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February 2007, Vol. 130, No. 2
Japanese exchange rates, export restraints, and auto prices in the 1980s
Changes in Japanese exchange rates affect the prices of U.S.-manufactured light vehicles in two related steps:
1. The pass-through effect. A stronger yen increases both the prices of models produced in Japan and the landed cost (the dollar value at the point of importation).
2. The competing-goods effect. The increases in landed costs of Japanese models lead to increases in demand and prices of domestic substitutes.
Quotas, such as the voluntary export restraints that were put in place in April 1981, can influence the magnitude of these effects: under binding restraints, where the level of imports reaches the level of the voluntary restraints, cost shocks (such as exchange rate fluctuations) do not affect prices.
Using 1980s price data from the Consumer Price Index (CPI) database, this article applies reduced-form equations to quarterly observations of transaction prices. The resulting estimates of the impact of exchange rates on prices of domestically produced automobiles are an indirect test of whether the voluntary export restraints were binding. Although the results for the early 1980s are inconclusive, results for the late 1980s yield significant exchange rate effects: a 10-percent increase in the yen translates into a 1.2-percent increase in a CPI-like price index for domestically produced automobiles, reflecting both pass-through and competing-goods effects. As one would expect, the elasticities were larger for models that competed more directly with Japanese models. These significant exchange rate effects imply that the voluntary export restraints were not binding over that period.
This excerpt is from an article published in the February 2007 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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