9709491 Engel This project addresses one of the central questions in international finance: how consumer and producer prices respond to nominal exchange rate changes, and how those responses relate to changes in import prices. The implications for the behavior for real exchange rates if explored. The goal of the empirical work is to allow us to build models of goods pricing into macroeocnomic models of open economies. The link between pricing-to-market theories and menu-cost pricing will be studied, and the consequences for foreign exchange rate volatility and possibly international market efficiency will be examined. The first phase of the project involves reexamining currently popular methods of testing purchasing power parity of panel data. A new model is proposed which generalizes existing work. It allows for the speed of adjustment of prices to relate to several sources of price disequilibria. It also constructs a model for the covariance of price shocks across locations that makes estimation of relatively large panels by GLS feasible. The second phase of the project makes use of a new data set recently obtained from the Bureau of Labor Statistics. It consists of consumer price data disaggregated into 44 sub-categories which together comprise over 99.5% of the C.P.I. The data is available for 27 U.S. cities. Comparable data are obtained from Statistics Canada for Canadian cities. The project uses the data to examine the behavior of prices between locations. The thrust of many of the empirical studies is to distinguish between intra-location relative price behavior that is due to market segmentation owing to distance between locations and relative price behavior between cross-country location pairs that may also depend on nominal exchange rate behavior. ??
