Table Of ContentLecture Notes in Economics and Mathematical Systems 433
Jayant Menon
Exchange Rates and Prices
The Case of Australian Manufactured Imports
Lecture Notes in Economics
and Mathematical Systems 433
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JayantMenon
Exchange Rates
and Prices
The Case of Australian
Manufactured Imports
Springer
Author
Dr. Jayant Menon
Monash University
Centre of Policy Studies and
The IMPACT Project
Clayton, Victoria 3168
Australia
"Publication of this work was assisted by a special publications grant from the
University of Melbourne".
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Menon, Jayant:
Exchange rates and prices : the case of Australian manufactured
imports I hy Jayant Menon.
(Lecture notes in economics and mathematical systems ; 433)
ISBN 978-3-540-60801-1 ISBN 978-3-642-52070-9 (eBook)
DOI 10.1007/978-3-642-52070-9
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ISBN 978-3-540-60801-1
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In loving memory of
Mrs. V.R.N. Menon
and
Dr. V. V. V. Menon
Preface
The objective of this study is to provide an in-depth analysis of the exchange
rate pass-through relationship, using Australian imports of manufactures as a
case study. The study begins by piecing together the theoretical literature on
exchange rate pass-through, to provide the basis for the development of
models for the empirical analysis. To place the empirical analysis m
comparative context, a critical survey of the existing empirical literature on
exchange rate pass-through is then undertaken. This is followed by a review
of aspects of the structure and performance of Australian manufacturing that
relate to the theme of the study. Next, the data and methodology are
discussed.
The analysis of exchange rate pass-through is conducted in two stages. First,
it seeks to establish the degree to which Australian dollar (AUD) import
prices of total manufactures and 50 product categories contained therein have
responded to the massive fluctuations in the AUD during the 1980s. This is
done by applying an econometric procedure which avoids the pit-falls in
previous studies to a carefully assembled data set. Second, the study
investigates the determinants of inter-product differences in the degree of
exchange rate pass-through. This is done by relating the pass-through
coefficients to a series of variables representing foreign control, quantitative
restrictions (QRs), product characteristics and market structure within a cross
section regression framework.
A number of interesting results emerge from the analysis. First, exchange
rate pass-through is incomplete for most products, with significant differences
in the degree of pass-through across products. Second, recursive estimation
rejected the hypotheses of the "hysteresis" effect in Australian import prices,
and the asymmetric pass-through of exchange rate depreciations and
appreciations in all cases. As regards the determinants of inter-product
differences in pass-through, the resttlts suggest that quantitative restrictions,
foreign control, concentration, product differentiation and the import share of
the domestic market are negatively related to pass-through, where as the
substitutability between imported and domestically produced goods is
viii Exchange Rates and Prices
positively related to pass-through.
Our finding of incomplete pass-through has a number of implications for
policy. First, the small-country assumption of international price taking
behaviour seems inappropriate for most of Australia's imports. More
importantly, it implies that exchange rate changes are likely to lead to real
effects in the economy operating through changes in the terms of trade.
Second, it brings into question the effectiveness of exchange rate policy in
correcting trade deficits, since relative prices will no longer adjust as much
following exchange rate changes. Third, it suggests that the inflationary
(deflationary) effects of exchange rate depreciation (appreciation) will be
moderated. Finally, it provides grounds to reconsider the perceived harmful
effects of exchange rate volatility on international trade flows.
Acknowledgments
This book is based on my doctoral dissertation read at the Institute of Applied
Economic and Social Research at the University of Melbourne. My biggest
intellectual debt goes to my thesis supervisors, Peter Dixon and Prema
Chandra Athukorala. Peter and Chandra provided invaluable advice, guidance
and support throughout the duration of this research project. I am grateful for
the countless evenings that they set aside to assist me with my work. Many
of the ideas that went into forming this thesis were born out of discussions
during these sessions. A number of people have provided detailed comments
on various parts of this book which I have found very useful. I thank Robert
Feinberg, Robert Phillips, Tom Taylor, Jon Kendall, Graham Dunkley and an
anonymous referee of this series for their contributions in this respect. A
number of people have contributed by answering various queries and/or
providing comments and advice at various stages. I am grateful to Jagdish
Bhagwati, Harry Bloch, Jeffrey Carmichael, Avinash Dixit, George Fane,
Ross Garnaut, John Griffiths, Gabor Korosi, Brian Parmenter, Alan Powell,
John Freebairn, Ross McCleod, Warwick McKibbin, Marcus Miller, Neville
Norrn~n, Stephen Nickel, Tony Thirwall, Larry Sjasstad, Richard Snape and
Takeshi Takayama for sparing the time to take an interest in my work. I
received useful comments from participants at a number of conferences at
which various parts of this book have been presented. I thank the participants
from the Third International Economics Postgraduate Research Conference,
19th and 20th Conference of Economists, 1993 Meetings of the Australasian
Econometric Society and the 1995 Royal Economic Society Conference. I
also thank participants at seminars at Monash University and the Australian
National University for their comments. For assistance with the compilation
and preparation of the data base, I wish to thank Geoff Brown and Peter
Cordy from the Australian Bureau of Statistics, and Tony Lawson and Paul
Emery from the Industry Commission. Various data and computing problems
were solved with the assistance of Catherine Baudinette and Stephen Muir. I
am grateful for financial assistance received from the Institute of Applied
Economic and Social Research at the University of Melbourne and the Centre
of Policy Studies and IMPACT Project at Monash University for the purchase
of the unpublished data used in this study. I am also grateful to the
X Exchange Rates and Prices
Department of Applied Economics at Victoria University, Chisholm College
at LaTrobe University and the Centre of Policy Studies and IMPACT Project
at Monash University for granting me study leave/time-off to complete this
book. A Commonwealth scholarship released me from teaching
responsibilities for one semester and this provided the most productive six
month period in the writing of this book. Last but certainly not least, I wish
to thank the members of my family, Mani, Geetha, Anant, Nick and Scott
Narain, for their support, and for tolerating my obsession with completing this
book.
Publication of this work was assisted by a special
publications grant from the University of Melbourne.
