Behavior Of Relative Prices Research Articles

Returns to Scale, Productivity and Competition: Empirical Evidence from U.S. Manufacturing and Construction Establishments

We build a model of firm entry and exit and show how returns to scale shape firm survival, the equilibrium productivity and size distributions and firm concentration. High productivity dispersion and high concentration ratios need not reflect inefficiencies when returns to scale are strongly decreasing. We apply a broad set of structural and reduced-form estimation techniques to establishment-level data from the U.S. Census of Construction and Manufacturing to assess returns to scale and productivity dispersion across establishments. Indeed, industries with lower returns to scale are characterized by higher productivity dispersion and lower concentration ratios as predicted in the model. Returns to scale are 0.96 on average, but range from 0.86 in Non-metallic Minerals to 1.3 in Semiconductors. Returns to scale tend to be highest in durable manufacturing, medium in non-durable manufacturing and lowest in the production of housing. An economy characterized by such differences in its sectoral production structure will exhibit long-run structural change away from construction and non-durable manufacturing, as in the data, and endogenously replicate the cyclical behavior of relative prices in the U.S.: relative durable prices are counter-cyclical while relative housing prices are pro-cyclical.

Business potential in Russia: Competitive growth in the manufacturing sector

The paper analyzes the consequences of radical reforms in the Russian economy for the development of the manufacturing sector, including the behavior of relative prices for manufactured goods, downsizing of enterprises, and problems of the noncompetitiveness of enterprises in the manufacturing sector compared with the approaches to competitiveness in the economy of the United States. The full development of vertically integrated multisectoral corporations owned by the federal government is considered to be a possibility for overcoming the noncompetitiveness of enterprises in the manufacturing sector.

A Solution to the Palm — 3Com Spin-Off Puzzles

This paper revisits the relative pricing of Palm and 3Com shares in 2000. We offer a simple rational explanation of the Palm/3Com price relationship before Palm’s spinoff is completed. Lending fees and spin-off uncertainty are crucially important to understanding the relative levels and co-movement of Palm and 3Com share prices. We use Palm’s post-spinoff forward prices (calculated from the market prices of calls and puts) and model the spin-off uncertainty in valuing 3Com. Considering forward pricing and spin-off uncertainty resolves various pricing puzzles and explains the observed empirical evidence, including a sharp change in relative price behavior once the spinoff uncertainty is resolved on May 8, 2000.

Relative price convergence among US cities: Does the choice of numeraire city matter?

Using annual consumer price index (CPI) data for 17 US cities between 1918 and 2007, this paper examines the implications of the choice of numeraire city for the behavior of relative prices across cities. A common factor representation of relative price is used to understand the nature of the dynamic behavior of relative prices. This paper finds overwhelming evidence of convergence in relative prices with Atlanta, Chicago, and Los Angeles as the numeraire city. Further, with Boston, Cincinnati, Houston, San Francisco, Seattle, and St. Louis, the lack of convergence in relative prices is found to be driven by the nonstationarity of the common factor. In contrast, with New York, Philadelphia, and Portland, while the common factor is stationary, the idiosyncratic components are unit root processes. This paper further investigates the implications of the choice of numeraire city by estimating the half-life with different numeraire cities, after correcting for the small-sample and the time aggregation bias. These half-life estimates are smaller than those reported in previous studies and they vary depending on the choice of numeraire city. The relative price volatility seems to hold some promise for explaining why the choice of numeraire city matters for the unit root results or the half-life estimates.

Openness and the Sectoral Effects of Fiscal Policy

Based on structural VAR evidence for the U.S., we document that a rise in govemment spending generates three facts: (I ) an appreciation of the terms of trade: (2) a fall in the price of traded vs. non-traded goods (proxied by the price of goods relative to services), and (3) a positive co-movement between the manufacturing and the service sector, both in consumption and production. We show that, even if govetument spending is assumed to be as intensive in goods and services as households' consumption, the relative price behavior can be explained as a simple implication of trade openness. However, a baseline open-economy business-cycle mtxlel has problems in rationalizing simultaneously the sectoral co-movement of quantities and the behavior of relative prices. This anomaly is enhanced if govemment spending is assumed to be intensive in non-traded goods. (JEL: E.'I2, F41, E62)

Walrasian General Equilibrium Allocations and Dynamics in Two-Sector Growth Models

Abstract This paper analyzes and solves miniature Walrasian general equilibrium systems of momentary and moving equilibria. The Walrasian framework encompasses the fundamental neoclassical and classical two-sector growth models; the families of solutions of steady-state and persistent growth per capita in various competitive two-sector economies are parametrically characterized. Moreover, the endogenous behavior of relative prices and the sectoral allocation of primary factors are analyzed in detail. The technology parameters of the capital good industry are decisive for obtaining long-run per capita growth in closed (global) economies. A review of the literature complements the theorems on the general equilibrium allocations, dynamic systems, and the time paths of Walrasian two-sector economies.

The Law of One Price in Scandinavian Duty-Free Stores

Many empirical studies have rejected the law of one price. That prices of a good differ across locations has been explained by differences in product attributes and costs of local inputs, transport costs, trade barriers, and that buyers have imperfect information about prices in different locations; see Penelopi K. Goldberg and Michael M. Knetter (1997) for a survey. We examine the law of one price in situations where none of the mentioned reasons for its failure can be invoked. It has also been suggested that deviations from the law of one price are a consequence of rigid nominal prices and that different countries typically have different currencies. We explore whether this can contribute to our understanding of deviations from the law of one price. Our data are taken from three Scandinavian duty-free outlets, where each product (at the same location) has price tags in at least two currencies. Hence, a consumer has the option to choose between several prices for the same identical good. In such a setting there is a strong prior that the law of one price (LOP hereafter) holds well. However, the potential for arbitrage will arise because nominal prices are not continuously adjusted while exchange rates fluctuate daily. Based on standard tests, we reject LOP at all duty-free outlets. Given that LOP does not hold here, it is less surprising that many previous studies have found that prices of similar products at different locations differ significantly. Nevertheless, the main conclusion of the paper is that in this natural experiment, LOP remains a useful guide to the behavior of relative prices. As deviations become large, nominal prices are adjusted to reduce the deviations from LOP, thereby limiting arbitrage opportunities. The patterns at the duty-free outlets suggest that there is a band of inaction so that small deviations from LOP may persist (for almost a decade in one case), but that large deviations quickly lead firms to adjust relative prices. The findings are consistent with costly arbitrage and fixed costs of adjusting nominal prices.

Comment on Optimal Exchange Rate Policy

Transportation costs aside, under most circumstances, when markets are complete, when perfect competition prevails, and prices adjust instantaneously, an economy's choice of the exchange rate may not be that significant. However, when one of these features is missing, changes in the nominal exchange rate may have real effects because they can affect the behavior of relative prices over time. Charles' hunch is that changes in the nominal peso-dollar exchange rate may affect the real exchange rate because of violations to the law of one price in the conditions of trade between Mexico and the United States. This paper examines the optimal exchange rate policy when, because of some underlying price stickiness and local-currency pricing effects, the law of one price fails. As a way of motivation, in section I of the paper, Charles starts with an expression that decomposes consumer prices into tradeables and nontradeables. He also obtains an expression that describes changes in the real exchange rate in terms of deviations from the law of one price and changes in the relative prices of tradeables to nontradeables. Applying the insight of some of his earlier work, Charles tries to disentangle the alternative sources of changes in the real exchange rate. He focuses on the commodities component of the consumer prices for the U.S. and consumer prices of traded goods for Mexico. He reports that his analysis suggests that it is violations of the law of one price that dominate real consumer exchange rates in Mexico. There could be other reasons for his observation that the law of one price fails, such as the presence of nontraded marketing services. Charles reports that his analysis, at the level of disaggregation he picks, suggests that marketing factors are not likely to be very relevant in explaining movements in the U.S./Mexico real exchange rate. The question remains; why is the law of one price violated? It is important to answer this question to better construct an appropriate model in which to evaluate the optimality of alternative exchange rate regimes. He reports that there are two pieces of information that may help in resolving what accounts for violations to the law of one price. The first piece of information is Rogers (1999). As Charles reports, Rogers extends Rogers and Engel (1996) by looking at aggregate consumer prices for cities

Relative Price Riddles in International Business Cycle Theory: Are Transport Costs the Explanation?

We study relative price behavior in an international business cycle model with specialization in production, in which a goods market friction is introduced through transport costs. The transport technology allows for flexible transport costs. We analyze whether this extension can account for the striking differences between theory and data as far as the moments of terms of trade and real exchange rates are concerned. We find that transport costs increase both the volatility of the terms of trade and the volatility of the real exchange rate. However, unless the transport technology is specified by a Leontief technology, transport costs do not resolve the quantitative discrepancies between theory and data. A surprising result is that transport costs may actually lower the persistence of the real exchange rate, a finding that is in contrast to much of the emphasis of the empirical literature.

Relative Prices and Inflation in Poland 1989-1997

The paper is organized as follows: Section 2 discusses briefly two main groups of theories that link inflation and relative price variability and provides a sketch of a survey of the literature. Section 3 takes on Ball and Mankiw's models predicting the causality from relative price variability to inflation and discusses it in more detail. Section 4 provides a brief background of the factors underlying Polish relative price variability and empirical evidence on relative price behavior in Poland. The theoretical model as well as obtained regression results are discussed in section 5. Section 6 takes a closer look at relative price changes on a cumulative basis and section 7 introduces the Cukierman and Leiderman model of price controls with its policy-related implications. Finally, section 8 concludes with a summary of results, conclusions and a sketch of possible policy recommendation.

The Relative Price Differential between Higher and Lower Priced Homes

The varying risk characteristics of homeownership housing by value stratification have been considered in a number of recent papers. These papers have obtained conflicting empirical results and interpretations. This paper attempts to provide an analytical framework for reconciling these diverse results and for understanding relative price behavior. The paper indicates that the relative price differential between high and low priced homes depends on both monetary and real variables. The analysis demonstrates that monetary shocks, manifest in rising expected inflation and real interest rates, widen the price differential between higher and lower priced homes, and real shocks, manifest in rising real income and employment, narrow the differential.

Real Exchange Rates and the Prices of Nontradable Goods

This paper attempts to provide a perspective on real exchange rate developments following the inception of the EMS. The focus is on structural determinants of real exchange rates, notably the behavior of tradables and nontradable prices and productivity. It is found that changes in the relative price of tradable goods in terms of nontradables account for a sizable fraction of real exchange rate dynamics during the EMS period. Sectoral productivity growth differential help explain the behavior of the relative price of tradable goods, especially in the long run. There is also some evidence that the EMS has extended on relative price behavior.

Real Exchange Rates and the Prices of Nontradable Goods

This paper attempts to provide a perspective on real exchange rate developments following the inception of the EMS. The focus is on structural determinants of real exchange rates, notably the behavior of tradables and nontradable prices and productivity. It is found that changes in the relative price of tradable goods in terms of nontradables account for a sizable fraction of real exchange rate dynamics during the EMS period. Sectoral productivity growth differential help explain the behavior of the relative price of tradable goods, especially in the long run. There is also some evidence that the EMS has extended on relative price behavior.

Dynamic comparative advantage: Some implications for trade policy in North America

This paper explores the implications of changing North American trade policies for dynamic comparative advantage and shows, with examples from the energy and high-technology sectors, how a new policy based on interdependence might work. Newly industrializing countries such as Mexico should aim to break into industries with progressively higher technological and value-added components, such as computer manufacturing—industries that are entering a period of expanded demand and going beyond the period of greatest capital intensity. Although few Mexican firms might be expected to enter such oligopolistic markets alone (at least in the short run), they could combine forces with established enterprises abroad in order to permit gradual market penetration. The examples in the paper illustrate the need for a stable macroeconomic framework for policymaking that includes exchange rates, investment incentives, relative price behavior, taxes, intellectual property rights, labor and environmental regulations, capital market policies, harmonization of standards, and other measures. There is also a need for policies that anticipate the potential private and social returns of activities that might be overlooked in a static framework.

Building Blocks of Market Clearing Business Cycle Models

We compare "real business cycle" and increasing returns models of economic fluctuations. In these models, business cycles are driven by productivity changes resulting either from technology shocks or from movements along the increasing returns production function. We stress four crucial building blocks that give both types of models hope of fitting the data. These building blocks include durability of goods, specialized labor, imperfect credit and elastic labor supply. We also present new evidence on co-movement of both outputs and labor inputs across sectors and on the behavior of relative prices over the business cycle. We conclude that the increasing returns model is easier to reconcile with the data than the real business cycle model.

On a Two-Sector Model of Economic Growth with Exhaustible Natural Resources

Recent contributions to the theory of economic growth with exhaustible natural resources are concerned mainly with deriving the optimal rate of depletion of a resource stock and with the problem of how to attain an equitable balance between present and future generations. Other theories are interested in whether a competitive market achieves efficient depletion of the exhaustible resources. These conclude that, to ensure efficiency of a competitive economy under conditions of perfect capital markets, it is required that individuals have perfect foresight, or there exist futures markets extending into an infinite future. The basic framework of these works is the one-sector model. The purpose of this paper is to extend the analysis to a two-sector model and to examine the effects of the depletion of exhaustible resources on the relative prices and the relative growth of each sector. An economy is considered in which consumption and investment goods are produced by separate production functions and using exhaustible natural resources in different intensities. The dynamic behavior of relative prices and the growth pattern of the economy are analyzed under assumptions of a constant-savings ratio, perfect capital markets, and perfect foresight. It is shown that the growth rates of the two sectorsmore » and the dynamic paths of the relative prices depend crucially on the initial stocks of capital and exhaustible resources, as well as the relative factor intensities of the two sectors. 11 references.« less

The Austrian Theory of Capital in Relation to Partial Equilibrium Theory

Consideration of durable instruments does not impair the formal validity of the Austrian analysis, 118.—Capital from the point of view of the individual entrepreneur, 122. — Continuity of the production function, 123.— Derivation of time factors from the production function, 124. — Speed of turnover, 125.— Working capital, 129.— Discounted marginal productivity, 132. — Fixed capital, 134. — Cost of services of durable instruments, 135.— Effect of small changes in the rate of interest on the relative employments of rival and complementary factors, 138. — Effect on speed of turnover of capital behavior of relative prices, 149.