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Exchange rate pass through: An application to US and Japanese steel prices
Abstract
This paper contributes to the debate over the extent to which changes in exchange rates are passed through to changes in import prices. A model of imperfect competition is presented and is used to estimate the impact of changes in the yen/dollar exchange rate and other factors on US and Japanese steel prices. A 10% change in the yen/dollar exchange rate is estimated to result in a 7.3% change in the prices of Japanese steel imported into the USA but to only a 1.9% change in US producer proces for steel. The small share of the Japanese imports in the US steel market can provide an explanation for that latter result. Both US and Japanese steel prices are influenced significantly by industrial activity in the USA as represented by the US index of industrial production, while US steel prices are also seen to be affected by changes in the costs of production.
Purpose
This study aims to (1) develop an artificial intelligence (AI)-based model to accurately forecast rebar prices and (2) propose procurement strategies to reduce the subjectivity involved in rebar price trend forecasting and minimize procurement costs for construction project general contractors.
Design/methodology/approach
Correlation analysis was used to identify the key factors influencing changes in rebar prices over time. An AI-based inference model, symbiotic bidirectional gated recurrent unit (SBiGRU), was developed for rebar price forecasting. The performance of SBiGRU was compared with other AI techniques, and procurement strategies based on the SBiGRU model were proposed.
Findings
The SBiGRU model outperformed the other AI techniques in terms of rebar price forecasting accuracy. The proposed rebar price forecasting model (RPFM) and procurement patterns, which integrate inventory management principles and rebar price forecasts, were demonstrated to effectively optimize procurement costs, realizing a remarkable 6.13% reduction in procurement expenses compared to the conventional monthly procurement approach.
Research limitations/implications
The accuracy of AI models may be impacted by disparities in the data used for model training. Future research should explore approaches incorporating price predictions and order factors.
Originality/value
This study significantly extends the bounds of traditional rebar price prediction by integrating AI-driven forecasting with inventory management principles, highlighting the potential of AI-based models to improve construction industry procurement practices, reduce related risks and costs, optimize project operations and maximize project outcomes.
An important issue for exchange rate pass-through (ERPT) is the extent to which exchange rate changes affect the prices of imported goods and the consumer prices. The objectives of this study are to make a comparative study by exploring the literature relating pass-through for import prices and domestic prices in Australia, China and India. In particular, we test whether the exchange rate pass-through to import prices is complete, estimate the pass-through to consumer price index (CPI) to investigate whether there is any association between the pass-through and the average inflation rate across these countries. A structural VAR model is used to examine the exchange rate pass-through over the period 1990–2011. The impulse responses indicate that exchange rates have less effect in the rising domestic prices in China and India. This will have important policy implication for the monetary authorities.
International economists typically assume that temporary real exchange rate shocks can have only temporary real effects -and no effect at all on the underlying structure of the economy. This paper shows that even in a simple "off-the-shelf" industrial organization model, this assumption is unfounded; if market-entry costs are sunk, exchange rate shocks can alter domestic market structure and thereby have lasting real effects. In other words, a sufficiently large exchange rate shock can cause hysteresis in import prices and quantities. This simple idea has strong implications for exchange rate theory (Baldwin and Krugman 1986 shows this), for trade policy (Dixit 1987a discusses this), and for the estimation of trade equations as the present paper shows. To show that the theoretical point is not just empirically empty theorizing, we present evidence which suggests that the recent dollar overvaluation is an example of a hysteresis-inducing shock. To this end we demonstrate that the pass-through relationship shifted in a manner that 13 consistent with the nature and timing of the market structure changes predicted by the model. In particular, we find evidence that the structural break occurred during the rising dollar phase rather than In 1985 as is commonly asserted. A direct test of the model is not performed due to data limitations.
The authors investigate the pass-through from exchange rates to import prices when firms' future demands depend on their current market shares. They show that profit-maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates. They present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of U.S. import prices. Copyright 1989 by American Economic Association.
Error Correction Models (ECMs) have proved a popular organizing principle in applied econometrics, despite the lack of consensus as to exactly what constitutes their defining characteristic, and the rather limited role that has been given to economic theory by their proponents. This paper uses a historical survey of the evolution of ECMs to explain the alternative specifications and interpretations and proceeds to examine their implications for estimation. The various approaches are illustrated for wage equations by application to U.K. labor market data 1855-1987. We demonstrate that error correction models impose strong and testable nonlinear restrictions on dynamic econometric equations, and that they do not obviate the need for modeling the process of expectations formation. With the exception of a few special cases, both the nonlinear restrictions and the modeling of expectations have been ignored by those who have treated ECMs as merely reparameterizations of dynamic linear regression models or vector autoregressions. Copyright 1991 by Blackwell Publishers Ltd
The recent theoretical and empirical literature on the role of exchange rates in agricultural prices and trade is reviewed. Specifically, alternative specifications of the exchange rate in excess demand functions are considered. Results show that the specification most common in recent theoretical and empirical work is unnecessarily restrictive and may bias the resulting analysis. Several less restrictive specifications for empirical research are suggested.
Although agricultural commodities are often assumed to have flexible prices, little has been done to estimate exchange rate pass-through. Perfect commodity arbitrage opportunities imply complete pass-through; imperfect opportunities could lead to incomplete pass-through. Analysis of commodity price and exchange rate adjustments for five commodities exported to Japan by the United States reveals that during the 1970s, commodity prices were generally flexible. During the 1980s, when the dollar was rising, price stickiness on the part of exporters/importers contributed to inflexible prices and asymmetric exchange rate response. Specifically, an exchange rate increase was passed through for some commodities but not a decline.
A model was developed to assess recent effects of exchange rate changes, inflation, and price insulation policies on real
U.S. commodity prices. Exchange rate effects are defined so that they can occur and be significant under either fixed or floating
rate regimes. The results indicate exchange rate effects on real U.S. commodity prices are smallest under free trade and real
commodity price insulation policies but rise substantially as nominal price insulation policies become more prevalent.
An econometric model of the wheat, corn, and soybean markets is used to examine the dynamic effects of exchange rate fluctuation on U.S. commodity markets. Exports and agricultural prices are found to be sensitive to movements in the exchange rate, while domestic factors, such as disappearance and inventories, are less sensitive but still responsive. Dramatic short-run adjustments in prices and exports are followed by less dramatic but significant longer-run adjustments. Thus, the hypothesis of elastic response to the exchange rate seems particularly relevant for the short run.- Authors
This paper examines the effect of tariffs and exchange rates on U.S. prices of Japanese cars, trucks and motorcycles. In particular, we test whether the long-run pass-through of tariffs and exchange rates are identical: the symmetry hypothesis. We find that this hypothesis is easily accepted in our sample. We also find that the pass-through relation varies across products, ranging from about 0.6 for trucks to unity for motorcycles. These coefficients have very different implications for trade policy. We explain the results based on demand, cost and institutional conditions in each industry.
This paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm. The model stresses the role of exchange rate uncertainty and expectations. The most important result of the analysis is that the stochastic properties of deviations from the ‘law of one price’ are crucially affected by the currency of denomination of export prices. Using data on domestic and dollar export prices of Japanese goods, I find that deviations from the ‘law of one price’ are due to exchange rate surprises, but also to price staggering and ex ante price discrimination.
This paper provides an analytical study of linear regressions involving the levels of economic time series. An asymptotic theory is developed for regressions that relate quite general integrated random processes. This includes the spurious regressions of Granger and Newbold (1974) and the recent cointegrating regressions of Granger and Engle (1985). An asymptotic theory is developed for the regression coefficients and for conventional significance tests. It is shown that the usual t- and F-ratio test statistics do not possess limiting distributions in this context but actually diverge as the sample size T ↑ ∞. The limiting behavior of regression diagnostics such as the Durbin–Watson statistic, the coefficient of determination and the Box–Pierce statistic is also analyzed. The theoretical results that we present explain many of the earlier simulation findings of
[6] and [7].
A competitive industry has established home firms, and foreign firms with entry and exit costs. The real exchange rate follows
a Brownian motion. Industry equilibrium is determined using methods of option pricing. Entry requires the operating profit
to exceed the interest on the entry cost, and similarly for exit. The middle band of rates without entry or exit yields hysteresis;
it is found to be very wide for plausible parameter values. The exchange rate pass-through to domestic prices is found to
be close to one in the phases where foreign firms enter or exit, and near zero otherwise.
We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996-2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., inflation rate, inflation volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility.
This paper gives a systematic application of maximum likelihood inference concerning cointegration vectors in non-stationary vector valued autoregressive time series models with Gaussian errors, where the model includes a constant term and seasonal dummies. The hypothesis of cointegration is given a simple parametric form in terms of cointegration vectors and their weights. The relation between the constant term and a linear trend in the non-stationary part of the process is discussed and related to the weights. Tests for the presence of cointegration vectors, both with and without a linear trend in the non-stationary part of the process are derived. Then estimates and tests under linear restrictions on the cointegration vectors and their weights are given. The methods are illustrated by data from the Danish and the Finnish economy on the demand for money. Copyright 1990 by Blackwell Publishing Ltd
The adjustment of relative prices to exchange rate movements is explained in an industrial organization approach. Given labor costs in the respective currencies, exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium. The extent of absolute and relative price adjustment is shown to depend on market integration, product substitutability, the relative number of domestic and foreign firms, and the market structure. The impact of exchange rates on prices is illustrated in a variety of approaches including the Cournot, A. Dixit and J. Stiglitz_(1977), and S. Salop_(1979) models. Some empirical evidence is offered in support of the theory. Copyright 1987 by American Economic Association.
The relationship between cointegration and error correction models, first suggested by Granger, is here extended and used to develop estimation procedures, tests, and empirical examples. A vector of time series is said to be cointegrated with cointegrating vector a if each element is stationary only after differencing while linear combinations a8xt are themselves stationary. A representation theorem connects the moving average , autoregressive, and error correction representations for cointegrated systems. A simple but asymptotically efficient two-step estimator is proposed and applied. Tests for cointegration are suggested and examined by Monte Carlo simulation. A series of examples are presented. Copyright 1987 by The Econometric Society.
This paper investigates the efficiency of three primary metals markets in the USA using both static cointegration and dynamic error correction tests. The spot prices of lead, tin and zinc over the period January 1964 to December 1987 have served as the basis of the analysis. The results show that spot prices for lead and both tin and zinc are cointegrated at the 1% level. This means that these markets are not efficient in the semistrong form sense since casuality must run in at least one direction. There is also evidence of a weaker (in a statistical sense) cointegrating relationship between the spot prices for tin and zinc.
A general appreciation of the dollar will result in a corresponding fall in the dollar prices of primary commodities. The elasticity with respect to the value of the dollar will depend on supply and demand elasticities and on shares in world production and consumption of the commodity, but should be in the zero-one interval. Published estimates have indicated substantially greater elasticities, implying excess volatility of primary commodity prices. The author shows that this apparent excess volatility may be accounted for in terms of use of an inappropriate exchange rate index and through omission of wealth effects on LDCs associated with dollar-denominated debt. Copyright 1989 by Royal Economic Society.