Appendix I: Data
U.S. domestic prices, published by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, are retrieved from DRI Database. For all SIC 2-digit level industries and SIC 3546 (pumps and pumping equipment), new producer price indices are too short for our analyses, and therefore wholesale price indices are used. For all other SIC 4-digit level industries, producer price indices are used. SIC-based U.S. export prices are obtained from BLS. The limited availability of these data is the main constraint on the coverage and sample periods of our analyses.
Japanese domestic and export wholesale price indices are obtained from the Bank of Japan (BOJ). Since BOJ data are not organized according to SIC, they are matched up with U.S. data, by aggregating multiple series if necessary. One outlier in the export price of precision instruments (1982:3) is ignored. Some products are excluded from our study because we cannot establish reasonable concordance (e.g., certain fabrics and X-ray equipment). All U.S. and Japanese price data are quarterly (last month of the quarter).
Exchange rate series are generated in three different ways. First, industry-specific real effective exchange rate series are constructed for individual industries in each country. Weights are derived from bilateral export shares of 16 industrial countries (Canada, the United States, Japan, Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands, the United Kingdom, Austria, Finland, Norway, Sweden, Switzerland, Spain minus the home country), published in the United Nation’s Commodity Trade Statistics for 1984. IMF’s normalized (i.e., cyclically adjusted) unit labor costs for manufacturing are used as deflators. Second, in columns (b) of Table 4, real effective exchange rate series for the United States and Japan, not disaggregated by industry, are obtained from IMF’s database. Weights are based on multilateral (i.e., including third market effects) manufacturing export shares of the same sixteen countries, and the same deflators are used—see McGuirk (1987). Finally, in Section VI, the nominal yen/dollar rate from IMF International Financial Statistics (IFS) is used to generate the real bilateral exchange rate endogenously.
Cyclical variables are constructed as follows. For domestic price equations, the change in seasonally adjusted domestic real GNP is used. For export price equations, the weighted average of changes in seasonally adjusted real GNPs of G-7 nations excluding the home country is used, with weights proportional to 1981 GNP. These cyclical variables are zero-mean adjusted for each sample period.
Wages are obtained from IFS. They are seasonally adjusted. Material prices for the United States are BLS’s wholesale prices for nonfood materials (including fuel). Material prices for Japan are the import price index in IFS (Japanese imports are predominantly fuel and raw materials). Logarithms of wages and material prices used in estimation are zero-mean adjusted for each sample period.
Appendix II: Estimation Results by Industry
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I would like to thank Michael Dooley, Dale Hendersnn, Jocelyn Horne, Takatoshi Ito, David Lipton, Paul Masson, Anne McGuirk, Carmen Reinhart, Jun Saito, and the participants of the Research Department seminar for helpful comments. David Hicks and Kenneth Cobb provided excellent research assistance. All errors that may remain, however, are mine.
See Baldwin (1987b), Dornbusch (1987), Helkie and Hooper (1988), Hooper and Mann (1987), Knetter (1988), Krugman (1987), Krugman and Baldwin (1987), Mann (1986), Woo (1984), Yamawaki (1988), and Economic Report of the President (1988).
Other explanations of pass-through emphasize: (1) the dollar’s role as a dominant invoice currency; (2) U.S. firms’ global market power; (3) difference in the export dependency ratio; (4) aggregate demand conditions; (5) the size of firms—Japanese export firms are large and have deep pockets; and (6) difference in the profit-maximization horizon—Japanese are long-term maximizers, while Americans are short-term maximizers. This may be due to differences in corporate culture, capital cost, the role of the stock market, productivity growth or direct investment. There are also game-theoretic models of pass-through where, for example, no or little pass-through is Pareto-superior to the Cournot-Nash solution (Chadha, 1987). Also see Dornbusch (1987), Hooper and Mann (1987), and Krugman (1987a) for more models.
Totally differentiate (1) and set Δℓnc = Δℓnw = Δℓnq = K and Δt=0. The resulting equation must hold for any ℓnw or ℓnq, hence (2).
From now on, all equations are in rates of change. The primary reason for this is to eliminate high serial correlation in the error terms. An alternative way is to model the structure of error explicitly, but this will increase computational difficulty.
ẏd is defined as the zero-mean adjusted rate of change in domestic real GNP, while ẏx is a weighted average of zero-mean adjusted rates of change In real GNP of G-7 countries other than the home country.
The MINDIS, or minimum-distance estimation, command of the RAL statistical package is used. The algorithm is due to Berndt, Hall, Hall, and Hausman (1974).
However, θx < 0 cannot be ruled out under certain assumptions about cost and demand—see Feenstra (1987).
However, LLRT results in Table 4 are less conclusive. Only paper-related industries and electrical machinery are seen to have statistically different export price elasticities between the two countries.
Our exercise Is not intended to have policy implications regarding the desirability of this rate of do Liar depreciation against that or, for that matter, managed float against a fixed rate system. Such discussion would require explicit assumptions about how nominal wages are (should be) determined in each country (see McKinnon and Ohno, 1988). Λ more complete model of productivity differentials and real exchange rates is developed by Marston (1987b). Marston’s model is formulated with unit labor costs and labor productivity data in mind. In contrast, we estimate productivity φ from a cost function.