We propose an exchange rate model that can explain both the observed volatility and the persistence of real and nominal exchange rate movements and thus in some measure resolves Rogoff’s (1996) purchasing power parity puzzle. Our analysis reconciles the well-known difficulties in beating the...

Tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance. We show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size...

The half-life of deviations from purchasing power parity (PPP) plays a central role in the ongoing debate about the ability of macroeconomic models to account for the time series behaviour of the real exchange rate. The main contribution of this paper is a general framework in which alternative...

U.S. retail food price increases in recent years may seem large in nominal terms, but after adjusting for inflation have been quite modest even after the change in U.S. biofuel policies in 2006. In contrast, increases in the real prices of corn, soybeans, wheat and rice received by U.S. farmers...

Motivated by policy statements of central bankers, we propose to regard the central banker as a risk manager who aims at containing inflation and the deviation of output from potential within pre-specified bounds. We develop formal tools of risk management that may be used to quantify the risks...

Sign restrictions on the responses generated by structural vector autoregressive models have been proposed as an alternative approach to the use of exclusion restrictions on the impact multiplier matrix. In recent years such models have been increasingly used to identify demand and supply shocks...

Since Bernanke, Gertler and Watson (1997), a common view in the literature has been that systematic monetary policy responses to the inflation triggered by oil price shocks are an important source of aggregate fluctuations in the U.S. economy. We show that there is no evidence of systematic...

In deciding a monetary policy stance, central bankers need to evaluate carefully the risks the current economic situation poses to price stability. We propose to regard the central banker as a risk manager who aims to contain inflation within pre-specified bounds. We develop formal tools of risk...

The origins of stagflation and the possibility of its recurrence continue to be an important concern among policymakers and in the popular press. It is common to associate the origins of the Great Stagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This paper...

Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth. In this Paper, we review the arguments supporting such views. First, we highlight some of the conceptual difficulties in assigning a central role to...