Showing papers on "Price level published in 1991"

Stock Price Clustering and Discreteness

Abstract: Stock prices cluster on round fractions. Clustering increases with price level and volatility, and decreases with capitalization and transaction frequency. Clustering is pervasive. Price clustering will occur if traders use discrete price sets to simplify their negotiations. Exchange regulations require that most stocks be traded on eighths. Clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters, halves, or whole numbers. An econometric model of clustering is derived and estimated. Projections from the results suggest that traders would frequently use odd sixteenths when trading low-price stocks, if exchange regulations permitted trading on sixteenths. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The Collapse of Purchasing Power Parities during the 1970s

Abstract: This paper reviews and analyzes the empirical record of exchange rates and prices during the 1970's and the analysis is based on the experience of the Dollar/Pound, the Dollar/French Franc and the Dollar/DM exchange rates. Section 2 presents the evidence on PPP during the 1970's and contrasts it with the evidence from the 1920's -- a period during which the doctrine held up reasonably well. This analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks, and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy. The evidence regarding deviations from purchasing power parities is also relevant for determining whether there is a case for managed float. Section 3 attempts to explain what went wrong with the performance of the doctrine during the 1970's. It examines the hypothesis that the departures from PPP are a U.S. phenomenon, as well as the hypothesis that the departures are due to large changes in inter-sectoral relative price changes within the various economies. Given that the predictions of the simple versions of PPP do not hold up, section 4 proceeds in examining the question of whether national price levels have been independent of each other. Section 5 addresses the question of whether exchange rates and national price levels are comparable and whether in principle one should have expected them to be closely linked to each other. The main point that is being emphasized is that there is an important intrinsic difference between exchange rates and national price levels which stems from the basset market theory' of exchange rate determination. This theory implies that the exchange rate, like the prices of other assets, is much more sensitive to expectations concerning future events than national price levels and as a result, in periods which are dominated by news' which alter expectations, exchange rates are likely to be much more volatile than national price levels and departures from PPP are likely to be the rule rather than the exception. Finally, section 6 concludes the paper with some policy implications.

Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence

Abstract: Contrary to the long-held notion of purchasing power parity (PPP), economists have found systematic evidence that the general level of prices across countries at a point in time varies dramatically. Irving B. Kravis, Alan W. Heston, and Robert Summers (1982), for example, report that some countries' national price levels are no more than one-third the U.S. price level. Extensions of this work show that such departures from PPP have persisted for decades. Recently, efforts have been made to explain systematically these persistent, or structural, departures from PPP. Pioneering work by Kravis and Robert E. Lipsey (1983, 1987, 1988) has demonstrated that a positive correlation between the price level and (real) per capita gross domestic product is robust across numerous cross-sectional specifications. For instance, using data from Kravis et al. (1982 table 6-12), 87 percent of the variation in national price levels (PL) of 21 countries' in 1975 is explained by per capita GDP (y) and a constant:

Price Discrimination and Retail Configuration

Abstract: The hypothesis that price discrimination based on willingness to pay for quality can occur in multifirm markets is confirmed using microdata on gasoline retailing. A test that discriminates between price structures associated with discrimination and with cost-driven, competitive differentials is developed and implemented with controls for variation in outlet and market characteristics. A second test based on profitability variation rejects a competitive, peak-load pricing explanation for the observed price dispersion. The data suggest that price discrimination at the retail level adds at least 9¢ a gallon to the average price of full-service gasoline.

Some Further Evidence on the Law of One Price: The Law of One Price Still Holds

Abstract: International trade models often postulate the existence of a representative price, i.e., the price which prevails at all markets. This is known as the "Law of One Price." In this paper, the law of one price is tested for seven commodities among four countries by explicitly considering transaction costs. The empirical evidence suggests that, in most cases, the law of one price cannot be rejected asa maintained hypothesis. Furthermore, for the remaining cases transaction costs seem to cause the failure.

Marketing Margins, Market Power, and Price Uncertainty

Abstract: This paper provides a conceptual and empirical framework for analyzing marketing margins in a noncompetitive food-processing industry facing output price uncertainty. The framework allows the decomposition of observed margins into components reflecting the marginal cost of the processing industry, oligopoly/oligopsony price distortions, and an output price risk component. The empirical procedure is applied to a time series of spreads between wholesale pork prices and farm prices of market hogs. The principal finding is that, while farm/wholesale margins are more consistent with competitive performance now than they were fifteen years ago, the output price risk component persisted throughout the sample period.

House Prices and Regional Real Estate Cycles: Market Adjustments in Houston

Abstract: Real estate cycles often generate sharp swings in real housing prices, price changes that cannot be adequately described by a single statistic such as median home values. Instead, the entire structure of prices across all quality levels must be examined. This paper analyzes the price impact of the Houston, Texas, real estate bust. It shows that the average price of housing fell, and that the structure of the housing price function itself changed. Changes in the marginal price of housing were probably more significant to the market equilibrating process than the decline in average price alone.

Petrol prices, oil price rises and oil price falls: some evidence for the UK since 1972

Abstract: This paper examines the relationship between retail petrol prices, excise duties and crude oil prices in the UK over the period 1973–1988. The existence of a stable relationship between the petrol price, level of excise duty and spot oil price is confirmed through use of the cointegration approach. Although the speed of reaction of petrol prices to changes in the crude price depends on whether crude prices are rising or falling, any asymmetry in the pricing response is virtually absent after an adjustment period of only four months.

Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation

Abstract: Price movements are the channel through which market information is transmitted An increase in one price relative to others is the signal that directs resources and rations consumption In other words, markets operate through the distribution of prices

Pricing, Patent Loss and the Market for Pharmaceuticals

Abstract: Empirical studies suggest that entry of generic competitors results in minimal decreases or even increases in brand-name drug prices as well as sharp declines in brand-name advertising This paper examines circumstances under which this empirical pattern could be observed The analysis focuses on models where the demand for brand-name pharmaceuticals is divided into two segments, only one of which is cross-price-sensitive Brand-name firms are assumed to set price and advertising in a Stackelberg context; they allow for responses by generic producers but the latter take decisions by brand-name f inns as given Brand-name price and advertising responses to entry are shown to depend upon the properties of the reduced-form brand-name demand function Conditions for positive price responses and negative advertising responses are derived We also examine the implications for brand-name price levels, and for the brand-name price response to entry, of health sector trends (such as increasing HMO enrollments) that may have the effect of expanding the size of the cross-price-sensitive segment of the market The paper concludes with a review of recent empirical research and suggestions for future work on the effects of generic entry

A Test of Tariff Endogeneity in the United States

Abstract: The high level of protection that exists in many countries is a source of irritation to the normative biases that most economists hold in favor of liberal trade policies. Public-choice explanations of protection, however, suggest that interest groups vie in the political system for self-serving policies, including tariffs and other forms of protection. Such an approach explains the existence of policies that do not seem to be in the "national interest" of aggregate economic efficiency. This paper examines aggregate time-series data for the United States from 1890 to 1970 in order to test some of the hypotheses that arise from this public-choice approach. Specifically, Granger-causality tests are carried out over a set of international and macroeconomic variables for the 1890-1970 period. A vector autoregressive (VAR) methodology is employed to examine the data for several reasons. First, theories of tariff endogeneity suggest that tariffs are created and changed in the political system in response to certain economic factors. However, the standard theory of tariffs suggests that feedback effects exist from tariffs to many of the same economic factors: for instance, the price level, income, unemployment, and the trade balance. Therefore, a structural regression model with causality preestablished may be misspecified. Furthermore, the political process is slow to respond to pressure in some cases. This implies that an uncertain lag structure lies behind the relationship among time-series variables. Using a VAR model allows flexibility in selecting a lag structure. A VAR model is also useful for eliminating secular changes in variables.' Consequently, we expect to establish a set of causal relationships through the VAR methodology.

Welfare Effects of Price Discrimination by a Regulated Monopolist

Abstract: Should a multiproduct monopolist whose "average price" is capped by regulation be allowed to engage in (third-degree) price discrimination? If the cap applies to a price index with weights proportional to demands at uniform prices, then price discrimination benefits consumers as well as the firm. But if -- perhaps more realistically -- it is the firm's average revenue that is capped, then consumers prefer uniform pricing. In this case total output is higher when discrimination is allowed, which increases welfare, but marginal utilities differ across markets, which is inefficient, and the overall effect is ambiguous. A small amount of discrimination is desirable, however. It is better not to allow price discrimination if the price cap is close to the level of marginal cost. The consequences of tightening the price cap when discrimination is allowed are also examined.

Real and Nominal Exchange Rates in the Long Run

Abstract: This paper decomposes longer-run movements in (major) dollar real exchange rates into components associated with changes in nominal exchange rates and price levels, and their comovements. Though the decompositions suggest some permanent movements, they imply that there are large transitory components in real exchange rates. These transitory components in real exchange rates are found to be closely associated with those in nominal exchange rates. A stochastic version of Dornbusch’s overshooting model—configured with representative parameter values for the United States and subjected to permanent nominal shocks—can rationalize these transitory comovements of nominal and real exchange rates as well as several other features of the decompositions.

Real and Nominal Exchange Rates in the Long Run

Abstract: This paper decomposes longer-run movements in (major) dollar real exchange rates into components associated with changes in nominal exchange rates and price levels, and their comovements. Though the decompositions suggest some permanent movements, they imply that there are large transitory components in real exchange rates. These transitory components in real exchange rates are found to be closely associated with those in nominal exchange rates. A stochastic version of Dornbusch`s overshooting model--configured with representative parameter values for the United States and subjected to permanent nominal shocks--can rationalize these transitory comovements of nominal and real exchange rates as well as several other features of the decompositions.

Long-Run Money Demand in Large Industrial Countries

Abstract: The long-run properties of money demand functions in the large industrial countries are examined under the hypothesis that the long-run functions have been stable but that the dynamic adjustment processes are more complex than those represented in most earlier models. The results broadly support this hypothesis, but for certain aggregates they also call into question some basic hypotheses about the nature of the demand function, including, notably, that of homogeneity with respect to the price level.

Relative Price Variability and Inflation

Abstract: Regression studies have established that there tend to be convex, nonsymmetric relationships between relative price variability and the inflation rate, unanticipated inflation, and the change in the inflation rate. This paper shows that such regression results follow as "definitional artifacts" for a simple but quite general stochastic model of price changes. The analysis is based on the fact that the definitions of relative price variability, the inflation rate, unanticipated inflation, and the change in the inflation rate imply a particular structure for the covariances among these variables. The structure of these covariances has implications for the regression coefficients. Copyright 1991 by Ohio State University Press.

Endogenous Price Fluctuations in an Optimizing Model of a Monetary Economy

Abstract: This paper demonstrates that an optimizing model of a monetary economy can produce perfect foresight equilibria in which the price level fluctuates forever. Cyclically or chaotically fluctuating equilibria are more likely to exist when the rate of money supply growth is high. Furthermore, the set of equilibrium prices may have a complicated topological structure, which poses a more serious problem concerning the validity of comparative statics method than any sort of indeterminacy previously discussed in the literature. Copyright 1991 by The Econometric Society.

An Ordered Probit Analysis of Transaction Stock Prices

Abstract: We estimate the conditional distribution of trade-to-trade price changes using ordered probit, a statistical model for discrete random variables. Such an approach takes into account the fact that transaction price changes occur in discrete increments, typically eighths of a dollar, and occur at irregularly spaced time intervals. Unlike existing continuous-time/discrete-state models of discrete transaction prices, ordered probit can capture the effects of other economic variables on price changes, such as volume, past price changes, and the time between trades. Using 1988 transactions data for over 100 randomly chosen U.S. stocks, we estimate the ordered probit model via maximum likelihood and use the parameter estimates to measure several transaction-related quantities, such as the price impact of trades of a given size, the tendency towards price reversals from one transaction to the next, and the empirical significance of price discreteness.

Feeder cattle price differentials in georgia teleauctions

Abstract: Three Georgia feeder cattle teleauction markets were analyzed from 1977 to 1988 to estimate the impacts of cattle characteristics and market conditions on prices. Cattle characteristic price impacts were similar to those in previous studies. The impact of feeder cattle futures price on teleauction price was positive but varied across markets. Optimal lot size ranged from 143 to 276 head. In one market, 14 lots were necessary to generate positive price impacts. Additional buyers were estimated to have a $.30/cwt per buyer impact on price.

Procyclical Prices: A Demi-Myth?

Abstract: This paper critically reevaluates recent claims that the postwar U.S. price level exhibits countercyclicality. While overall countercyclicality is confirmed, temporal disaggregation suggests a shift from pro- to countercyclicality in the early 1970s. Furthermore, the countercyclicality is markedly more pronounced for negative than for positive output innovations. The evidence thus casts doubt on single-source business cycle explanations.

Price Patterns in Competitively Clustered Markets

Abstract: In this paper, numerical analyses of price competition in spatial markets are presented. How equilibrium conditions are affected by the geographic distribution of firms and their pricing behavior is illustrated. Simulated and empirical findings suggest that clustering of competitors in space tends to promote lower overall price levels. It is posited that competitive market clusters may be responsible for the adoption of lower price conjectures. In theory, this suggests that the spatial structure of a market can create context-specific price-reaction functions that are sensitive to the relative locations of firms and distance to nearest and next-nearest rivals. Point-pattern and nearest-neighbor analyses of store locations for rival food chains in a major metropolitan market show that rivals tend to cluster in space, and that chain outlets in competitive market clusters demonstrate a tendency to support lower prices.

Nonneutrality of Money in Classical Monetary Thought

Abstract: Contrary to the strawman “classical” model of the textbooks, the original classical economists did not believe that money-stock changes affect only the price level and not real output and employment. Most classicals saw money as having powerful short-run real effects and perhaps some residual long-run effects as well. Concern for money’s impact on real activity strongly influenced the classicals’ views of the desirability or undesirability of monetary expansion and contraction.

Output Fluctuations and Monetary Shocks; Evidence From Colombia

Abstract: Using annual data for Colombia over the last thirty years and a new battery of econometric techniques, we test opposing theories that explain macroeconomic fluctuations: The neoclassical synthesis, which posits that, in the presence of temporary price rigidity, an unanticipated monetary expansion produces output gains that erode over time with increases in the price level; and an alternative explanation, which focuses on “real” technological or preference shocks as the sources of output changes. The coefficients from these systems are used to examine two basic propositions: the long-run neutrality of nominal quantities with respect to permanent movements in the money stock; and the short-run sensitivity of output to inflation.

New Goods and Index Numbers: U.S. Import Prices

Abstract: Researchers constructing index number frequently face the problem of new (or disappearing) goods, for which the price and quantity are not available in some periods. In theory, the correct way to handle a new good is to treat its price before it appears as equal to the reservation price (i.e., where demand is zero); in practice, this method can be difficult to implement. However, if the underlying aggregator function is CES then the reservation price is infinity, and we show that the corresponding price index takes on a very sensible form. We apply this formula to measure the price index for six disaggregate U.S. imports, which have been supplied from many new countries over the past several decades. We find that by incorporating the new supplying countries, the price index for developing countries is significantly lower than would otherwise be measured.

How fast are hospital prices really rising

Abstract: The hospital services component of the Consumer Price Index (CPI) measures the cost of hospital services to private patients paying list prices. It is, however, widely used as an estimate of the overall rate of inflation in hospital prices in spite of the fact that there are strong reasons to believe that it is inappropriate to use the CPI for this purpose. This is because: 1) A growing number of patients are enrolled in health maintenance organizations (HMOs) and preferred provider organizations (PPOs), which negotiate discounts from list prices; and 2) the size of the discounts may have been increasing. The potential result is a gap between the rate of inflation of list prices and the rate of inflation of actual prices paid in transactions. This study explores whether such a gap exists and determines its possible magnitude. In addition, parallel indices for list and actual prices are computed on the basis of data from California hospitals for fiscal years 1983-1988. The analysis suggests that list price inflation has greatly exceeded actual inflation--by a factor of two for recent years. These findings have broad implications for evaluating not only inflation but also the impact of cost containment strategies.