Consumer Goods from China Are Getting More Expensive
We find that, in a sharp reversal of earlier trends, U.S. import prices for consumer goods shipped from China have been rising rapidly in recent quarters—by 7 percent between 2010:Q2 and 2011:Q1. In this post, we track U.S. import price movements in Chinese goods in different product categories by creating an import index that uses highly disaggregated data. We also consider the likely causes of the recent rise in prices for consumer goods. If these price hikes persist, they could have important consequences for U.S. businesses and consumers because China is the largest single supplier of ...
A Way With Words: The Economics of the Fed’s Press Conference
When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke?s June press conference confirms the importance of his comments in the marketplace.
What’s Driving the Recent Slump in U.S. imports?
The growth in U.S. imports of goods has been stubbornly low since the second quarter of 2015, with an average annual growth rate of 0.7 percent. Growth has been even weaker for non-oil imports, which have increased at an average annual rate of only 0.1 percent. This is in sharp contrast to the pattern in the five quarters preceding the second quarter of 2015, when real non-oil imports were growing at an annualized rate of 8 percent per quarter. The timing of the weakness in import growth is particularly puzzling in light of the strong U.S. dollar, which appreciated 12 percent in 2015, ...
Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates
Border prices of traded goods are highly sensitive to exchange rates; however, the consumer price index (CPI) and the retail prices of goods that make up the CPI are more stable. This paper decomposes the sources of this price stability for twenty-one OECD (Organisation for Economic Co-operation and Development) countries, focusing on the important role of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported ...
Pass-through of exchange rates to consumption prices: what has changed and why
In this paper, we use cross-country and time-series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods as well as to non-traded goods. We highlight three reasons for the change in pass-through into the retail prices of goods. First, pass-through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors, meaning that the costs of imported goods as well as home-tradable goods ...
Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence
Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship?s life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and ...
International capital flow pressures
This paper presents a new measure of capital flow pressures in the form of a recast exchange market pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes a global risk response index, which reflects the country-specific sensitivity of capital flow pressures to measures of ...
A bargaining theory of trade invoicing and pricing
We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower ...
Equilibrium Sovereign Default with Exchange Rate Depreciation
This study proposes and quantitatively assesses a terms-of-trade penalty for defaulting: defaulters must exchange more of their own goods for imports, which causes an adjustment to the equilibrium exchange rate. This penalty can take the place of an ad hoc fall in output: Facing only this penalty and temporary exclusion from debt markets, countries are willing to maintain borrowing obligations up to a realistic level of debt. The terms-of-trade penalty is consistent with the observed relationship between sovereign default and a country's trade flows and prices. The defaulter's currency ...
The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited
This paper extends the previous literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation. We employ heterogeneous autoregressive (HAR) models to capture the quasi-long-memory properties of volatility and the Shapley-Owen R2 measure to quantify the contributions of components. We conclude that meteor showers are more influential than heat waves, that jumps play a modest but significant role in volatility transmission and that significant, bidirectional cross-rate volatility ...