Estimates of pass-through for a range of resource inputs integral to the economic function of New Zealand, are calculated for the period 1988(I) to 1997(III). Estimations explaining the relationship (the pass-through effect) are reported for the five largest imports into the New Zealand economy. Estimates are run on a bilateral and disaggregated basis for imports from Australia, Japan, UK, and USA. Bilateral investigation finds a partial first quarter response but does not find complete pass-through for all products, with coefficient values displaying unexpected correlations with the exchange rate. By comparison pass-through for the aggregated data is found to be complete and rapidly achieved. All small country assumptions are found to hold for New Zealand

Heagney, Kevin John

English

Massey Research Online

Copyright is owned by the Author of the thesis.  Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only.  The thesis may not be reproduced elsewhere without the permission of the Author.  EXCHANGE RATE PASS-THROUGH AND THE PRICES OF SELECTED NEW ZEALAND IMPORTS Kevin John Heagney 1998 EXCHANGE RATE PASS-THROUGH AND THE PRICES OF SELECTED NEW ZEALAND IMPORTS A thesis presented in partial fulfilment of the requirements for the degree Of Master of Applied Economics At Massey University Kevin John Heagney 1998 II ABSTRACT Estimates of pass-through for a range of resource inputs integral to the economic function of New Zealand, are calculated for the period 1988(1) to 1997(111). Estimations explaining the relationship (the pass-through effect) are reported for the five largest imports into the New Zealand economy. Estimates are run on a bilateral and disaggregated basis for imports from Australia, Japan, UK, and USA. Bilateral investigation finds a partial first quarter response but does not find complete pass-through for all products, with coefficient values displaying unexpected correlations with the exchange rate. By comparison pass-through for the aggregated data is found to be complete and rapidly achieved. All small country assumptions are found to hold for New Zealand. III ACKNOWLEDGEMENTS The method and approach taken for this paper is an amalgam of the concepts theoretical and empirical that are to be found within the mass of Pass-Through literature readily available for examination. The approach and methodology used are of a proven nature and go some way towards extending the already existing body of knowledge. Bearing in mind that nothing in or of itself is entirely original in either concept or content, I hereby declare that any similarities to others' work is not therefore intentional, nor is it made with disregard to the formalities of academic research. I acknowledge the support and guidance of my supervisor Professor Srikanta Chatterjee, and of my second supervisor, Dr. Claudio Michelini for his invaluable assistance with the econometric aspects of this study. Lastly, the views expressed in this paper are those of the author and do not necessarily reflect the views of Massey University nor the Department of Applied and International Economics. IV DEDICATION There are many markers along the road to completion of a document such as this, some good and some less so but all undeniably bearable. Some have come with human shape, form, and thankfully, with senses outside of the physical alone. To those people, and the shared experience that has gone into the shaping of this paper, I say thank you. That is the general, and now the specific, to the three most important people in my life George, Jack, and especially Amanda. v TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................. V LIST OF TABLES .......................................................................................... Vll LIST OF FIGURES ........................................................................................ VII Chapter 1 ......................................................................................................... 1 1.1. Introduction ......................................................................................... 1 Chapter 2 ........................................................................................................ 6 Literature Review ........................................................................................ 6 2.1 Early Years .......................................................................................... 6 2.2 The Law of One Price Extended .......................................................... 8 2.3 Other Factors Influencing Pass-Through ........................................... 11 2.4 Oligopolistic Models ........................................................................... 12 2.5 Restrictive Practice and Large Firm Decision Making ........................ 14 2.6 Current Position ................................................................................. 16 2.7 Small Countries ................................................................................. 17 2.8 Shortcomings ..................................................................................... 19 2.9 New Zealand ...................................................................................... 21 2.1 O Conclusion ....................................................................................... 22 Chapter 3 ...................................................................................................... 26 Theoretical & Analytical Framework ....................................................... 26 3.1 New Zealand a Small Country ........................................................... 26 3.2 Perfect Competition & the Exchange Rate ........................................ 27 3.3 Imperfect Competition ........................................................................ 29 3.4 Scale Effects for Pass-Through ......................................................... 30 3.5 Mark-up Model ................................................................................... 32 3.6 Model and Variables .......................................................................... 34 3.7 Data ................................................................................................... 41 3.8 Estimation .......................................................................................... 46 3.9 Lagged Models .................................................................................. 48 3.1 O Almon Polynomial Distributed Lag Model ........................................ 49 VI Chapter 4 ...................................................................................................... 52 Export Update ........................................................................................... 52 4.1 Hypotheses ........................................................................................ 52 4.2 Update ............................................................................................... 52 4.3 Estimation .......................................................................................... 52 4.4 Results ............................................................................................... 53 4.5 Analysis ............................................................................................. 54 4.6 Discussion of results .......................................................................... 55 4. 7 Conclusion ......................................................................................... 56 Chapter 5 ...................................................................................................... 58 Empirical Findings and their Interpretation ............................................ 58 5.1 Australia ............................................................................................. 58 5.2 Japan ................................................................................................. 59 5.3 United Kingdom ................................................................................. 60 5.4 United States of America ................................................................... 61 5.5 Aggregate .......................................................................................... 62 5.6 General Analysis ................................................................................ 64 Australia: ............................................................................................... 65 Japan: ................................................................................................... 66 United Kingdom: ................................................................................... 66 United States of America: ..................................................................... 67 Aggregate Results: ............................................................................... 67 Distributed Lag Graphs: ........................................................................ 68 Aggregate Data Graphs: ....................................................................... 68 5.7 Discussion of Results ........................................................................ 69 Chapter 6 ...................................................................................................... 75 Conclusion and Policy Implications ....................................................... 75 6.1 Export Update .................................................................................... 75 6.2 The Importation of Selected Production Inputs .................................. 76 6.3 Conclusion ......................................................................................... 78 6.4 Further Research ............................................................................... 81 REFERENCES .............................................................................................. 83 VII LIST OF TABLES Table 3.1 Proportion of Imports From The Four Selected Foreign Markets, 1996 .... 42 Table 3.2 GNI Inflation Measure, Percentage Change 1/4To1/4, 198411-1997111. .45 Table 4.1 Regression Results of Exchange Rate Pass-Through in Resource-Based Manufactured Exports of New Zealand ............................................................. 53 Table 5.1 For Selected Imports of Australian Origin, the Results of Estimation for the Exchange Rate by a Distributed Lag Model. ..................................................... 58 Table 5.2 For Selected Imports of Japanese Origin, the Results of Estimation for the Exchange Rate by a Distributed Lag Model. ........ .. ..... .. .................................... 59 Table 5.3 For Selected Imports of the United Kingdom the Results of Estimation for the Exchange Rate by a Distributed Lag Model ............ .................................... 60 Table 5.4 For Selected Imports of the United States of America the Results of Estimation for the Exchange Rate by a Distributed Lag Model ......................... 61 Table 5.5 For Selected Imports using Aggregated Data, the Results of Estimation for the Exchange Rate by a Distributed Lag Model .................. ...... ... .... ... .............. 62 LIST OF FIGURES Figure 5.1 For Selected Imports of Australian Origin the Results of Estimation for the Exchange Rate by a Distributed Lag Model. ..................................................... 58 Figure 5.2 For Selected Imports of Japanese Origin, the Results of Estimation for the Exchange Rate by a Distributed Lag Model. ..................................................... 59 Figure 5.3 For Selected Imports of the United Kingdom the Results of Estimation for the Exchange Rate by a Distributed Lag Model ............. .. ... .... .......................... 60 Figure 5.4 For Selected Imports of the United States of America the Results of Estimation for the Exchange Rate by a Distributed Lag Model ......................... 61 Figure 5.5 For Selected Imports using Aggregated data, the Results of Estimation for the Exchange Rate by a Distributed Lag Model ................................................ 62 Figure 5.6 For Selected Imports using aggregated data, the plotted logarithmic Values of the Exchange rate against the five imported products ....................... 63 Figure 5.7 For Selected Imports using aggregated data, the plotted logarithmic Values of the Fl variable against the five imported products ............................. 63 

Exchange rate pass-through and the prices of selected New Zealand imports : a thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Economics at Massey University

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Exchange rate pass-through and the prices of selected New Zealand imports : a thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Economics at Massey University

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