Working Papers

The Impact of a Large Depreciation on the Cost of Living of Rich and Poor Consumers with Anatoli Colicev and Jozef Konings - Revise & Resubmit

Abstract: We use retailer scanner data to analyze the impact of a large and sudden exchange rate shock on the cost-of-living of consumers. While the marginal cost of foreign sourced products increases by 7 percent more than of local sourced products, the retail margin on foreign products decreases by 4 percent relative to local products. We document increased entry and exit of both foreign and local varieties around the depreciation. To analyze the impact on consumers we decompose the cost-of- living into a cost , a retail markup, a substitution and a variety effect. As richer consumers spend, on average, more on foreign varieties, we find that they are disproportionally affected by the cost effect. However, lower retail markups on foreign products offset this relative cost increase. Since richer consumers benefit more from changes in product variety, their cost of living increases only by 16 percent, while for poor consumers the cost-of-living increases by 24 percent.

On the Sources of Market Segmentation in the EU with Frank Verboven - Available on request

Abstract: How large is market segmentation across European countries? We use regional consumption data on 68 fast-moving consumer goods and measure market segmentation in terms of the in- crease in cost-of-living differences across international region pairs compared to intranational pairs. By measuring market segmentation in terms of cost-of-living differences, we provide a more comprehensive analysis of market integration across European markets by jointly analyzing the contribution of Law of One Price deviations and choice set differences. To this end, we specify and estimate a structural model of consumer demand and market structure that gives rise to an intu- itive decomposition of cost-of-living differences into (1) cost differences, (2) markup differences, (3) differences in expenditure shares and (4) choice set differences. We estimate that the cost- of-living differences across Belgium, France, Germany and the Netherlands are more than seven times larger compared to intranational region pairs. As 12% of these differences can be explained by geographic differences and roughly 50% by taste differences, we estimate that continued inte- gration of output markets is likely to reduce 40% of the current cost-of-living differences. While cost and markup differences for commonly available product varieties have been the focus of the literature, we find a much more important role for choice set differences over LOP deviations to explain the remaining portion of market segmentation.

Commodity Exporters, Heterogeneous Importers, and the Terms of Trade with Guilherme Tonsig Teijeiro - Available on request

Abstract: How important are terms-of-trade shocks relative to total-factor-productivity shocks as a source of consumption volatility in commodity-exporting economies? We develop a tractable version of Gopinath & Neiman (2014) with segmented financial markets and realistic real exchange rate determination and provide a bridge to the more traditional frictionless model. We have two main results. First, we show how the differences between the models are captured by two partial elasticities for which we provide analytical expressions. Second, we show that a combination of these two partial elasticities determines the relative importance of terms-of-trade shocks relative to productivity shocks, independent of assumptions on market structure, returns to scale to importing, selection into importing, and financial markets. We calibrate the economy to Chilean and Colombian micro and macro data to show that the terms of trade are at least two times more important than in the standard frictionless small-open economy (SOE) framework: thirty-four percent of this difference is accounted for by monopolistic competition, sixty-two by increasing returns to importing, and only four percent by firm heterogeneity and selection. However, we show that the latter are crucial in capturing moments of the microdata such as the slope of the sub-intensive margin of trade adjustment and the distribution of imports.

Work in Progress

Understanding Border Effects in Europe: Evidence from the Mineral Water Industry