Changes In Relative Prices Research Articles

Two Perspectives on Preferences and Structural Transformation

We assess the empirical importance of changes in income and relative prices for structural transformation in the postwar United States. We explain two natural approaches to the data: sectors may be categories of final expenditure or value added; e.g., the service sector may be the final expenditure on services or the value added from service industries. We estimate preferences for each approach and find that with final expenditure income effects are the dominant force behind structural transformation, whereas with value-added categories price effects are more important. We show how the input-output structure of the United States can reconcile these findings. (JEL E21, L16)

Commodity trade between EU and Egypt and Orcutt’s hypothesis

Orcutt hypothesized that trade flows respond faster to a change in the nominal exchange rate as compared to a change in relative prices. Although he recommended testing his hypothesis at commodity level, due to lack of commodity prices previous studies used aggregate trade flows of one country with the rest of the world and did not support the hypothesis. In this paper, we test Orcutt’s hypothesis using trade flows of 59 industries that trade between European Union and Egypt. These are the industries that account for 100 % of the trade between the two regions and for which price data are available. We find support for the Orcutt’s hypothesis in 1/3rd of industries.

Putting Prices on the Plate: The Industrial Revolution and its Impact on Traditional Cuisine in Three European Regions

Food traditions have been surveyed by many social scientists, but rarely from a purely economic viewpoint. This paper aims at introducing the economic logic of relative scarcities to the food table in order to explain the emergence and resilience of regional food traditions. The argument is straightforward. Traditional regional cuisine has its roots in the local least-cost diet. Rational choice theory implies that this least-cost diet seamlessly adapts to relative food prices. But since we still eat dishes which no longer are least-cost, the proposition needs some qualification. By incorporating the Becker-Stigler extended utility function, the concept of personal capital is added. Past consumption is assumed to influence present consumption, as preferences are accumulated in the individual’s personal capital. Consequently, food choice will not perfectly reflect relative prices and food traditions will change slower than relative prices otherwise suggest. Case studies of Lancashire in England, Piedmont in Italy and Western Norway are presented to explore the theoretical framework. Optimal least-cost diets both before and after each region’s industrial transition are quantified in a linear optimisation model. The pre-transition least-cost diets fairly well match the qualitative description of traditional regional cuisine. The post-transition diets in Lancashire and Piedmont clearly adapt to the relative price changes induced by industrialisation, particularly to the relative decline of wheat prices. The least-cost diet in Western Norway, however, remains static. The outcomes suggest that the modelled least-cost diets are relevant descriptions of the pre-industrial cuisines found in the three regions.

Export Dynamics in Large Devaluations

This paper studies export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, interest rates, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish export dynamics leading to more gradual net export dynamics, sharper contractions in output, and endogenous declines in labor productivity.

Intraday Stealth Trading and Volatility: The Evidence from the Warsaw Stock Exchange

The intraday volatility and volume U-shape pattern is well documented in the literature. It describes the common pattern of investor’s behavior on the stock markets: investors trade in the beginning and the end of the day more intensive than in the lunch time. However that pattern does not differentiate between trades’ sizes and investors characteristics. The stealth trading hypothesis states that informed traders tend to hide their information. There is a need for such behavior at the time of low volatility and they may achieve this by breaking up their trades into smaller parts. At the time of high volatility informed traders are willing to place large orders at the beginning and the end of the trading day because high volatility provides a sufficient camouflage for their information. We examine volatility pattern for small, medium and large trades and consider how durations between trades and spreads differ between trade size categories. Our sample consists of the data from the Warsaw Stock Exchange, which is organized as an order driven market. We show that medium-size trades are associated with relative large cumulative stock price changes, however these results are not robust when liquidity measures and durations between the consecutive trades are taken into account.

Export Dynamics in Large Devaluations

We study the source and consequences of sluggish export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, the interest rate, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish exports lead to more gradual net export reversals, sharper contractions and recoveries in output, and endogenous stagnation in labor productivity.

Measuring CPI's reliability: the stochastic approach to index numbers revisited

The reliability measurement of the Consumer Price Index (CPI) has recently drawn much attention, as the index number has been criticized for its inaccuracy in accessing the degree of inflation. This article centers on providing a new regression specification that can help better gauge the CPI's reliability. More specifically, based on the stochastic approach to index numbers, we argue that the conventional treatment of the systematic changes in relative prices should be made time variant. We therefore propose a more comprehensive regression specification by including additional dummies that represent different general inflation rate levels and business cycle phases. Under this framework, we are more capable of avoiding possible misspecifications in the regression equation, as was experienced by Clements and Izan (1987). It also allows us to better answer the ‘Keynes’ critic’ regarding the stochastic approach to index numbers. The empirical results of Australia and the US are used to validate the merit of our specification.

A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry

In this paper we empirically analyse two counterfactual situations facing an antitrust authority following the merger of two of the largest international cigarette companies. First we estimate a random coeffi cients model of the demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are consistent with the independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian antitrust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows that the model is partially successful in predicting the ranking of price changes across companies following the divestiture. This suggests structural econometric analysis using a random coefficients model can provide information for antitrust authorities assessing the implications of a potential merger and partial divestiture.

The sensitivity of tourism demand to exchange rate changes: an application to Swiss overnight stays in Austrian mountain villages during the winter season

This paper investigates the impact of the depreciation of the euro against the Swiss franc on tourism demand. The data consist of Swiss overnight stays in West Austrian ski resorts during the winter season. Using a panel error correction model, we found that the elasticity of tourism demand with respect to exchange rates is significantly larger than unity in absolute terms. In particular, the real exchange rate elasticity ranges between −1.5 using the dynamic panel data model and −2.2 for the long difference regression model. This indicates that Swiss winter tourists are highly sensitive to changes in exchange rates and relative prices. High elevation ski resorts benefit most from the depreciation of the euro against the Swiss franc. For Austrian ski resorts, tentative estimates suggest that the depreciation of the euro against the Swiss franc has led to an additional 173,000 overnight stays over the last four winter seasons.

Moving up the Quality Ladder? EU-China Dynamics in Clothing

We apply a simple method to study the relative quality of Chinese versus European products exported in the clothing sector after the end of the Multi-Fiber Arrangement. Based on the model of Foster et al., (2008), we interpret the change in relative export prices and quantities sold in narrowly defined product categories as an indicator of quality shifts. Using UN Comtrade data, we find that European varieties exported to the US typically sell for a higher price than identical Chinese varieties exported to the US, but this price gap is narrowing. Despite rising prices, Chinese varieties are gaining market share. This opposite movement of relative prices and quantities sold in the same destination market are a strong indication of China’s moving up the quality ladder in its clothing exports relative to the EU. While European core products in clothing are stable over time, Chinese exports show product dynamics with exit and entry of new core products every year.

Income and Substitution Effects of Estate Taxation

This paper evaluates the effect of estate taxes on labor supply. The analysis decomposes the effect of estate taxation into the substitution effect of relative price changes and the two income effects for which the estate tax is responsible. These two income effects arise from tax burdens on those who leave estates plus tax burdens on those who receive them. Despite the double income burden of the estate tax, existing empirical evidence suggests that the net effect of estate taxation on aggregate labor supply is uncertain.

Welfare consequences of food prices increases: Evidence from rural Mexico

This paper presents an analysis of the welfare consequences of recent increases in food prices in Mexico using micro-level data. We estimate a QUAIDS model of demand for food, using data collected to evaluate the conditional cash transfer program Oportunidades. We show how the poor have been affected by the recent increases and changes in relative prices of foods. We also show how a conditional cash transfer program provides a means of alleviating the problem of increasing staple prices, and simulate the impact of such a policy on household welfare and consumer demand. We contrast this policy with alternative policy responses, such as price subsidies, which distort relative prices and are less well-targeted.

Inflation and Sectoral Output Growth Variability in Bulgaria

This paper analyzes the relationship between inflation and sectoral output growth variability in Bulgaria using a monthly data set from 2000:01 to 2012:08. The Bulgarian economy is working under a unique currency board setting that exclusively allows the government to influence the money supply through its fiscal position on the asset side of the central bank's balance sheet. Abrupt relative price changes across sectors bring fluctuations in sectoral output growth. Nevertheless, inflation effects on average output growth are positive and linear. Besides, persistent real exchange rate appreciation causes lower growth and higher variability under the pegged exchange rate regime.

Preferences and Policies: An Intra‐Household Demand System

I estimate a household demand system with specific focus on allocation to children, adults and joint household goods. The main finding is that marginal dollars are spent disproportionately on adult‐assignable goods relative to the way in which the average dollar is spent. The estimation provides both income effects and a complete set of cross‐price effects, which informs analysis both of income transfers and of policies that induce relative price changes. Contrasted with earlier work, the demand system in this paper covers nearly all household expenditures. I show bias that results from reduced‐form systems.

Violation of the Law of Demand

Following the classic work of Mitjuschin, Polterovich and Milleron, necessary and sufficient as well as sufficient conditions have been developed for when the multicommodity Law of Demand holds. We show when the widely cited Mitjuschin and Polterovich sufficient condition also becomes necessary. Using this result, violation regions for the very popular Modified Bergson (or hyperbolic absolute risk aversion) class of utility functions are fully characterized in terms of preference parameters. For a natural extension of the constant elasticity of substitution member of the Modified Bergson family that is neither homothetic nor quasihomothetic, we create the first simple, explicit example of which we are aware that (i) fully characterizes violation regions in both the preference parameter and commodity spaces and (ii) analyzes the range of relative income and price changes within which violations occur.

Farmers’ Supply Response, Price of Corn Residue, and Its Economic Viability as an Energy Feedstock

Previous economic analyses of energy from corn stover assumed yield reductions from residue removal (without nutrient replacement) and limited or no supply response by farmers to changes in the price of stover. We exploit agronomic and cost information from a randomized block design experiment to model and quantify farmers’ supply response to changes in relative prices of corn stover, corn grain, and soybean. We then couple this supply response with a model of a cost-minimizing processing plant. Results suggest that stover-based energy may be closer to economic viability than previously found. In addition, in areas where reductions in corn yield due to corn monoculture are small, processing plants may find optimal to pay a higher price for stover to induce farmers to adopt continuous corn because it reduces transportation cost. This suggests that such areas may experience changes in their land cover configuration if stover-based energy does become commercially viable.

WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?

This paper studies the welfare impact of a gaming tax in a two-sector, trade base equilibrium model. Its partial-equilibrium part examines tax divisions between market participants and the impact of this divisiveness on the relative price of gaming. The general-equilibrium part analyzes the welfare effect of the tax via the resultant relative-price change. We establish that market conditions such as supply capacity and market size have a clear bearing on tax division and overall welfare, and that a gaming tax is more likely to be economically bad if less of the tax burden can be passed along to tourist players. A high tax can only be applied if much of the tax is borne by visitors; a low tax has to be adopted if otherwise. Since its small adverse effect can be easily absorbed by its induced economic growth, a low gaming tax will attract outside investment conducive to overall efficiency. We also point out that policy concerns as well as market conditions may all affect tax regimes and their differences as observed in the American and Asian markets. We find that gaming business reality supports our theoretical assertions.This paper was presented at the Southern Economic Journal Symposium on Gambling, Prediction Markets and Public Policy on September 15-16, 2008 in Nottingham, U.K.; we thank conference participants for their helpful comments. Also, we have benefited a lot from intensive discussions with Ricardo Chi Sen Siu about gaming tax issues in each revision of this paper. The usual disclaimers apply.

Distribution Capital and the Short- and Long-Run Import Demand Elasticity

International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes.

Distribution Capital and the Short- and Long-Run Import Demand Elasticity

International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes.

Revenge of the Optimum Currency Area

Revenge of the Optimum Currency Area