RDP 9304: Exchange Rate Pass-Through: The Different Responses of Importers and Exporters Appendix 4: Error Correction Model Results

Jacqueline Dwyer, Christopher Kent and Andrew Pease

May 1993

Appendix 4: Error Correction Model Results[42]

(a) Import Prices

Model 1: Import Price P-H ECM

  • dependent variable – ΔIPDm
  • period of estimation – 1975:1 to 1992:4
Variable Lag Coefficient Standard error t-statistic
RESIDUAL t−1 −0.156 0.069 −2.259
ΔIPDm t−2 0.145 0.048 3.009
ΔTWIm t 0.528 0.038 13.779
ΔTWIm t−1 0.184 0.043 4.230
ΔWPm t 0.419 0.139 3.009
ΔWPm t−1 0.334 0.129 2.582
R2     0.783  
Adjusted R2     0.767  
Sum of squared residuals     0.011  
Standard error of estimate     0.013  
Tests for autocorrelation: Test statistic Significance level
First order χ2(1)=1.113 0.291
First to fourth order χ2(4)=5.097 0.277

Model 2: Import Price UECM

  • dependent variable – ΔIPDm
  • period of estimation – 1975:3 to 1992:4
Variable Lag Coefficient Standard error t-statistic
IPDm t−1 −0.382 0.058 −6.579
TWIm t−1 0.343 0.054 6.386
WPm t−1 0.326 0.056 5.812
ΔIPDm t−4 −0.119 0.057 −2.107
ΔTWIm t 0.481 0.037 13.092
CONSTANT   1.844 0.272 6.773
R2     0.798  
Adjusted R2     0.782  
Sum of squared residuals     0.010  
Standard error of estimate     0.013  
Tests for autocorrelation: Test statistic Significance level
First order χ2(1)=1.271 0.260
First to fourth order χ2(4)=8.680 0.070
Long-run coefficients
Variable Coefficient
TWIm 0.899
WPm 0.853

(b) Manufactured Export Prices

Model 3: Manufactured Export Price P-H ECM

  • dependent variable – ΔIPDx
  • period of estimation – 1974:4 to 1992:4
Variable Lag Coefficient Standard error* t-statistic
RESIDUAL t−1 −0.100 0.034 −2.959
ΔTWIx t 0.268 0.042 6.400
ΔTWIx t−1 0.142 0.074 1.933
ΔWPx t 0.882 0.129 6.850
R2     0.384  
Adjusted R2     0.357  
Sum of squared residuals     0.021  
Standard error of estimate     0.017  
Tests for autocorrelation: Test statistic Significance level
First order χ2(1)=1.423 0.233
First to fourth order χ2(4)=12.102 0.017*
* Standard error estimates were White corrected because of evidence of second order autocorrelation.

Model 4: Manufactured Export Price UECM

  • dependent variable – ΔIPDx
  • period of estimation – 1975:2 to 1992:4
Variable Lag Coefficient Standard error* t-statistic
IPDx t−1 −0.111 0.030 −3.738
TWIx t−1 0.119 0.037 3.182
WPx t−1 0.085 0.030 2.817
ΔIPDx t−1 −0.336 0.104 −3.218
ΔTWIx t 0.222 0.049 4.553
ΔTWIx t−1 0.174 0.058 3.003
ΔWPx t 0.627 0.190 3.308
ΔWPx t−1 0.271 0.229 1.185
ΔWPx t−2 −0.441 0.217 −2.029
CONSTANT   0.673 0.207 3.254
R2     0.559  
Adjusted R2     0.494  
Sum of squared residuals     0.014  
Standard error of estimate     0.015  
Tests for autocorrelation: Test statistic Significance level
First order χ2(1)=0.109 0.741
First to fourth order χ2(4)=5.901 0.207
* Standard errors were corrected for heteroscedasticity (detected at a significance level of 3.3 per cent).
Long-run coefficients
Variable Coefficient
TWIm 1.072
WPm 0.766

Footnote

The full models contained four lags of all variables (including contemporaneous changes in world prices and exchange rates). Statistically insignificant variables were removed in order to obtain parsimonious models. All residuals were found to have insignificant degrees of heteroscedasticity, skewness and kurtosis at the 5 per cent level (unless otherwise specified). [42]