Price Level Volatility Research Articles

Creating Monetary Measurement Unit (MMU) as the Global Universal Measure for Hedging against Inflation and Currency Risk

The paper presents an indicator created to reflect the long-term stability in the trend of real growth of the global economy, based on the current market data through a basket of currencies with a government bond yields based premium. The results suggest that the indicator is adequate to be considered as a benchmark for widespread indexation, with a potential hedging for diverse types of contracts and assets against price level volatility and currency risk on an international scale.

An input–output model of exchange-rate pass-through

ABSTRACTThe impact of the exchange rate on price formation is often debated through a mechanism called the exchange-rate pass-through. Studies of the pass-through generally rely on econometric analysis implemented on time series data. This study examines pass-through to the domestic price level through an input–output model. The proposed model is implemented on a sample of countries, and a number of different variables connected to the pass-through are examined. A comparison across countries and sectors highlights the importance of the construction sector in price formation. National income is negatively related to the pass-through. A high dependence on intermediate imports implies higher pass-through. Price level volatility and pass-through are positively related; whereas a country’s monetary policy stance has no apparent effect. The effect of exchange-rate volatility is unclear; it is negative for the real effective exchange rate, the connection is very weak in the case of the nominal exchange rate.

THE WELFARE COST OF EXCESS VOLATILITY IN INCOMPLETE MARKETS WITH SUNSPOTS

In an incomplete markets economy with sunspots, the Pareto-criterion cannot rank sunspot equilibria of different levels of excess price-level volatility. Therefore, I propose a measure of excess volatility cost in terms of a period-0 endowment good. Ex-ante endowment subsidies are provided, in theory, to each consumer, so that the resulting equilibrium allocation of the higher volatility is Pareto-equivalent to the original benchmark equilibrium with a lower volatility level. The aggregate volatility cost is computed as the sum of all consumers' subsidies. Focusing on local analysis that considers small variations around a given volatility level, I show that the aggregate cost strictly increases in volatility even though each individual cost does not necessarily have this property.

Heterogeneous wage setting and endogenous macro volatility

In order to strengthen the debate on the foundations of aggregate business cycles, the science of macroeconomics has recently benefited from a series of contributions that emphasize the complex nature of collective human action. Progressively, agent heterogeneity, local interaction, sentiment formation and out-of-equilibrium dynamics are becoming central pieces on the analysis of short-term business fluctuations. This paper offers a contribution to this new literature by exploring a macro framework where endogenous fluctuations emerge regardless from the occurrence of shocks to technology or preferences. The proposed setting separates firms into two groups, which follow different wage setting strategies. The firms may systematically change from one class of wage setters to the other following local interaction rules and by making a global assessment of the profitability of each of the wage setting alternatives. Under reasonable parameterizations, long-term large periodicity cycles are generated; these cycles might constitute a meaningful component of the observed output gap and price level volatility, a component that complements the typical view on exogenous disturbances over an otherwise stable economy.

Price-level volatility and welfare in incomplete markets with sunspots

In an economy with incomplete financial markets as described by Cass (1989), there is typically a continuum of equilibria driven by sunspots. In some cases, there is no Pareto ranking among the different sunspot equilibria. However, this paper shows that a sunspot equilibrium with lower price-volatility is superior in economic welfare to one with higher price-volatility based on a compensation test of balanced tax-transfer plans. Specifically, I start with a non-singular benchmark equilibrium. For any nearby equilibrium prices with smaller volatility, there exists a small redistribution of first period endowments that achieves an equilibrium with the same price-volatility but is yet Pareto-superior to the benchmark equilibrium. Such a Pareto-improving redistribution does not exist for the nearby equilibrium with higher price-volatility.

Exchange rate determination: The role of factor price rigidities and nontradeables

This paper introduces factor (labor) markets into the intertemporal monetary model of Obstfeld and Rogoff and combines this richer market structure with a new utility-independent representation of nontradeables. This allows us to explore the international monetary transmission mechanism for factor price (wage) rigidities under different degrees of macroeconomic openness. Factor price rigidities imply similar properties for the international transmission mechanism as domestic producer price rigidities. Nontradeables give raise to interesting new effects under asymmetric monetary shocks: They create short-run PPP deviations, increase exchange rate volatility relative to price level volatility and reduce (positive) consumption and (negative) output comovements.

Price Level Volatility: A Simple Model of Money Taxes and Sunspots

We investigate sunspot equilibria in a static, one-commodity model with taxes and transfers denominated in money units. Volatility in this economy is purely monetary, since the only uncertainty is about the price level. We construct simple, robust examples of sunspot equilibria that arenotmere randomizations over certainty equilibria. We also identify the source of these SSEs: Equilibrium in the securities market is determinedas ifthere were no restricted consumers and the unrestricted consumers faceintrinsicuncertainty. Perfect securities markets eliminate allocation uncertainty, but they exacerbate price-level volatility.Journal of Economic LiteratureClassification Numbers: D50, D52, D84, E31, E62.

Bank regulation as an antidote to price level instability: A ‘real bills’ model that yields ‘quantity theory’ prescriptions

We use an overlapping generations model with a risky storage technology to describe a new type of ‘sunspot’ equilibrium characterized by excessive price level volatility and overinvestment in stored goods. The features of this equilibrium lead us to interpret it as involving ‘speculation’ and as arising when banks create excessive quantities of money. This interpretation provides welfare justification for imposing quantity limits on the bank money stock. We argue that the monetary regime established in England under Peel's Act imposed such a quantity limit. Our findings support quantity theorists' traditional view that the possibility of ‘overissue’ provides a rationale for bank regulation.