Jonathan McCarthy

Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies

This paper examines the impact of exchange rates and import prices on domestic PPI and CPI in selected industrialised economies. The empirical model is a VAR incorporating a distribution chain of pricing. Impulse responses and variance decompositions indicate that these external factors have a modest effect on domestic price inflation over the post-Bretton Woods era. The pass-through is somewhat stronger in countries with a larger import share. A historical decomposition over 1996-98 indicates, however, that external factors have had a sizable disinflationary effect in most of the countries during the past couple of years. Estimating the model using post-1982 data has little effect on these conclusions.

Imperfect insurance and differing propensities to consume across households

Abstract This paper extends previous tests of consumption insurance by splitting the sample to examine whether the marginal propensity to consume (MPC) out of idiosyncratic income shocks is larger for low-wealth households than it is for high-wealth households. Using data from the PSID, I find: (1) The MPC of low-wealth households is higher than that of high-wealth households. There are indications that both precautionary savings behavior and liquidity constraints contribute to this difference. (2) Splitting the data using two different measures of wealth indicates that households perceive housing equity as illiquid. (3) When low-wealth households are split into two subgroups, the MPC of the very-low-wealth group is smaller, reflecting the insurance aspects of means-tested safety-net programs.

Is there a Bubble in the Housing Market now

Real home prices have been rising strongly since the mid-1990s, and have continued to do so even as the economy has weakened. This has sparked the concern as to whether there is a bubble in the housing market, the collapse of which could harm the overall economy. Taking into account fundamentals – including more appropriate price indices and interest rates – aggregate home prices are relatively high but not yet out of line. Home prices in some areas still may be set for a fall; however, prices in these areas typically have been volatile. Previous large home value declines in these areas have not had a sizable negative effect on the aggregate economy.

Equipment expenditures since 1995: the boom and the bust

Business investment in equipment surged in the 1990s, then fell back sharply after mid-2000. A popular explanation of these trends holds that the soaring stock market and declining computer prices of the last decade encouraged excess investment, setting the stage for the retrenchment that followed. Yet an analysis of the factors underlying investment suggests that capital spending patterns in the late 1990s would have been quite similar had stock values and equipment prices remained near their recent historical averages.

Microeconomic Inventory Adjustment: Evidence from U.S. Firm-Level Data

We examine inventory adjustment in the U.S. manufacturing sector using quarterly firm-level data over the period 1978-97. Our evidence indicates that the inventory investment process is nonlinear and asymmetric, results consistent with a nonconvex adjustment cost structure. The inventory adjustment process differs over the business cycle: for a given level of excess inventories, firms disinvest more in recessions than they do in expansions. The inventory adjustment process has changed little between the 1980s and 1990s, suggesting that recent advances in inventory control have had little effect on adjustment costs. Nevertheless, the optimal inventory-sales ratio in the durable goods sector has declined significantly during our sample period.

The Measurement of Rent Inflation

Providing for shelter represents a large portion of the typical household budget. Accordingly, rent, paid either to a landlord or to oneself as an owner-occupant, has a large weight in the CPI and in the personal consumption expenditures deflator, resulting in substantial scrutiny of how tenant rent and owners’ equivalent rent are measured in these price indexes. In this paper, we describe how the Bureau of Labor Statistics (BLS) estimates tenant rent and owners’ equivalent rent. We then estimate alternative inflation rates for tenant rent and owners’ equivalent rent based on American Housing Survey data, following BLS methodology as closely as possible. Our alternative tenant rent inflation series is generally consistent with the corresponding BLS series. However, our alternative owners’ equivalent rent inflation series is consistently lower than the corresponding BLS series by an amount large enough to have a significant effect on the overall inflation rate. This result is driven by the inverse relationship between rent inflation and the level of monthly housing cost evident in the American Housing Survey data.

Housing Activity and Consumer Spending

The current expansion has seen record-high levels of transactions in housing, extraordinary growth in the aggregate value of owner-occupied housing, and large increases in the amount of funds realized from the refinancing of mortgage debt. Many analysts thus have pointed to the strong housing market and rising home prices as a major pillar supporting recent economic growth and have expressed concern that a contraction in housing activity and values could pose a significant risk to consumer spending and real economic growth. This paper explores the channels by which the housing market may affect consumer spending and assesses the potential risk from a softening in the housing market. Our assessment is that while a housing slowdown by itself may slow consumer spending some, it is probably insufficient to precipitate a downturn without some additional shocks outside of the sector.

Microeconomic Inventory Adjustment and Aggregate Dynamics

We examine microeconomic and aggregate inventory dynamics in the business sector of the U.S. economy. We employ high-frequency firm-level data and use an empirically tractable model, in which the aggregate dynamics are derived explicitly from the underlying microeconomic data. Our results show that the microeconomic adjustment function in both the manufacturing and trade sectors is nonlinear and asymmetric, results consistent with firms using (S,s)-type inventory policies. There are differences in the estimated adjustment functions between the two sectors as well as the durable and nondurable goods firms within each sector. The estimated adjustment function is remarkably stable across subperiods, indicating little change in the inventory adjustment process over time. As predicted by our model, higher moments of the cross-sectional distribution of inventory deviations affect aggregate inventory dynamics.