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The author is grateful to Michael Deppler, David T. Coe, Martin Fetherston, John Green, Alex Hoffmaister, Mahomud Pradhan, Ulrich Stiehler, Ramana Ramaswamy, and Julio Santaella for helpful comments; and to Sungcha H. Cha, Toh Kuan, and Fritz Pierre-Louis for research assistance.
See Goldstein and Khan (1984) for a survey of export and import models including simultaneous supply and demand models.
Note that instead of (or together with) a cost variable, the capital stock can be used as a determinant of export supply (see, for example, Holly and Wade, 1991). That would be justified when rigidities in the production structure do not allow firms to fully optimize.
We include lagged values of the dependent variables. Including lagged values of the exogenous variables in the equations did not improve the fit significantly.
The data sources for manufacturing export volumes and prices, industrial countries GDP’s and prices are the OECD. The latter two variables were aggregated using the World Economic Outlook PPP weights. Industrial countries are defined as G7 excluding the United Kingdom. Unit labor costs and the effective exchange rate are from the World Economic Outlook database, and domestic manufacturing prices are from Economic Trends. The estimations are done by the maximum-likelihood method using Gauss version 2.2.
This is a Chow test based on regression results for the pre-ERM sample and the whole sample using the specification in Table 3. The residual sum of squares for the two regressions are 0.005192 and 0.006699 respectively. Note, of course, that the power of this test is low due to the short length of the ERM period.