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Work in Progress “Local Versus Producer Currency Pricing: Evidence from Disaggregated Data” (pdf) Abstract: The pricing behavior of firms is a central issue in international macroeconomics. Whether firms set prices in the currency of the producer or the consumer is critical for policy because a devaluation succeeds in increasing demand for a country's goods when the prices are rigid in the currency of the producer, but not if the prices are rigid in the currency of the consumer. Using the introduction of the euro as a natural experiment, I find that import price volatility among Eurozone members dropped dramatically after the introduction of the euro. Additionally, I show that the magnitude of the drop is commensurate with the drop in exchange rate volatility. On the other hand, when looking at exports, I find that the introduction of the euro had no impact on export price volatility. The results support the presence of pricing in the currency of the producer. (JEL F1, F3, F4). “Heterogeneous Firms, Quality, and Trade” (pdf) – new version Abstract: We present a model of heterogeneous firms and endogenous quality choice. In equilibrium, some firms exit the market, others produce output but choose no quality upgrades and others, the most productive ones, produce both output and quality upgrades. For these firms quality upgrade increases in productivity. The model generates the Baldwin and Harrigan (2007) and Johnson (2007) insight that prices can increase in productivity, the Verhoogen (2008) insight that developing countries have an incentive to export more quality goods to developed countries, and the Sutton (1991) insight that competition in endogenous sunk costs industries does not necessarily result in market fragmentation. It also generates the Linder hypothesis, and the Balassa-Samuelson effect. Finally, we show that trade partner characteristics do affect the level of competition in the host country. “Forecasting Exchange Rates in Data-Rich Environments” (pdf) Abstract: Failures of existing models of exchange rates to outperform the random walk may be related to the fact that most of these models only use a limited number of variables, whereas agents follow a much larger number of time-series. Therefore, we expect forecasts based on a much larger data set to have more predictive power. Following the work of Stock and Watson (2002), Bernanke and Boivin (2003) and Bernanke, Boivin and Eliasz (2005), we construct factor-augmented autoregressive models and use them to perform out-of-sample forecasts for five dollar-denominated exchange rates (JPY, CAD, GDM, GBP, and FFR). We find that factor-augmented models that are estimated in a data-rich environment still fail to outperform the random walk. We interpret the outcome of this paper to provide further support for the efficient markets hypothesis. “Using Expectations to Forecast Exchange Rate Volatility” Abstract: Expectations about future fundamentals, both observable and unobservable to an econometrician, affect exchange rates. In this paper, I present a methodology that enables me to extract the unobservable component of these expectations using several forward rates of the same maturity and same denomination. Then, I show that the newly constructed time-series helps improve forecasts on exchange rate levels. Furthermore, changes in the volatility of the unobservable component help forecast changes in the volatility of exchange rates and provide superior estimates compared to a GARCH(1,1) specification. Publications “The Historical and Recent Behavior of Goods and Services Inflation” (with Richard Peach, and Robert Rich), Federal Reserve Bank of New York’s Economic Policy Review, Vol 10(3), December 2004 Abstract: Since the late 1990s, the combination of relatively high services inflation and declining goods prices has produced a record-level gap in these inflation rates. Some commentators argue that if the gap between services and goods inflation continues to expand in this manner, the outcome will be either faster overall inflation or deflation. This article examines the relationship between these divergent inflation rates from 1967 to 2002. The authors find that while the level of each inflation rate is subject to permanent shifts, the gap between services inflation and goods inflation over time remains stable. Moreover, when the gap is above its long-run value, as it currently is, equilibrium is restored through a rise in goods inflation and a slowing of services inflation. Their results suggest that concerns over an imminent marked acceleration or dramatic slowing in inflation may be unwarranted. Taking the Pulse of the Tech Sector: A Coincident Index of High-Tech Activity (with Bart Hobijn and Kevin s. Stiroh J.), Federal Reserve Bank of New York’s Current Issue in Economics and Finance, Vol 9(10), Oct 2003 Abstract: A new index of the U.S. high-tech sector—drawing upon a range of technology-specific data—has the potential to offer a more timely assessment of economic activity than has been possible to date. The index suggests that while the tech sector has rebounded from its poor performance in the 2000-01 "tech bust," it has not resumed its rapid expansion of the late 1990s. - In the News: Forbes 2003