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A 'pricing-to-market' model with unobserved variables: explaining New Zealand's import prices

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  • Eric Hansen

Abstract

A model of 'pricing-to-market' (PTM) behaviour in import prices is developed for a small open economy to allow for two measurement problems: (i) that neither the marginal production cost of imported goods nor their corresponding (foreign-currency) export price are observable by the econometrician; (ii) that PTM behaviour, if it exists, alters the relationship between foreign countries' export price indices for total exports and the true, unobservable price index. The analysis shows that variations in the measured markup on import prices depends on the degree to which domestic demand is synchronized with world demand, whether bilateral exchange rate movements are due to domestic or foreign factors, and on the degree to which PTM behaviour differs from such behaviour in other countries. Equations estimated for the price of New Zealand (NZ) imports from the US strongly supports the model, and finds that the degree of PTM by US exporters in response to price and exchange rate movements is substantially greater in NZ than the average for other countries. However, the degree of PTM in NZ in response to excess demand is similar to that of other countries.

Suggested Citation

  • Eric Hansen, 1999. "A 'pricing-to-market' model with unobserved variables: explaining New Zealand's import prices," Applied Economics, Taylor & Francis Journals, vol. 31(1), pages 3-8.
    • Handle: RePEc:taf:applec:v:31:y:1999:i:1:p:3-8
    DOI: 10.1080/000368499324507
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    References listed on IDEAS

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    1. Peter Hooper & Catherine L. Mann, 1989. "Exchange Rate Pass-through in the 1980s: The Case of U.S. Imports of Manufactures," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 297-337.
    2. Feenstra, Robert C. & Gagnon, Joseph E. & Knetter, Michael M., 1996. "Market share and exchange rate pass-through in world automobile trade," Journal of International Economics, Elsevier, vol. 40(1-2), pages 187-207, February.
    3. Fisher, Eric, 1989. "A model of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 26(1-2), pages 119-137, February.
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    Cited by:

    1. Carl Mela & Praveen Kopalle, 2002. "The impact of collinearity on regression analysis: the asymmetric effect of negative and positive correlations," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 667-677.
    2. David Hargreaves & Bruce White, 1999. "Measures of New Zealand's effective exchange rate," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, September.
    3. Aruna Kumar Dash & V. Narasimhan, 2011. "Exchange Rate Pass-through," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 12(1), pages 1-23, March.

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