"Trade Costs, Asset Market Frictions and Risk Sharing," (2011), accepted, American Economic Review. Appendix
I use bilateral import data to test for and quantify the importance of trade costs and asset market frictions in explaining the failure of perfect international consumption risk sharing. I find that while frictions in international asset markets significantly impede optimal consumption risk sharing between developed and developing countries over the period 1970-2000, developed countries are close to optimal risk sharing with each other. Trade costs, in contrast, significantly impede risk sharing for all countries.
"Can Trade Costs Explain Why Exchange Rate Volatility Doesn't Feed Into Consumer Prices?" (2008), Journal of Monetary Economics, 55 (3), pp.606-628. Data and Programs
If countries specialize in imperfectly substitutable goods, trade costs increase the share of expenditure devoted to domestic output, reducing the exposure of consumer price inflation to exchange rate changes. I present a multi-country flexible-price model where expenditure shares are inversely related to trade costs through a gravity equation. In this setting, consumer price inflation can be approximated as an expenditure share weighted average of the contributions to inflation from all countries. I use data from 24 OECD countries, 1970-2003, to estimate a structural gravity model. I combine the fitted expenditure shares from the estimation with actual data on exchange rates to construct predictions of inflation. The behavior of these predictions indicates that trade costs can explain both qualitatively and quantitatively the failure of exchange rate volatility to feed into inflation.
"Specialization, Factor Accumulation and Development," with Juan Carlos Hallak (2004), Journal of International Economics, 64 (2), 277-302.
We estimate the effect of factor proportions on the pattern of manufacturing specialization in a cross-section of OECD countries, taking into account that factor accumulation responds to productivity. We show that the failure to control for productivity differences produces biased estimates. Our model explains 2/3 of the observed differences in the pattern of specialization between the poorest and richest OECD countries. However, because factor proportions and the pattern of specialization co-move in the development process, their strong empirical relationship is not sufficient to determine whether specialization is driven by factor proportions, or by other mechanisms also correlated with level of development.
"Pricing-to-Market: Evidence From Producer Prices," with Stefanie Haller (2010), Revision requested, Review of Economic Studies. Appendix
We document pricing-to-market by producers who sell the same product to buyers in two markets that are segmented by variable exchange rates. We can cleanly identify desired relative markup responses to exchange rate movements because we observe prices charged by the same plant for the same product to buyers from the two different markets at a monthly frequency. The matched price quotes allow us to use fixed effects to control for unobserved marginal cost changes. The high frequency allows us to focus only on episodes where prices change, hence separating out desired markup variation from the default behavior of relative markups due to price stickiness. For prices invoiced in destination currency, we find that desired relative markups move one-for-one with exchange rate changes. This implies that producers invoicing in destination currency engage in an extreme form of pricing-to-market, with relative markups inheriting the random walk behavior of exchange rates.
"Exporters and Exchange Rates," with Stefanie Haller *Coming soon* Slides
"Price Setting in Ireland," with Stefanie Haller
"Terms-of-Trade Effects, Interdependence and Cross-Country Differences in Price Levels," (2003).
This paper revisits the theory and the empirics of the classic Balassa-Samuelson productivity model of cross-country differences in price levels. The classic model says that price levels are positively related to productivity in the traded sector and negatively related to productivity in the non-traded sector. I show that once endogenous specialization and costly intra-temporal trade are added to the classic model, this result is modified in two ways. First, the elasticity of relative prices with respect to traded sector productivity depends on the strength of terms-of-trade effects, and may even be negative if terms-of-trade effects are sufficiently strong. Second, the asymmetric trade patterns induced by costly trade mean that the relative price level between a pair of countries depends on productivity in all other countries that these two countries trade with. I simulate the model with trade costs, and show that both of these effects are potentially important. I then use the insight that traded-sector production is specialized to reassess the empirical evidence on productivity models of price level differences. I show that the evidence of other researchers is inconclusive. I estimate the relationship in a way that is consistent with the theoretical model. The model is not rejected, but the evidence is not strongly in favor either.