The long-run determinants of U.S. lumber imported from Canada revisited

Identification of the Long-Run Determinants of U.S.-Canada Softwood Lumber Trade

“…Moreover, by analyzing the time series properties of the determinants of Canadian softwood lumber exports to the U.S., we propose the most appropriate econometric techniques which should be utilized in empirical studies when modeling the dynamic behaviour of Canadian lumber exports. Accordingly, the paper also attempts to reconcile the opposing findings obtained by the earlier studies foreseeing an insignificant effect of several crucial determinants, including the exchange rate (Buongiorno et al, 1988;Jennings et al, 1991;Sarker, 1996;Bolkesjo & Buongiorno, 2006;Baek, 2012), with those obtained by a handful of others revealing a substantial long-run effect of some or all of these variables (Adams et al, 1986;Wear & Lee, 1993;Baek, 2007). It does so by highlighting the variation in estimated coefficients obtained by making alternative time-series modeling assumptions.…”

“…While housing starts reasonably measures the demand for lumber for constructing new houses, disposable income more adequately captures the demand accounted for by house repairs or remodeling. However, as pointed out by Baek (2012), housing starts and disposable income are highly correlated. To avoid the problem of multicollinearity, we only include the housing starts index in our estimation.…”

“…Canadian lumber, H is housing starts, and M is maintenance or repairing activities. The empirical methodology used in this paper builds on the theoretical framework founded in Buongiorno et al (1988) and Chen et al (1988), and later employed by Baek (2012) for the application of a fully-modified ordinary least squares estimation (FM-OLS). According to these studies, the demand for softwood lumber imports is derived from the demand for new housing or remodeling of the existing houses.…”

“…To avoid the problem of multicollinearity, we only include the housing starts index in our estimation. The imported lumber market in the U.S. is imperfectly competitive since the lumber produced in the U.S. is not a perfect substitute of that produced in Canada (Baek 2012). As defended by the Canadian industry and the government in the course of the dispute, consumers in the U.S. often perceive imported lumber as a distinct commodity due to the differing species composition of lumber imported from Canada.…”

“…However, as far as the significance of the Canadian/U.S. dollar exchange rate is concerned, many earlier studies predict an insignificant effect of exchange rate, such as, Sarker (1996), Bolkesjo and Buongiorno (2006), Buongiorno et al (1988), Jennings et al (1991), andBaek (2012). On the other hand, a handful of others disclose an important long-term effect of Canadian/U.S.…”