The European price revolution that began in the 16th century is one of the earliest episodes of widely-recognized inflation. I use inter-city real exchange rates (measured in silver) to assess how extensively it spread and how rapidly long-run PPP was restored. Real exchange rates appear to be stationary with half-lives similar to those in modern data: Thus there was a shared price revolution. But I also find that debasements contributed significantly to local-currency inflation. Tracking these relative prices also reveals some notable differences across cities that are worthy of further study.
This paper examines the unintended corporate costs of sanctions in the sanctioning country arising from its geoeconomic dependence on the sanction target, focusing on the EU–Russia conflict following Russia’s invasion of Ukraine. Exploiting changes in the variance–covariance structure of financial and news variables with gas prices on official sanction and countersanction announcement days, the paper develops a novel measure of sanction intensity. Sanction intensity raises credit spreads in the sanction-imposing countries by 8% at the start of the full-scale invasion, with effects around 30% stronger for firms highly dependent on Russia before the war. After 100 days, the increase in spreads is equally split between elevated fundamental default risk and a higher excess bond premium. The financial cost of sanction intensity spills over to the real economy as corporate investment declines, primarily due to higher borrowing costs, while bankruptcies rise due to gas price responses.
We develop a model that shows how foreign reserve management decisions can adversely affect U.S. money market liquidity. Consistent with the March 2020 dash-for-cash, our model suggests that as export-price volatility increases, a foreign central bank that pegs its exchange rate shifts reserves from relatively illiquid Treasuries to the Fed's reverse repo facility. Over the relevant horizon, this precautionary behavior drains liquidity from U.S. money markets and raises repo spreads. These predictions provide a credible channel to identify the effect of foreign central bank demand for dollar liquidity on repo spreads, exploiting the characteristics of commodity exporters with pegged exchange rates. Empirical evidence supports the model's predictions: precautionary sales by these central banks lead to a statistically and economically significant widening of repo spreads, accompanied by a drawdown in Treasury balances. These results underscore how the Fed's foreign-repo facilities mitigate global dollar-funding stress and protect U.S. short-term funding markets.
We define and characterize love-for-variety, which measures the consumer's desire to consume more variety of goods, first for general homothetic symmetric preferences, and then for the two classes of GM-CES and the three classes of HSA/HDIA/HIIA. These five classes are pairwise-disjoint with the sole exception of CES. If we depart from CES within GM-CES, the standard CES measure of love-for-variety underestimates the true love-for-variety, potentially by a wide margin. If we depart from CES within HSA/HDIA/HIIA by introducing the 2nd law of demand, the standard CES measure overestimates the true love-for-variety. We illustrate these and other results in an Armington model of competitive trade, where countries differ in the variety of goods they produce, and we show how the ACR formula for the gains from trade needs to be modified.
We examine the role of the international environment in shaping Federal Reserve monetary policy beyond its domestic dual mandate. We use minutes of the Federal Open Market Committee and construct indexes of the attention paid by U.S. monetary policymakers to the international economic and financial situation. These indexes are built by applying natural language processing (NLP) techniques ranging from word count to built-from-scratch machine learning models, including large language models. By integrating those text-based indicators into a Taylor rule, we get a quantitative assessment of the international attention channel on Fed decisions. Our results show that heightened international attention, which in our sample is concentrated around adverse foreign developments, is associated with a more accommodative monetary policy stance than implied by a standard Taylor rule.
