. Some of the questions this ...
Estimating the border effect: some new evidence
To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as ...
The hitchhiker’s guide to missing import price changes and pass-through
A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics microdata, we derive ...
Inflation measurement and price volatility
Remarks before the Charlotte Economics Club, Charlotte, N.C., October 4, 2007. ; "Those of us responsible for crafting U.S. monetary policy cannot afford to be distracted by the flux of short-term price changes that are destined to be unwound. Our eye should be focused on underlying inflationary pressures, some of which may indeed be coming from food and energy markets. Routinely excluding food and oil price movements from our inflation gauges may have made sense in the 1970s, the 1980s and even the 1990s--but not now, nor in the next few years."
Introductory remarks to the Price Measurement for Monetary Policy Conference
Remarks given to a conference organized by the Federal Reserve Banks of Dallas and Cleveland,> Dallas, Texas, May 24, 2007 ; "One of our main criticisms here at the Dallas Fed of much of the core inflation literature is that it lacks theoretical coherence. It reminds me of the time-honored saying that an economist is someone who sees something work in practice and then wonders if it can work in theory."
How rigid are producer prices?
Conventional wisdom suggests that producer prices are more rigid than consumer prices and therefore play less of a role in the allocation of goods and services. Analyzing 1987-2008 microdata collected by the U.S. Bureau of Labor Statistics for the producer price index, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as consumer prices that include sales and substantially less rigidity than consumer prices that exclude them. Moreover, large firms change prices two to three times more frequently than small firms do, and by smaller amounts, ...
The stability of dummy variable price measures obtained from hedonic regressions
Although the stability of coefficients from hedonic regressions has received much attention recently, that of dummy variable (DV) price indexes obtained from these regressions has not. In principle, one problem translates into the other only when some prices are not observed in the data. Numerically, however, DV measures obtained from a "typical" specification can be quite unstable even when the number of missing prices is small. To the extent that collinearity is an important source of the problem, functional forms that use (orthogonal) fixed effects to control for quality differences across ...
What's behind volatile import prices from China?
In a sharp departure from earlier trends, the price of U.S. imports from China rose 6 percent in the 2006-08 period. To explore the forces behind this surprising increase, the authors create a new import index that uses highly disaggregated data to track price developments in different product types. The index reveals that the largest price increases were concentrated in industrial supplies - goods that rely heavily on commodity inputs. The authors conclude that the surge in commodity prices through mid-2008 was the primary driver of the rising import prices from China.