Working Paper: NBER ID: w3364
Authors: Richard C. Marston
Abstract: Relative price changes in Japanese and U.S. manufacturing are driven by two forces, productiviry growth which leads to secular changes in costs and exchange rate fluctuations which change relative prices between the two countries. In sectors where productivity growth is high, reductions in costs can neutralize exchange rate appreciations to keep prices competitive with those abroad, at least in the long run, But even in these sectors, exchange rate fluctuations are the dominant influence on relative competitiveness in the short run.
Faced with swings in exchange rates, firms adopt defensive measures to defend their export markets. The paper presents estimates of "pricing to market" elasticities which suggest that firms lower their export prices in domestic currency relative to their domestic prices in order to limit the effects of currency appreciations. There is evidence that firms in both countries pursue such pricing strategies, but pricing to market is more extensive in Japan. In response to a appreciation of the yen, Japanese firms reduce their export prices in yen sharply so as to limit the pass-through of the appreciation into the dollar prices of their exports.
Keywords: Price Behavior; Manufacturing; Productivity; Exchange Rates
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity growth (O49) | Secular changes in costs (J39) |
| Secular changes in costs (J39) | Relative prices between Japan and the US (F31) |
| Productivity growth (O49) | Relative prices between Japan and the US (F31) |
| Exchange rate fluctuations (F31) | Relative competitiveness (F12) |
| Exchange rate fluctuations (F31) | Pricing behavior (D40) |
| Pricing behavior (D40) | Relative prices (P22) |
| Exchange rate fluctuations (F31) | Export prices in domestic currency (F31) |