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Abstract:
We document that the quality of earnings reported by politically connected firms is significantly poorer than that of similar non-connected companies. Moreover, we find that earnings quality has no predictive power for the likelihood of establishing connections. Hence, we rule out that our results (on average) are simply due to firms with ex-ante poor earnings quality establishing connections more often. Instead, our results suggest that, because of a lesser need to respond to market pressures to increase the quality of information, connected companies can afford disclosing lower quality accounting information. In particular, lower quality reported earnings is associated with a higher cost of debt only for the non-politically connected firms in the sample.

Political connections, information quality, accruals quality

Abstract:
Many firms voluntarily incur the costs of attempting to influence politicians. However, estimates of the value of political connections have been made in only a few extreme cases. We propose a new approach to valuing political ties that builds on these previous studies. We consider connected to a politician all companies headquartered in the politician's home town, and use an event study approach to value these ties at their unexpected termination. Analysis of a large number of sudden deaths from around the world since 1973 reveals a market adjusted 1.7% decline in the value of geographically connected companies. The decline in value is followed by a drop in the rate of growth in sales and access to credit. Our results additionally show a larger effect for family firms, firms with high growth prospects, firms operating in industries over which the politician has jurisdiction, and firms headquartered in highly corrupt countries.

political ties, political connections

Abstract:
Corporate lobbying activities are designed to influence legislators and thus to further company goals by encouraging favorable policies and/or outcomes. Using data made available by the Lobbying Disclosure Act of 1995, this study examines corporate lobbying activities from a financial perspective. We find that on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications and continue to hold when we account for potential sample selection. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation.

Corporate Lobbying, accounting performance, market returns, portfolio

Abstract:
We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the levels of the Big Mac RER can be measured meaningfully. Second, as the exact composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs.

In most economies, the exchange rate is the single most important relative price, one that potentially feeds back into a large range of transactions. Obstfeld and Rogoff (2000).

Abstract:
We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the levels of the Big Mac RER can be measured meaningfully. Second, as the exact composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs.

Real exchange rates, TAR models, law of one price, sigma-convergence, betaconvergence

Abstract:
This paper shows that many Asia-Pacific firms are significantly exposed to foreign exchange risk. Their exposure appears to be much more widespread than is typical for the large, western industrialized economies. The paper also shows that exchange rate pegs appear to do little to alleviate this widespread exposure against currencies other than the peg. The firms studied here are most exposed to fluctuations in the U.S. dollar; the yen and euro are important in a few countries. The extent of their exchange rate exposure has varied but not diminished over the last decade. The most widespread exchange rate sensitivity (not just the most exchange rate fluctuation) occurred during the Asian Crisis period; this is evident even after accounting for the local macroeconomic conditions that affect aggregate local returns.

economic exposure

Abstract:
This paper shows that many Asia-Pacific firms are significantly exposed to foreign exchange risk. Their exposure appears to be much more widespread than is typical for the large, western industrialized economies. The paper also shows that exchange rate pegs appear to do little to alleviate this widespread exposure against currencies other than the peg. The firms studied here are most exposed to fluctuations in the U.S. dollar; the yen and euro are important in a few countries. The extent of their exchange rate exposure has varied but not diminished over the last decade. The most widespread exchange rate sensitivity (not just the most exchange rate fluctuation) occurred during the Asian Crisis period; this is evident even after accounting for the local macroeconomic conditions that affect aggregate local returns.

economic exposure

Abstract:
Developing countries traditionally experience passthrough of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors' products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of passthrough and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set - prices of eight narrowly defined brand commodities, observed in 76 countries - we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors' prices and the CPI, can be explained by changes in the monetary environment - including a fall in long-term inflation. Real wages work to reduce passthrough to competitors' prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries.

Economics - International Economics, Economics - Macroeconomics, International Affairs/Globalization, International Development, International Trade and Finance

Abstract:
Developing countries traditionally exhibit passthrough of exchange rate changes that is greater and more rapid than high-income countries, but have experienced a rapid downward trend in recent years in the degree of short-run passthrough, and in the adjustment speed. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set - prices of eight narrowly defined brand commodities, observed in 76 countries - we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors' prices and the CPI, can be explained by changes in the monetary environment. Real wages also work to reduce passthrough to competitors' prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries.

Abstract:
We study the effect of a sovereign credit rating change of one country on the sovereign credit spreads of other countries from 1991 to 2000. We find evidence of spillover effects, that is, a ratings change in one country has a significant effect on sovereign credit spreads of other countries. This effect is asymmetric: positive ratings events abroad have no discernable impact on sovereign spreads, whereas negative ratings events are associated with an increase in spreads. On average, a one-notch downgrade of a sovereign bond is associated with a 12 basis point increase in spreads of sovereign bonds of other countries. Interestingly, the magnitude of the spillover effect following a negative ratings change is amplified by recent ratings changes in other countries. We distinguish between common information and differential components of spillovers. While common information spillovers imply that sovereign spreads move in tandem, differential spillovers are expected to result in opposite effects of ratings events across countries. Despite the predominance of common information spillovers, we also find evidence of differential spillovers among countries with highly negatively correlated capital flows or trade flows vis-a-vis the United States. That is, spreads in these countries generally fall in response to a downgrade of a country with highly negatively correlated capital or trade flows. Variables proxying for cultural or institutional linkages (e.g., common language, formal trade blocs, common-law legal systems), physical proximity, or rule of law traditions across countries do not seem to affect estimated spillover effects.

Abstract:
We study the effect of a sovereign credit rating change of one country on the sovereign credit spreads of other countries from 1991 to 2000. We find evidence of spillover effects, that is, a ratings change in one country has a significant effect on sovereign credit spreads of other countries. This effect is asymmetric: positive ratings events abroad have no discernable impact on sovereign spreads, whereas negative ratings events are associated with an increase in spreads. On average, a one-notch downgrade of a sovereign bond is associated with a 12 basis point increase in spreads of sovereign bonds of other countries. Interestingly, the magnitude of the spillover effect following a negative ratings change is amplified by recent ratings changes in other countries. We distinguish between common information and differential components of spillovers. While common information spillovers imply that sovereign spreads move in tandem, differential spillovers are expected to result in opposite effects of ratings events across countries. Despite the predominance of common information spillovers, we also find evidence of differential spillovers among countries with highly negatively correlated capital flows or trade flows vis-à-vis the United States. That is, spreads in these countries generally fall in response to a downgrade of a country with highly negatively correlated capital or trade flows. Variables proxying for cultural or institutional linkages (e.g., common language, formal trade blocs, common-law legal systems), physical proximity, or rule of law traditions across countries do not seem to affect estimated spillover effects.

Abstract:
Using highly disaggregated price data of the Big Mac Meal and its ten ingredients from twenty-five European countries since 1993, we investigate two questions related to the effects of the adoption of the Euro on prices. First, was the changeover to the euro accompanied, as many believe, by an increase in prices in member countries? Second, does the adoption of the euro promote goods market arbitrage in the form of a faster speed of convergence to a common price? On the first question, in order to net out global or regional effects on prices not related to the adoption of the euro, we compare the experience of eurozone countries to non-euro European countries in a 'difference-in-differences' specification. We perform statistical tests over different time horizons, and conclude that there is no evidence of significant price increases associated with the adoption of the euro even for food items. On the second question, we examine the trend in price dispersion as well as the persistence of deviations from the law of one price. Once After properly accounting for possible non-linearities, we find little systematic evidence of a significant improvement in goods market integration following the introduction of the euro. On these two questions (at least), there is no euro effect to be found.

price dispersion, goods market integration, euro

Abstract:
This study measures the proportion of real exchange rate movements that can be accounted for by movements in the relative price of non-traded goods using the framework employed by Engel (1999). Among the twenty-one bilateral Asian-Pacific real exchange rates considered here, that proportion is found to be trivially small for all possible horizons that the data allow - from one month up to 25 years. This pattern appears unaffected by the cross-sectional variation in either income level, or the degree of openness present among these Pacific-Rim economies. The only qualifications occur when considering fixed (or semi-fixed) exchange rate regimes.

Real Exchange Rate, MSE, Decomposition

Abstract:
We suggest it may be "too easy" to attribute real exchange rate movements to law of one price deviations. We show that it is immaterial whether one uses seemingly traded goods, nontraded goods, or even just a single, unimportant consumer good, say beer. The ease of attributing the variation to any such deviations is explained using a model with intermediate goods trade. In the model, the stage of production determines the traded/nontraded distinction. We find empirical substantiation for the model: law of one price deviations lose explanatory power; and - defined appropriately in terms of intermediate goods - relative prices matter.

Real Exchange Rates, PPP, MSE decomposition

Abstract:
We study the method proposed by Flood and Rose (FR, 2004, 2005) for checking for financial integration by estimating the risk-free rate using the idiosyncratic component of individual stock returns. Performing simulations with data with a known return generation process, we find that the FR methodology produces poor estimates of the risk-free rate, and hence the FR method fails to accept integration when true. We then show analytically that the FR method actually provides an estimate of the market return, and conclude the FR methodology would also falsely accept integration as long as the market returns in the two markets do not differ widely.

financial market integration, risk-free rate

Abstract:
This paper presents estimates of exchange rate pass-through derived from a panel of very disaggregated import unit-values to Hong Kong. The estimation approach builds on that utilized by Knetter (1989, 1993) to study export pricing and pricing to market. The three-dimensional data set examined comprises Hong Kong's top eight floating exchange rate trading partners, and twenty-one of the top five-digit SITC imports since 1992. Pass-through estimates for Hong Kong imply relatively faster import price adjustment than is typically found for larger, less open economies. These estimates are robust to a number of sensitivity tests. Finally these results confirm, from a different perspective, findings by Parsley (2001) that deviations from the law of one price play a relatively smaller role in real exchange rate movements for Hong Kong than for other East Asian countries.

Abstract:
This paper presents estimates of exchange rate pass-through derived from a panel of very disaggregated import unit-values to Hong Kong. The estimation approach builds on that utilized by Knetter (1989, 1993) to study export pricing and pricing to market. The three dimensional data set examined comprises Hong Kong's top eight floating exchange rate trading partners, and twenty-one of the top 5-digit SITC imports since 1992. Pass-through estimates for Hong Kong imply relatively faster import price adjustment than is typically found for larger, less open economies. These estimates are robust to a number of sensitivity tests. Finally these results confirm, from a different perspective, findings by Parsley (2001) that deviations from the law of one price play a relatively smaller role in real exchange rate movements for Hong Kong, than for other East Asian countries.

Exchange Rate Pass through

Abstract:
We examine the link between inflation and the variability of relative prices in U.S. equity markets and in U.S. goods and services markets. We find strong, comparable links in both sets of markets. This finding represents a puzzle since conventional wisdom ? derived from menu cost or imperfect information models ? is not compelling in equity markets. We next examine whether we can attribute the results to small sample biases. We do find an important but generally overlooked bias that is present in many existing studies. However, the bias is too small to explain our own findings, and the puzzle remains.

Relative Price Dispersion

Abstract:
A rapidly expanding literature studies the effect of currency union and other exchange rate arrangements on goods market integration. All existing studies employ a methodology based on observed volumes of trade. However, from a theoretical point of view the connection between market integration and the volume of trade is loose. In this paper, we propose a different metric of market integration, based on the dispersion of prices of identical products in different countries. This metric is motivated by the theory of arbitrage in the presence of transaction costs. We apply the methodology to a unique 3-dimensional data set that includes prices of 95 very disaggregated goods (e.g., light bulbs and toothpaste with fluoride) in 83 cities around the world from 1990 to 2000. We find that a currency board or a currency union generally provides a stimulus to goods market integration that goes far beyond merely reducing exchange rate volatility to zero. However, there are important exceptions. Long-term currency unions exhibit greater integration than more recent currency boards. All existing arrangements can improve their integration further relative to a U.S. benchmark.

pegs, currency board, dollarization, market integration

Abstract:
This Paper empirically studies the effect of instrumental and institutional stabilization of the exchange rate on the integration of goods markets. An instrumental stabilization of the exchange rate is accomplished through intervention in the foreign exchange market, or by monetary policies. An institutional stabilization is an adoption of a currency board or a common currency. In contrast to the literature that employs data on the volume of trade, an important novelty of this Paper is the use of a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities from around the world from 1990-2000. We find that goods market integration is increasing over time and is inversely related to distance, exchange rate variability, and tariff barriers. In addition, the impact of an institutional stabilization of the exchange rate provides a stimulus to goods market integration that goes far beyond an instrumental stabilization. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a US benchmark.

Hard pegs, currency union, dollarization, market integration

Abstract:
This paper empirically studies the effect of instrumental and institutional stabilization of the exchange rate on the integration of goods markets. An instrumental stabilization of the exchange rate is accomplished through intervention in the foreign exchange market, or by monetary policies. An institutional stabilization, is an adoption a currency board or a common currency. In contrast to the literature that employs data on the volume of trade, an important novelty of this paper is the use of a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities from around the world from 1990 to 2000. We find that goods market integration is increasing over time and is inversely related to distance, exchange rate variability, and tariff barriers. In addition, the impact of an institutional stabilization of the exchange rate provides a stimulus to goods market integration that goes far beyond an instrumental stabilization. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a U.S. benchmark.

Abstract:
This paper shows that many East Asian firms are significantly exposed to foreign exchange risk. Their exposure appears to be much more widespread than is typical for the large industrialized economies. The East Asian firms are most exposed to fluctuations in the U.S. dollar, though the mark and yen are important in a few countries. The extent of exchange rate exposure has varied over the last decade, but it does not appear to have diminished. The most widespread exchange rate sensitivity (not just the most exchange rate fluctuation) occurred during the Asian Crisis period; this is evident even after accounting for the local macroeconomic conditions that affect aggregate local returns. Finally, the East Asian evidence examined here provides no support for the idea that an exchange rate peg reduces foreign exchange exposure.

Abstract:
The real exchange rate has been called the single most important price in an economy, yet its behavior exhibits several puzzles. In this project, we use Big Mac prices as a unique prism to study the movement of real exchange rates. Part of our innovation is to match these prices to the prices of individual ingredients. There are a number of advantages associated with the approach. First, unlike the CPI real exchange rate, we can measure the Big Mac real exchange rate in levels in an economically meaningful way. Second, unlike the CPI real exchange rate, for which the attribution to tradable and non-tradable components involves assumptions on the weights and the functional form, we know (almost) the exact composition of a Big Mac, and can estimate the tradable and non-tradable components relatively precisely. Third, we can study the dynamics of the real exchange rate in a setting free of several biases inherent in examinations of aggregate CPI based real exchange rates. These biases - the product-aggregation bias (Imbs, Mumtaz, Ravn, and Rey, 2002), the temporal aggregation bias (Taylor, 2001), and the bias generated by non-compatible consumption baskets across countries - are candidate explanations for the puzzlingly slow mean reversion alluded to by Rogoff (1996). Finally, we show that Engel's result that deviations from the law of one price are sole explanation for real exchange rate movements does not hold generally. We offer some evidence that departure from the Engel effect can be systematically linked to economic factors.

Real exchange rates, TAR models, real exchange rate decompositions, sigma-convergence, beta-convergence

Abstract:
The real exchange rate (RER) has been called the single most important price, yet its behavior exhibits several puzzles. In this project, we use Big Mac prices as a unique prism to study the movement of real exchange rates. Part of our innovation is to match these prices to the prices of individual ingredients. There are a number of advantages associated with our approach. First, unlike the CPI RER, we can measure the Big Mac RER in levels. Second, unlike the CPI RER, for which the attribution to tradable and non-tradable components involves assumptions on the weights and the functional form, we (almost) know the exact composition of a Big Mac, and can estimate the tradable and non-tradable components relatively precisely. Third, we can study the dynamics of the RER in a setting free of: the product-aggregation bias, the temporal aggregation bias, and the bias generated by non-compatible consumption baskets across countries. Fourth that Engel's result that deviations from the law of one price are sole explanation for RER movements does not hold generally. We offer some evidence that departure from the Engel effect can be systematically linked to economic factors.

Abstract:
Using a panel of 51 prices from 48 cities in the United States we provide an upper bound estimate of the rate of convergence to Purchasing Power Parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.

Abstract:
This paper studies the effect of instrumental and institutional stabilization of exchange rate volatility on the integration of goods markets. Rather than using data on volume of trade, this paper employs a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world during 1990-2000. We find that the impact of an institutional stabilization - currency board or dollarization - promotes market integration far beyond an instrumental stabilization. Among them, long-term currency unions are more effective than more recent currency boards. All have room to improve relative to a U.S. benchmark.

Hard pegs, currency union, dollarization, market integration

Abstract:
A rapidly expanding literature studies the effect of currency union and other exchange rate arrangements on goods market integration. All existing studies employ a methodology based on observed volumes of trade. However, from a theoretical point of view the connection between market integration and the volume of trade is loose. In this paper, we propose a different metric of market integration, based on the dispersion of prices of identical products in different countries. This metric is motivated by the theory of arbitrage in the presence of transaction costs. We apply the methodology to a unique 3-dimensional data set that includes prices of 95 very disaggregated goods (e.g., light bulbs and toothpaste with fluoride) in 83 cities around the world from 1990 to 2000. We find that a currency board or a currency union generally provides a stimulus to goods market integration that goes far beyond merely reducing exchange rate volatility to zero. However, there are important exceptions. Long-term currency unions exhibit greater integration than more recent currency boards. All existing arrangements can improve their integration further relative to a U.S. benchmark.

hard pegs, currency board, dollarizatin, market integration

Abstract:
Many existing studies have found a correlation between inflation and price dispersion in goods markets. In this paper, we document that a similar correlation can be found in equity markets. We estimate the correlation between overall price changes and dispersion in the NYSE and in the NASDAQ. Using quarterly data from 1975 to 1999, we compare the stock market correlations with those of goods markets. We find striking correlations in both sets of markets. The most prominent explanations of the goods market correlation (such as menu costs) cannot plausibly apply to equity markets. Thus, our findings indicate that the correlation appears to be more widespread than can be accounted for by the usual explanations.

inflation and price dispersion, inflation and relative price variability

Abstract:
Crossing national borders adds significantly to price dispersion. This study of prices in Japan and the United States finds that a substantial part of that border effect is attributable to distance, shipping costs, exchange rates, and relative variability in wages.

Parsley and Wei exploit three-dimensional panel data on prices for 27 traded goods, over 88 quarters, across 96 cities in Japan and the United States, to answer several questions:
- Does the average exchange rate between countries stray further from zero than that between cities within a country?
- Is there any tendency for the average exchange rate to move closer to zero over time?
- Does the border narrow over time?
- Is there evidence linking changes in the so-called border effect - the extra dispersion in prices between cities in different countries beyond what physical distance could explain - with plausible economic explanations, such as exchange rate variability?

The authors present evidence that the intranational real exchange rates are substantially less volatile than the comparable distribution of international relative prices. They also show that an equally weighted average of commodity-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices.

Next they turn to economic explanations for the dynamics of the border effect.

Focusing on the dispersion of prices between city pairs, they confirm previous findings that crossing national borders adds significantly to price dispersion. Based on their point estimates, crossing the U.S.-Japan border is equivalent to adding between 2.5 and 13 million miles to the cross-country volatility of relative prices.

They infer that distance, exchange rates, shipping costs, and relative variability in wages influence the border effect. After those variables are controlled for, the border effect disappears.

This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to understand international capital flows. The authors may be contacted at david.parsley@owen.vanderbilt.edu or swei@worldbank.org.

Abstract:
This paper exploits a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan. We show that a simple average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Focusing on dispersion in prices between city-pairs, we find that crossing the U.S.-Japan Border' is equivalent to adding as much as 43,000 trillion miles to the cross-country volatility of relative prices. We turn next to economic explanations for this so-called border effect and to its dynamics. Distance, unit-shipping costs, and exchange rate variability, collectively, explain a substantial portion of the observed international market segmentation. Relative wage variability, on the other hand, has little independent impact on segmentation.

Abstract:
The paper studies export pricing to market (PTM) in a "small-country" context using a panel of disaggregated exports from Hong Kong since 1992. Conventional wisdom is that PTM is commonplace - except for US exports. This study provides a benchmark by which to interpret the puzzling behavior of US export prices. Empirically, Hong Kong's export price behavior is comparable to that of the US. This similarity reinforces the idea that PTM behavior is also a function of home market conditions and the ability to price discriminate across markets. There is little evidence of differences in PTM across Hong Kong's export destinations.

Abstract:
This study examines exchange rate pass-through in a 'small country' context. The study uses a panel of disaggregated exports from Hong Kong to its major flexible exchange rate destinations since 1992. Most existing evidence on pass-through is taken from G7 countries and finds that export prices (in the importing currency) respond less than fully to exchange rate changes. The notable exception is for exports from the United States. Existing evidence suggests that exporters from the U.S. apparently do not mitigate export prices in response to exchange rates, while other countries' exporters routinely pass-through less than 100% of exchange rate changes. This study provides a benchmark by which to interpret the puzzling behavior of U.S. export prices.

Empirically, Hong Kong's export price behavior overwhelmingly supports the competitive paradigm. In only a few cases is there evidence of less than complete pass-through by Hong Kong's exporters. The panel data set also allows an additional question to be addressed. In particular, there is no evidence of differences in pass-through across export destinations. Thus, by inference, near complete pass-through by U.S. exporters suggests similar competitive behavior.

Abstract:
This paper casts doubt on the validity of the hysteresis hypothesis as an explanation of the persistent U.S. trade deficits in the 1980s. We propose two tests to investigate two different implications of the hypothesis. The first implication is that cumulative changes in exchange rates, in addition to current exchange rate levels, are important determinants of trade flows. The second implication is that foreign exporting firms' perceptions of exchange rate volatility will affect their decisions to enter or exit the market. We find little support for either aspect of the hysteresis hypothesis.

Abstract:
Many firms voluntarily incur the costs of attempting to influence politicians. However, estimates of the value of political connections have been made in only a few cases. We propose a new approach to valuing political ties that builds on these previous studies. We consider connected to a politician all companies headquartered in the politician's hometown, and use an event study approach to value these ties at their unexpected termination. Analysis of a large number of sudden deaths from around the world since 1973, yields a 2% decline in market value of connected companies. Our stronger results are likely due to the lack of a clear event in earlier studies, and lead us to conclude that previous estimates understate the value of political ties.

Political connections, sudden deaths

Abstract:
This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Korea's monetary policy.

Exchange Rates, Exchange Rate Management, Monetary Policy Rule, Inflation Targeting, Exchange Rate Regimes, Exchange Rate Classification, Factor Instrumental Variables

Abstract:
This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Korea's monetary policy.

Exchange Rates, Exchange Rate Management, Monetary Policy Rule, Inflation Targeting, Exchange Rate Regimes, Exchange Rate Classification, Factor Instrumental Variables

Abstract:
We study the behavior of real exchange rates under various official designations of exchange rate arrangements. Examining many currencies, we find important differences across the designations. Most notably, real exchange rate mean reversion is fastest when nominal exchange rates are officially pegged. We also find a large nonlinear effect: adjustment is fastest when the real exchange rate deviates greatly from its mean. This nonlinear effect is also most striking among officially pegged currencies. Finally, we find that nominal exchange rates, rather than prices, do most of the adjusting.

convergence, panel

Abstract:
Central Banks that are primarily concerned with the behavior of prices will use monetary policy to insulate prices from exchange rate changes. Prices then appear unresponsive to the exchange rate. The observed relationships between prices and the exchange rate will reflect Central Bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determing the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts in a way to mitigate the impact of exchange rate fluctuations on domestic prices.

pass-through, endogeneity, monetary policy

Abstract:
This paper argues that the stability of exchange rate pass-through is not well tested in common econometric specifications of pass-through equations. This is because (a) expected future exchange rate changes are an importnt omitted variable in these estimations, and (b) the use of aggregate data complicates inference. commodity level estimates obtained from applying the Kalman filter are consistent with the apparent instability in aggregate pass-through. Moreover, by comparing these estimates to actual exchange rate movements, the observed instability is found to be consistent with forward-looking behavior as posited.

pass-through instability, econometric misspecification, Kalman filter

Abstract:
This paper points out an important difference between the effects of anticipated future exchange rate shocks on domestic and import prices when reputation effects exist. The distinction is relevant to discussions of the temporal stability of pass-through.

pass-through stability

Abstract:
This paper studies the effects of exchange rate uncertainty on prices in an intertemporal context. That is, we focus on the trade-offs between current and expected future volatility. We show that uncertainty matters even to risk neutral firms due to its effects on bid/ask spreads in foreign exchange. However, due to intertemporal considerations, firms may choose not to pass-through increases in volatility to prices. Moreover, ignoring these intertemporal considerations in empirical analyses will generally bias the resulting ordinary least squares estimates estimates of the effects of uncertainty.

exchange rate volatility, pass-through, risk neutral firms

Abstract:
It has been suggested that recent findings of a decline in aggregate exchange rate pass-through are due to changes in demand elasticities within the U.S., or to changes in competitive (supply) conditions in for those imports. An alternate explanation is that the commodity composition of U.S. imports has shifted in such a was as to change the overall pass-through. Evidence supportive of this conjecture is presented. We find, using sectoral level volume and import prices of imports from Japan, that U.S. imports are now more heavily concentrated in those sectors with traditionally low pass-through, whereas individual sector passthrough estimations are stable throughout the sample.

pass-through instability, commodity composition of trade

Abstract:
This paper presents new evidence that a positive association exists between inflation and relative prices and relative inflation rates in very disaggregated data for the United States over the period 1975 through 1992. There is also evidence that the response of relative prices and relative inflation rates to inflation varies inversely with the information content of a given shock to inflation. The relationship is studied from two cross-sectional perspectives using individual price series collected from forty-eight U.S. cities. Evidence on the persistence of the effects of inflation on relative prices is also presented. Results here demonstrate the absence of a long run relationship between inflation and relative price dispersion, i.e., the two series are not cointegrated. Finally, results from vector autoregressions further imply the effect is smaller than indicated by typical estimates.