Flexible Exchange Rates and Commodity Price Changes: The Case of Japan

Abstract

Although agricultural commodities are often assumed to have flexible prices, little has been done to estimate exchange rate pass-through. Perfect commodity arbitrage opportunities imply complete pass-through; imperfect opportunities could lead to incomplete pass-through. Analysis of commodity price and exchange rate adjustments for five commodities exported to Japan by the United States reveals that during the 1970s, commodity prices were generally flexible. During the 1980s, when the dollar was rising, price stickiness on the part of exporters/importers contributed to inflexible prices and asymmetric exchange rate response. Specifically, an exchange rate increase was passed through for some commodities but not a decline.

The pass‐through of exchange rate changes to the prices of Australian exports of dairy and livestock products

“…Previous studies for beef have reported similar econometric and data problems, for example, poor explanatory power, persistent serial correlation, and inconsistent signs on coefficients (Jabara and Schwartz 1987;Alston et al 1992;Patterson et al 1996). The authors have suggested that their results indicate the importance of other factors specific to the beef market, particularly import quotas and differences in product quality.…”

“…Incomplete or discontinuous pass-through is also found in the studies for beef. However, here the authors suggest that the results are caused by other influences, particularly the NTB commonly found in the beef trade, rather than imperfectly competitive market structures (Jabara and Schwartz 1987;Alston et al . 1992;Patterson et al .…”

“…However, the absence of the expected continuous long run pass-through relationship for the livestock commodities is only indicative of the influence that NTB have on exchange rate effects in these markets. Other factors specific to these commodities, such as the differences in product quality and availability raised by Jabara and Schwartz (1987) and Patterson et al (1996) may also lead to discontinuities in the relationship between exchange rates and export prices. For Australia, Chang and Griffith (1998) have also suggested that some participants in domestic beef markets practice price levelling, or the maintenance of relatively stable wholesale and retail prices in the face of changing procurement costs.…”

“…For corn, cotton, and soybeans, Pick and Park (1991) find evidence for a competitive market structure, but Jabara and Schwartz (1987) and Alston et al . (1992) report discontinuous or incomplete pass-through for the same commodities in similar time periods.…”

Price Dynamics in International Wheat Markets

“…Binkley (1983) evaluated the effects of freight charges and other marketing costs on wheat price stability. Ardeni (1989), Jabara and Schwartz (1987) and Goodwin et a1 (1990) addressed adherence to the law of one price in international wheat markets. Market power implications for international wheat price linkages have been investigated by McCalla (1966), Carter and Schmitz (1979) and Alaouze et a1 (1978).…”