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Exchange Rate Pass-Through and Credit Constraints (Journal of Monetary Economics 60(1), 2013, pp. 25-38)
An earlier draft with several extensions is available as BC Working Paper 788.

The macroeconomic evidence of the short-term impact of exchange rates on exports and prices is notoriously weak. This paper examines the microfoundations of this disconnect. I study the response of firms' export and price setting decisions to fluctuations in exchange rates and credit conditions using firm-level survey data. Financially constrained firms pass through exchange rate changes to prices at almost twice the rate of unconstrained firms. Similarly, their export volumes are about twice as sensitive to exchange rate fluctuations. The effect of borrowing constraints is particularly strong during the recent financial crisis.

On the Correlation Structure of Microstructure Noise: A Financial Economic Approach (Review of Economic Studies, 80(4), 2013, pp. 1304-1337)
A draft is available as NBER Working Paper 16469. An earlier draft circulated as "On the Correlation Structure of Microstructure Noise in Theory and Practice".
(with F. Diebold)

We introduce the financial economics of market microstructure to the financial econometrics of asset return volatility estimation. In particular, we derive the cross-correlation function between latent returns and market microstructure noise in several leading microstructure environments. We propose and illustrate several corresponding theory-inspired volatility estimators, which we apply to stock and oil prices. Our analysis and results are useful for assessing the validity of the frequently assumed independence of latent price and microstructure noise, for explaining observed cross-correlation patterns, for predicting as-yet undiscovered patterns, and most importantly, for promoting improved microstructure-based volatility empirics and improved empirical microstructure studies. Simultaneously and conversely, our analysis is far from the last word on the subject, as it is based on stylized benchmark models; it comes with a "call to action" for development and use of richer microstructure models in volatility estimation and beyond.

Learning to Argue with Intermediate Macro Theory: A Semester-Long Team Writing Project (Journal of Economic Education 45(3), 2014, pp. 191-210)
(with M. Halova Wolfe)

We describe our experience with integrating a semester-long economic analysis project into an intermediate macroeconomic theory course. Students work in teams of "economic advisors" to write a series of nested reports for a decision-maker that analyze the current state of the economy, and propose and evaluate policies. The project simulates real-world policy consulting with an emphasis on applying economic theory and models. We describe the project setup and how to tailor its theme to current events, explain methods for keeping it manageable in larger classes, discuss student learning outcomes, and document course evaluation results. Besides improving the learning experience, this project prepares economics students to contribute their own views to policy debates and buttress them with tight macroeconomic reasoning.


Working Papers

The Efficiency of the Global Markets for Final Goods and Productive Capabilities

Slow mean reversion of real exchange rates is commonly considered a result of border frictions that remain despite integration of financial and goods markets. This paper shows that even if border frictions decline, a contemporaneous decline in output shock variance can in fact slow down mean reversion. It proposes a new method of estimating border cost from time-series data only, without relying on within-country variation. Applying this method to the real exchange rate of final goods and a novel measure of the real exchange rate for productive capabilities, such as technology and know-how, gives very differential border cost estimates. During the years 1974–2008, a relocation reduces productive capability by 22% for the average country pair, whereas final goods by only 15%. The real exchange rate for final goods takes more than two years to revert to purchasing power parity, more than twice as long as productive capabilities.

Does Marketing Widen Borders? Cross-Country Price Dispersion in the European Car Market
(with E. Dvir)

We study cross-country price differences in the European car market using detailed pricing and technical data. Pricing-to-market is pervasive: model-specific real exchange rates for mechanically identical cars differ significantly from unity. They vary significantly across countries and across car manufacturers. We identify the determinants of car price differences in Europe and find strong evidence that car manufacturers price discriminate by manipulating the menu of included car features available in each country. Such bundling decisions sustain cross-country price differences of up to 13%. Although prices adjust to shocks within a few month, relative car prices show no sign of absolute convergence during the period 2003 – 2011.

Is the Intrinsic Value of Macroeconomic News Announcements Related to their Asset Price Impact?
(with T. Gilbert, C. Scotti and C. Vega)

The literature documents a heterogeneous asset price response to macroeconomic news announcements: Some announcements have a strong impact on asset prices and others do not. In order to explain these differences, we estimate a novel measure of the intrinsic value of a macroeconomic announcement, which we define as the announcement's ability to nowcast GDP growth, inflation, and the Federal Funds Target Rate. Using the same nowcasting framework, we then decompose this intrinsic value into the announcement's characteristics: its relation to fundamentals, timing, and revision noise. We find that in the 1998--2013 period, a significant fraction of the variation in the announcements' price impact on the Treasury bond futures market can be explained by differences in intrinsic value. Furthermore, our novel measure of timing explains significantly more of this variation than the announcements' relation to fundamentals, reporting lag (which previous studies have used as a measure of timing), or revision noise.

Price Drift before U.S. Macroeconomic News: Private Information about Public Announcements?
(A. Kurov, A. Sancetta and M. Halova Wolfe)

We examine stock index and Treasury futures markets around releases of U.S. macroeconomic announcements from 2003 to 2014. Since 2008 seven out of 18 market-moving announcements show evidence of substantial informed trading before the official release time. Prices begin to move in the "correct" direction about 30 minutes before the release time. The pre-announcement price move accounts on average for about half of the total price adjustment. This pre-announcement price drift has not been documented before. We examine four possible explanations. The evidence points to leakage and proprietary data collection as the most likely causes of the new drift.


Work in Progress / Under Revision

Just-in-Time Production and the Great Moderation: Inventories in German Manufacturing

In the mid-1980s firms started adapting new inventory management concepts such as just-in-time production (JIT). The relevance of JIT for the simultaneous decline in macroeconomic volatility is the subject of an unresolved debate. This paper reexamines the effect of JIT at the firm level and its aggregate implications. Both feedstock and product inventory in German manufacturing have declined by only 25% since the 1980s. The modesty of this reduction supports that the direct effect of JIT via inventory investment cannot explain the large drop in aggregate volatility. This paper proposes that the change in inventory risk exposure constitutes an important indirect effect of JIT. Inventory risk affects other spending and investment decisions of firms, and amplifies their response to uncertainty shocks. In a large firm panel, business expectations of firms with shorter inventory coverage respond significantly less to changes in the macroeconomic situation. This makes the sequence of decisions of firms with smaller inventory less erratic, and points towards a substantial contribution of inventory management to aggregate volatility.

Multivariate Comparisons of Predictive Accuracy
(with J. Christensen, F. Diebold and G. Rudebusch)

We propose a generalized Diebold-Mariano (DM) test of equal accuracy of a set of forecasts. The need for such a test arises in a variety of applications, but the existing DM literature is silent on the issue. Our approach makes only minimal assumptions on models and loss functions; it is therefore very flexible and applicable in many situations.

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