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Exchange Rate Pass-Through for Australian Manufactured Imports: Estimates from the Johansen Maximum-Likelihood Procedure

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  • Jayant Menon

Abstract

This paper estimates exchange rate pass-through for Australian manufactured imports by applying an econometric procedure which avoids the pit-falls in previous studies to a carefully assembled data set. For the first time, we provide estimates of pass-through based on the Johansen (1988) ML procedure. Our finding of incomplete pass-through has important implications for policy and the macroeconomy. Incomplete pass-through brings into question the validity of the "small" country assumption and the exogeneity of the terms of trade with respect to exchange rate changes. We may also have to reconsider the extent of the apparent inflationary (deflationary) consequences of exchange rate depreciations (appreciations), and the effects of exchange rate variability on international trade flows.

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File URL: http://www.copsmodels.com/ftp/workpapr/ip-60.pdf
File Function: Initial version, 1993-07
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File URL: http://www.copsmodels.com/elecpapr/ip-60.htm
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Bibliographic Info

Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number ip-60.

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Date of creation: Jul 1993
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Handle: RePEc:cop:wpaper:ip-60

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  1. Hall, S G, 1991. "The Effect of Varying Length VAR Models on the Maximum Likelihood Estimates of Cointegrating Vectors," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(4), pages 317-23, November.
  2. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  4. Sawa, Takamitsu, 1978. "Information Criteria for Discriminating among Alternative Regression Models," Econometrica, Econometric Society, vol. 46(6), pages 1273-91, November.
  5. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  6. Jayant Menon, 1992. "Exchange rates and prices of Australian manufactured exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(4), pages 695-710, December.
  7. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  8. Jayant Menon, 1993. "Exchange Rates, Import Prices, And The Macroeconomy," Economic Papers, The Economic Society of Australia, vol. 12(1), pages 37-48, 03.
  9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  10. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
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