Unanticipated Price Research Articles

Inflation news and the poor: The role of ethnic heterogeneity

• Income is more unequally distributed in ethnically fractionalized societies than in homogenous societies. • I show that Inflation shocks reduce the income share of the poor in ethnically fractionalized countries, leading to greater income inequality. • However, in homogenous societies, inflation shocks benefit the poor in relative terms. • Higher volatility of inflation in ethnically fractionalized countries likely increases demand for inflation hedging among the rich. Incomes are more unequally distributed in ethnically diverse populations than in more homogenous ones. In this paper, I help explain this pattern by showing that unanticipated inflation reduces the income share of the poor in ethnically fractionalized countries, while increasing it in ethnically homogenous populations. I propose a mechanism to explain the result, where inflation-hedging among the rich is more prevalent in ethnically fractionalized countries because inflation is more volatile. To identify episodes of unanticipated price increases, I construct a novel data set of inflation shocks across 189 countries, using the revisions to the inflation forecasts in IMFs World Economic outlook between spring and fall reports.

Generalized Autoregressive Conditional Heteroskedastic Model to Examine Silver Price Volatility and Its Macroeconomic Determinant in Ethiopia Market

Like most commodities, the price of silver is driven by supply and demand speculation, which makes the price of silver notoriously volatile due to the smaller market, lower market liquidity, and fluctuations in demand between industrial and store value use. The concern of this article was to model and forecast the silver price volatility dynamics on the Ethiopian market using GARCH family models using data from January 1998 to January 2014. The price return series of silver shows the characteristics of financial time series such as leptokurtic distributions and thus can suitably be modeled using GARCH family models. An empirical investigation was conducted to model price volatility using GARCH family models. Among the GARCH family models considered in this study, ARMA (1, 3)-EGARCH (3, 2) model with the normal distributional assumption of residuals was found to be a better fit for price volatility of silver. Among the exogenous variables considered in this study, saving interest rate and general inflation rate have a statistically significant effect on monthly silver price volatility. In the EGARCH (3, 2) volatility model, the asymmetric term was found to be positive and significant. This is an indication that the unanticipated price increase had a greater impact on price volatility than the unanticipated price decrease in silver. Then, concerned stockholders such as portfolio managers, planners, bankers, and investors should intervene and pay due attention to these factors in the formulation of financial and related market policy.

The Optimal Wheat Futures Hedge at the Euronext Paris from a Farmer’s Perspective

Futures contracts are extensively used by commer-cial market participants to hedge commodities against the risk of adverse price fluctuations. But although farmers have faced increased volatility in commodity prices in recent years, only very few of them actively use hedging as a risk management instrument. In this article we analyze the hedging potential of the Euronext milling wheat futures market for German farmers based on the estimation of optimal static as well as optimal dynamic hedge ratios. We find that both hedging approximately one year and half a year before harvesting leads to a reduction in the variance of returns compared with unhedged portfolios. But this risk minimization is achieved at the cost of lower returns on average. In addition we find that margin calls might be one of the reasons why so few farmers hedge since they cause liquidity problems especially in marketing years with unanticipated price shocks.

MANAGING THE GAP BETWEEN ACTUAL AND TARGET CAPITAL STRUCTURE: AN EVIDENCE FROM PAKISTAN

Investment framework is one of the most significant components that impact the company’s value. Reliable funding choices for a company generally lead to a capital structure that increases the firm’s value (Abor, 2006). Early studies provide contradictory reviews about a company’s capital structure decisions. This paper investigates the partial adjustment model for a company’s target capital structure. The study also explores how companies operating in different sectors of Pakistani market adjust towards the target capital structure levels. The study also recognizes that an unanticipated share price change also have an effect on the target capital structure. The results indicate that companies do have target leverage and that their adjustment speed varies from sector to sector of the Pakistani market. A typical sector closes more than 50% of the gap between its actual and its target debt ratios within one year.

The effects of macroeconomic shocks on the Brunei economy: a sign restriction approach

ABSTRACTThis paper examines the impact of oil price, foreign monetary policy, and domestic government spending shocks on the Brunei economy from 2003Q1 to 2014Q3 based on a structural vector autoregression model with shocks identified using the sign restriction methodology. The results show that an unanticipated oil price decline has a negative effect on government expenditure, and consequently non-oil GDP. Foreign monetary policy shocks also affect the economy through their impact on the interest rate, prices, and the real exchange rate. The procyclical fiscal stance, which exacerbates the business cycle, is an important source of macroeconomic fluctuations. Government expenditure smoothing should be accorded high importance in the conduct of fiscal policy. This could be achieved by using oil reserve funds to finance budget deficits to delink government spending from volatile oil revenue.

Anticipated vs. unanticipated house price movements and transaction volume

Using data from England and Wales, we analyze the relationship between house prices and transaction volume (number of houses sold) and find that there is a negative relationship. When we decompose price changes into anticipated and unanticipated components we find that while anticipated house price changes positively affect transaction volume, unanticipated price changes have a negative effect. These findings give insights for the theories which try to explain the relationship between house prices and transaction volume. Our findings are inconsistent with the “down-payment effect” approach developed by Stein (1995) and Ortalo-Magne and Rady (2006), and with the “loss aversion behavior” approach discussed by Genesove and Mayer (2001). However, our results support the evidence of asymmetric decisions on the buyer and seller side documented in Case and Shiller (1988) and partially support the mechanisms in search and matching models.

The Robertson connection between the natural rates of interest and unemployment

The paper explores the connection between the natural rates of unemployment and interest first put forward in the literature by Dennis Robertson in the 1930s. This looks at monetary dynamics in the business cycle and assesses the Robertsonian contribution to developments in macroeconomics before and after Keynes's General Theory. Robertson showed how unanticipated price level changes affect supply and demand in the labour market, as well as the saving–investment process in the credit market. Robertson's approach to economic policy was that of getting the relations right between cyclical changes in prices, output and employment and their long-run equilibrium values over time.

High Frequency Export and Price Responses in the Ontario Electricity Market

Export responses to unanticipated price shocks can be a key contributing factor to the rapid mean reversion of electricity prices, a phenomenon often seen in electricity markets. In this paper, we use event analysis to demonstrate how hourly export transactions respond to negative supply shocks in the Ontario electricity market. Although event analysis has been used for many years in other applications, particularly finance, to our knowledge this is the first time that this technique has been applied to price response analysis in the electricity market. The analysis clearly demonstrates the sensitivity of export volume to price changes, and more generally, the responses of prices and quantities to an unexpected supply shock.

Electricity Markets and Energy Security: Friends or Foes?

For a host of economic, geopolitical, and environmental reasons, the security of energy supplies has moved to the forefront of U.S. policy concerns. Here, I address the extent to which the U.S. electricity sector is affected by these factors and, in turn, whether increased electricity competition exacerbates them. After defining four dimensions of energy security that might pertain to electricity, I examine the role of global energy markets on that sector. Oil is currently used to generate only a small fraction of U.S. electricity supplies, although as recently as the late 1970s it generated about one-sixth of the total. Oil markets can affect electricity indirectly via substitution with natural gas. Competition in electricity markets should improve energy security by adding redundancy, but competition is threatened by unanticipated price increases, peak-load management, and risks associated with separating competitive generation from regulated transmission and distribution. Other complications include residential aversion to competition, residual market power, and the aspiration to reduce demand through conservation policies. The central security issue has been and remains the degree of conflict between competition and central control necessary to maintain reliability of the grid.

Export Demand Response in the Ontario Electricity Market

Export responses to unanticipated price shocks can be a key contributing factor to the rapid mean reversion of electricity prices. The authors use event analysis – a technique more familiar from financial applications – to demonstrate how hourly export transactions respond to negative supply shocks in the Ontario electricity market.

AGGREGATE PRICE SHOCKS AND FINANCIAL INSTABILITY: A HISTORICAL ANALYSIS

This article presents evidence on the relationship between price and financial stability. We construct an annual index of financial conditions for the United States, 1790–1997, and estimate the effect of aggregate price shocks on the index using a dynamic ordered probit model. We find that price‐level shocks contributed to financial instability during 1790–1933 and that inflation rate shocks contributed to financial instability during 1980–97. The size of the aggregate price shock needed to alter financial conditions depends on the institutional environment, but we conclude that a monetary policy focused on price stability would contribute to financial stability.

Value of an option to purchase electric power — the case of uncertain consumption

Large manufacturers and corporations often purchase options on power to protect themselves against unanticipated price increases. This paper analyzes the impact of uncertainty in power consumption by a corporation on the value of an option to purchase electric power. Because there is no economically viable method to store power, these options are exercised to satisfy immediate consumption needs only. The amount exercised may differ from the maximum amount contracted, which in turn alters the payoffs that accrue to the option contract. We apply a Monte Carlo methodology to show that ‘consumption uncertainty’ may substantively lower the price of an option contract under different conditions.

Nominal and Real Wage Cyclicality during the Interwar Period

Although there have been numerous attempts to study the cyclicality of real wages in the U.S., no consensus has formed as to the implications of the various findings for business cycle theory. This paper will demonstrate that separating the real wage into its nominal and price level components can shed new light on the interwar U.S. labor market. More specifically, we will show that an evolution from a relatively laissez-faire labor market during the 1920s, to a more highly regulated labor market during the 1930s, may have resulted in a more countercyclical real wage rate. If we could be certain that equilibrium business cycle models provided the correct specification of the labor market then interpretation of real wage cyclicality would be relatively straightforward; during periods dominated by labor demand shocks real wages would move procyclically and during periods dominated by labor supply shocks real wages would move countercyclically. In a disequilibrium model context, however, interpretation of real wage cyclicality is much more problematic. If nominal wages are sticky, then unanticipated price level changes can induce countercyclical real wage movements that mimic the real wage movements generated by shifts in the supply of labor. Perhaps the most famous (and controversial) example occurred during the first three years of the Great Depression when a massive decline in hours worked and production was associated with a sharp increase in the aggregate real wage rate (see Figure 1). Even greater complexity results from governmental attempts to influence the aggregate nominal wage. Policies that attempt to artificially change the nominal wage rate can result in either procyclical or countercyclical real wages depending on whether the direct impact of changes in the price of labor on the quantity of labor demanded outweighs the impact of wage changes on aggregate demand, and output. Separating the aggregate real wage rate into its nominal and price level components will allow us to discriminate between these two hypotheses. If labor markets are correctly characterized by equilibrium models, then the price level and real wage are determined independently and separating the real wage into its nominal and price

Integrated circuit (IC) pricing

This article examines the method by which firms set prices for integrated circuits and some of the assumptions used for price projections by manufacturers. A brief review of the literature on pricing is compares pricing practices of some major manufacturers. A rule of thumb pricing forecast used by some analysts is examined against 10 years of historical data. The data suggest that producers commonly achieve excess capacity in their markets as products mature resulting in unanticipated price cutting.

Price rigidity: An exploration of the demand side

AbstractThis paper presents an exploration of the demand‐side effects of unanticipated price changes. Consumers faced with these changes may have to reoptimize their income allocation. Reoptimization is costly, and reoptimization costs result in kinked demand curves. The existence of such kinked demands provides an additional explanation of the observed nominal price rigidity. In addition, examination of unexpected nominal price changes during inflationary periods provides some justification as to why nominal price adjustments are large, infrequent and almost never downward.

HOUSE PRICES, PERSONAL SECTOR WEALTH AND CONSUMPTION: SOME CONCEPTUAL AND EMPIRICAL ISSUES

This paper analyzes the impact of changes in the real price of houses upon the level of wealth and the rate of consumption of the personal sector. A theoretical framework is developed to assess under what conditions the real net worth of agents is increased by unanticipated house price inflation. Long-term trends in the value of the U.K. housing stock and in the excess returns to housing wealth are measured. The implications of the results for policy and for economic modeling are discussed. Copyright 1993 by Blackwell Publishers Ltd and The Victoria University of Manchester

Nominal-Wage Contracts and Real Activity: Evidence from the German Economy

The research on microfoundations of the Phillips Curve over the last two decades has produced two alternative new-classical explanations of the short-run output-inflation trade-off: the nominalwage contracting variety explanation of Fischer [4] and Gray [7], and the equilibrium explanation of Lucas [11].' Both explanations are similar in their prediction that real activity responds to aggregate demand disturbances through price surprises that they generate. They are very different, however, in mechanisms that generate such response. The contracting theory emphasizes the existence of long-term contractual arrangements that, in their simplest form, fix wage schedules in nominal terms for a predetermined period (the life of the contract) and leave the level of employment at the discretion of the firm. In this framework, a positive aggregate demand shock that occurs after the contract negotiation date will cause an increase in the general price level, a decrease in the real wage, and an increase in employment and output. By contrast, the equilibrium theory makes imperfect information central to the non-neutrality of nominal disturbances. According to this theory, agents lack full current information about aggregate variables and thus cannot dichotomize unanticipated price movements into their relative and absolute components. In this framework, unanticipated changes in aggregate demand lead to positive movements in output and employment because their price level effects are confused with relative price movements.2 Differences between the contracting and equilibrium explanations of the response of real activity to aggregate demand shocks provide empirically testable hypotheses. Gray, Kandil, and Spencer [8] test for the proposition that, while both theories predict a positive output response to aggregate demand shocks, the size of the response is larger in the contracting model than in the

Discretion, Wage Indexation, and Inflation

It is now well understood that discretionary policy-making frequently leads to socially sub-optimal outcomes. This point was first made by Kydland and Prescott [12] using an example of a monetary policy game. They argued that, in the presence of output distortions in the economy, the monetary authority has an incentive to renege on earlier promises to maintain price stability by expanding the money supply in order to create unexpected inflation, thereby increasing output and employment. Since private wage setters form expectations rationally, this policy action is anticipated and, in equilibrium, leads to excessive inflation without any resulting change in output or employment. Consequently, in the absence of enforceable policy rules, the time-consistent discretionary monetary path produces a socially sub-optimal inflation rate. This form of policy behavior has important implications for the decisions of private agents, such as their choice of the degree of wage indexation. However, most work in the literature on endogenous wage indexation, stemming from the seminal paper by Gray [10], has analyzed the equilibrium indexation choice assuming either a constant money growth rule [1] or a monetary rule involving lagged or contemporaneous feedback [8; 17]. Only the recent papers by Devereux [5; 6] have attempted to examine the implications of time-consistent discretionary monetary policy for endogenous wage indexation. The informational structure he considers has the monetary authority setting the money stock prior to the realization of shocks, so that the authority has no information regarding current period disturbances when determining its course of action. This assumption precludes any contemporaneous attempt by the monetary authority to stabilize output or the price level. Devereux reaches the conclusion that wage setters, who are aware of the authority's policy decision, will find it optimal to index positively to unanticipated price level surprises, since none of the aggregate shocks are offset directly by the monetary authority. Thus, the informational environment confronting the authority influences the degree of indexation and, subsequently, the manner in which aggregate demand and supply variability impinge upon social welfare.

Poverty, agricultural production and prices in rural India—a reformulation

The empirical analysis at the all-India level demonstrates that, while the level of agricultural production and rural poverty were inversely related, unanticipated consumer price increases aggravated rural poverty. Whether the advent of the new agricultural technology in the late 1960s altered the relationships in question is also considered. During the new technology phase, the coefficient of agricultural production ceased to be significant, while that of unanticipated price changes continued to be significant. Rationalization of the absence of a significant (inverse) relationship between rural poverty and agricultural production at the state-level, in terms of distress migration between neighboring states, is questioned and an alternative explanation is provided. Copyright 1989 by Oxford University Press.

Extraction at the intensive margin: Metal supply and grade selection in response to anticipated and unanticipated price changes

This paper examines empirical evidence of the relationship between price changes and ore quality selection and metal production in the context of a depletion model in which ore quality varies within a given deposit and the extractive firm does not plan to return at a later date to the low quality ores it leaves behind. In this context, it can be optimal for the extractive firm to lower the quality of extracted ore and decrease its metal production in response to revised expectations about the future path of the resource price. More standard results apply to the case of anticipated price changes. A probit model using micro data provides strong evidence against the anticipated price model but is consistent with the revised price expectations model. The empirical results emphasize the importance of ore quality as a choice variable in models of extraction.