Chow, Gregory C, “Tests of Equality Between Sets of Coefficients in Two Linear Regressions,” Econometrica, Vol. 28 (July 1960), pp. 591–605.
Christelow, Dorothy, “Japan’s Intangible Barriers to Trade in Manufactures,” Federal Reserve Bank of New York Quarterly Review, Vol. 10 (Winter 1985/86), pp. 11–18.
Citrin, Daniel, “Exchange Rate Changes and Exports of Selected Japanese Industries,” Staff Papers, International Monetary Fund (Washington), Vol. 32 (September 1985), pp. 404–29.
Collyns, Charles and Steven Dunaway, “The Cost of Trade Restraints: The Case of Japanese Automobile Exports to the United States,” Staff Papers, International Monetary Fund (Washington), Vol. 34 (March 1987), pp. 150–75.
Cuthbertson, Keith, “The Behavior of U.K. Export Prices of Manufactured Goods 1970-83,” Journal of Applied Econometrics, Vol. 1 (1986), pp. 255–75.
Davidson, J.E.H., David Hendry, Frank Srba, and Stephen Yeo, “Econometric Modelling of the Aggregate Time Series’s Relationship Between Consumer Expenditure and Income in the United Kingdom,” The Economic Journal, Vol. 88 (1978), pp. 661–92.
Froot, Kenneth A., “Adjustment of the U.S. and Japanese External Imbalances,” (mimeograph, Cambridge, Massachusetts: Massachusetts Institute of Technology, 1988).
Goldstein, Morris, and Mohsin S. Khan, “The Supply and Demand for Exports, a Simultaneous Approach,” The Review of Economics and Statistics, Vol. 60 (1978), pp. 275–86.
Goldstein, Morris, and Mohsin S. Khan, “Income and Price Effects in Foreign Trade,” in Handbook of International Economics, Volume II. ed. by R.W. Jones and P.B. Kenen (Elsevier, 1985).
Hendry, David, “Predictive Failure and Econometric Modelling in Macroeconomics: the Transactions Demand for Money,” in Econometric Modelling, ed. by P. Ormerod (Heinemann, 1980).
Hooper, Peter, and Catherine L. Mann, “The U.S. External Deficit: Its Causes and Persistence,” International Finance Discussion Papers, The Federal Reserve Board (Washington), Number 316 (1987).
Loopesko, Bonnie E., and Robert A. Johnson, “Realignment of the Yen-Dollar Exchange Rate: Aspects of the Adjustment Process in Japan,” International Finance Discussion Paper, The Federal Reserve Board (Washington), Number 311 (August 1987).
Masson, Paul, Steven Symanski, Richard Haas, and Michael Dooley, “MULTIMOD: A Multi-Region Econometric Model” (unpublished, International Monetary Fund, March 4, 1988).
Sachs, J.D., “The Dollar and the Policy Mix: 1985,” Brookings Papers on Economic Activity: 1, The Brookings Instutition (Washington), (1985), pp. 117–97.
Appendix I: Long-Run Restrictions on the Export Price Equation
In the main text, equation (2) is a reduced form market clearing price. The demand and supply functions can be written, assuming log-linear specifications, as:
where a1 is the elasticity of demand and b1 the elasticity of supply. Equating supply and demand and solving for price:
That is, export prices are a weighted average of competitor prices (pw) and factor costs (p), where the weights depend on the relative size of demand and supply elasticities. It is found that α = β = 0 in the long run. Hence, for a finite demand elasticity (a1), the long-run elasticity of supply must be perfectly elastic (b1—> ∞).
Appendix II: Equation Estimates
The full sample estimates of the trade and services account equations are presented below. All equations were estimated by OLS, using quarterly data over the period 1975-87, and with variables in logarithms. DH is the Durbin-h statistic, DW the ordinary Durbin-Watson statistic, SE the standard error, and
The author would like to thank his colleagues in Division E of the Asian Department, in particular Bijan Aghevli, for their helpful comments and suggestions.
Roughly three fourths of Japanese exports are manufactured goods while the remainder is composed mainly of other heavy or light industrial products.
LjZt = Zt-j.
The most important VER in value terms has been imposed on exports of automobiles to the United States (since April 1981) and, more recently, to the European Community and Canada. However, VERs have also been imposed on steel, textiles, certain machine tools, and forklift trucks. For an analysis of the effects of VERs on Japanese auto prices in the U.S. market, see Collyns and Dunaway (1987).
For example, if the elasticity of demand and the marginal cost of production were both independent of quantity, export prices would be a constant markup on input costs.
The last category was defined residually and is made up in Large part by fees and royalties. Unilateral transfers were assumed to be exogenous.
Instrumental variables estimates of the export volume/price equations were tried in order to avoid potential bias arising from simultaneity. The results were little different from the OLS results presented here; for export volumes, only predetermined variables enter the equation.
For example, the average price elasticity of studies on Japanese exports reported in Goldstein and Khan (1985) is -1.4, although the spread of results is quite wide. More recently, William Helkie at the Federal Reserve Board has estimated the price elasticity at just over -1.1 (reported in Loopesko and Johnson, 1987) while Ueda (reported in Froot, 1988) estimates the elasticity at close to -0.9.
Pass-through is about 70 percent after one year, and 95 percent by the end of three years.
Loopesko and Johnson (1987) report the opposite finding, using a similar methodology. However, they incorporate in their price equation a nonlinear variable that is a function of the dependent variable. Hence, there is every reason to suspect that the coefficient estimate of this variable is heavily biased.
The Action Program, July 1985-March 1988.
Travel receipts account for less than 10 percent of total service receipts, but transport payments make up about one third of total payments.
The static forecasts assume Lagged dependent variables take on actual historical values. In the dynamic forecasts, lagged dependent variables assume previously predicted values. The principal simultaneous element of the model simulation was the feedback of predicted export prices onto export demand, although there is also feedback from exports to transport payments and receipts.
Support for this proposition is provided by evidence of falling export price elasticity over the course of the data sample period which implies falling substitutability of Japanese exports for competing goods. On the truncated sample (ending in the third quarter of 1935) the long-run price elasticity was -1.3 compared with -1.1 for the full sample—although the change is not statistically large enough to cause failure of the parameter stability tests.
The “no realignment” assumption of this section is interpreted as no change in both the yen and the dollar effective exchange rates.
Owing to (a) the high elasticity of exports with respect to world GNP, and (b) feedback of domestic demand onto export prices (via the effect of GNP on wholesale prices—see below), world GNP has a stronger effect on the current account than domestic demand. If both world GNP and domestic demand had been 1 percent higher in 1986-87, it is estimated that the current account would have been about $3 billion higher in these years.
Estimates were based on simple regressions.
For Japan’s CPI this is probably quite reasonable given the small observed change in the index during the period of the yen’s sharp rise.
This result suggests that the yen appreciation had a strong effect on export prices during 1986-87. Nevertheless, the observed pass-through of the yen appreciation to export prices was only about 55 percent in this period compared with about 70 percent during the 1977-78 appreciation. One factor limiting the pass-through was the collapse in oil prices. Had oil prices not fallen, the model estimates that the pass-through would have risen to 60 percent. This is a conservative estimate since no account is taken of the effects of oil prices on the price of competitors’ manufactured goods prices.
Assuming full pass-through of an appreciation to prices, the Marshall-Lerner condition for a yen appreciation to lower the dollar trade surplus is:
while to lower the yen surplus, the condition is:
where Ex and Em are the price elasticities of exports and imports respectively and R the initial ratio of real exports to imports. For Japan, R was about 1.3 at end-1985, Ex = 1.1, and Em = 0.6. Therefore, ML($) = -0.56 and ML(¥) = -1.03 implying that the Marshall-Lerner condition is more comfortably satisfied in yen than in dollars. The ease at which the Marshall-Lerner condition is satisfied determines the speed of trade surplus reduction following an exchange appreciation.
In addition, this assumption was interpreted to imply that there was no fall in the operating ratio is manufacturing from its third quarter 1985 level.