Import demand and supply with relatively few theoretical or empirical puzzles
This paper documents that a textbook, supply and demand, simultaneous equations model of import prices and quantities can explain many aspects of import price and quantity behavior over the past 25 years, appears to forecast better than standard trade equations, and the instruments we use appear to be valid instruments. On the negative side, although the demand equation and the two reduced form equations satisfy nominal homogeneity restrictions, the supply equation does not. One possible explanation for this is that foreign suppliers do not believe that exchange rate shocks have the same permanence as price or wage shocks. Overall, however, the findings reported in this paper show that a classical simultaneous equations model can explain the behavior of non-oil import prices and quantities fairly successfully.
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