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Discussion Paper
Why Hasn't the Yen Depreciation Spurred Japanese Exports?
The Japanese yen depreciated 30 percent from its peak in the fourth quarter of 2011 against its trading partners. This was expected to boost its exports as the lower yen makes Japanese goods more competitive on global markets. Instead, the volume of Japanese exports of goods actually fell by 0.6 percent over this same period, as can be seen in the chart below. Weaker external demand surely contributed to this poor export performance. Yet over the same period, U.S. goods exports grew by more than 6 percent, which suggests that other factors are also at play. In this post, we draw on our recent ...
Discussion Paper
The Exchange Rate Disconnect
Why do large movements in exchange rates have small effects on international goods prices? This empirical regularity is a central puzzle in international macroeconomics. In a new study, we show that the key to understanding this exchange rate disconnect is to take into account that the largest exporters are also the largest importers. This is important because when exporters import their intermediate inputs, they face offsetting exchange rate effects on their marginal costs. For example, a depreciation of the euro relative to the U.S. dollar makes exports in U.S. dollars cheaper?but it also ...
Report
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 ...
Discussion Paper
The U.S. Dollar's Global Roles: Where Do Things Stand?
Previous Liberty Street Economics analysis and New York Fed research addressed the potential implications for the United States if the dollar’s global role changed, noting that the currency might not retain its dominance forever. This post checks the status of the dollar, considering whether any erosion in the dollar’s international standing has occurred. The evidence to date is that the dollar remains the world’s dominant currency by broad margins. Alternatives have not gained extensive traction, albeit this does not rule out potential future pressures.
Discussion Paper
From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market
How do changes in the interest rate that the Federal Reserve pays on reserves affect interest rates in money markets in which the Fed does not participate? And through which channels do changes in the so-called administered rates influence rates in onshore and offshore U.S. dollar money markets? This post offers an interactive map illustrating the web of relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market.
Discussion Paper
The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors
In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the ...
Report
Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies
This paper examines the impact of exchange rates and import prices on the domestic producer price index and consumer price index in selected industrialized economies. The empirical model is a vector autoregression incorporating a distribution chain of pricing. When the model is estimated over the post-Bretton Woods era, impulse responses indicate that exchange rates have a modest effect on domestic price inflation while import prices have a stronger effect. Pass-through is larger in countries with a larger import share and more persistent exchange rates and import prices. Over 1996-98, these ...
Working Paper
The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes
We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending?a final digit, usually a zero or nine, used by a majority of prices in that store?and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for ...
Working Paper
Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada
Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all ...
Discussion Paper
Real Inventory Slowdowns
Inventory investment plays a central role in business cycle fluctuations. This post examines whether inventory investment amplifies or dampens economic fluctuations following a tightening in financial conditions. We find evidence supporting an amplification mechanism. This analysis suggests that inventory accumulation will be a drag on economic activity this year but provide a boost in 2020.