This thesis examines the role of exchange rate fluctuations on prices of automobiles imported into Canada over the period 1980(0)-1990(4). The theoretical model is motivated by the desire to synthesize existing models which only identify portions of incomplete exchange rate pass-through. The model captures general demand and supply influences by defining a rational expectations, dynamic optimization problem, with firms maximizing profits with respect to prices, subject to linear demand curves and quadratic adjustment costs. An extension to the model accounts for the possibility of strategic price interaction between competitors and, equally important, nests the original model. The model also strengthens the link between theoretical foundations and empirical estimation by providing a natural framework for recent econometric developments. In particular, favourable unit root and cointegration tests permit the theoretical model to be respecified as an error correction model (ECM) such that long-run equilibrium relationships can be separated from the short-run dynamics of a system. Following the theoretical foundations, each of the three separate automobile classifications (subcompact, compact/midsize, and large) is estimated using a traditional econometric approach, the Engle-Granger two-step procedure, and a Johansen (1991) /vector autoregressive (VAR) approach. Overall, results indicate that, regardless of the econometric methodology, U.S. automobile exporters pass through the largest amount of a change in exchange rates, followed in order by Germany and Japan. Knetter (1993) presents evidence to suggest little difference in pricing behaviour within common industries. Gross and Schmitt (1993) argue that the degree of pricing-to-market (PTM) varies across automobile sectors but remains similar within a given category. This thesis goes one step further and argues that pricing behaviour is different even within categories. Finally, in ranking the econometric techniques in terms of "best fit", under the assumption that the Johansen procedure identifies cointegrating vectors, the Johansen/VAR methodology produces ECMs with greater parameter stability, lower probability of model misspecification and better forecasting ability.
| Identifer | oai:union.ndltd.org:uottawa.ca/oai:ruor.uottawa.ca:10393/9518 |
| Date | January 1996 |
| Creators | Sabiston, David R. |
| Contributors | Plourde, Andre, |
| Publisher | University of Ottawa (Canada) |
| Source Sets | Université d’Ottawa |
| Detected Language | English |
| Type | Thesis |
| Format | 233 p. |
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