The Impact of Exchange Rate Devaluation on Price Indices of Exported Goods in Iran

Transcription

1 ra. Eco. Rev. Vol., No., 7. pp he mpact of Exchage Rate Devaluato o Prce dces of Exported Goods ra Abstract E Nooradd Sharfy*, Vahd aghezhad Omra, ahereh Valead Ahagaree 3 Receved: 6/4/ Accepted: 6//4 xchage rate s a mportat factor fluecg prce dces of exported goods of a coutry dfferet ways. mported termedate commodty s oe of the mportat ways by whch the chage exchage rate affects prce dces of the exported goods. Usg the put-output table of ra for the year, ths paper vestgates the mpact of exchage rate devaluato o prce dces of exported goods ra. he results of the research dcate that, whe all agets do ot adust ther eargs exactly wth respect to prce dces of products, the exchage rate pass-through s partal; therefore the cremet the level of exported prces s less tha that of exchage rate varato. cotrast, whe all agets adust ther eargs wth respect to prce dces, the prce dces of all products wll crease as much as exchage rate varato, hece, the pass-through s complete, ad as a result, the curret devaluato polcy s eutral. Keywords: Devaluato, Prce dces, Exported Goods, Exchage Rate Pass-hrough, put-output Aalyss. JEL Classfcato: C67, E58, F47.. troducto he exchage rate of ra has decreased for dfferet reasos recet years. hs reducto has affected the domestc prce of products through mported goods ad servces. However, the Exchage Rate Pass-hrough (ERP) o prces of mported goods vares dfferet stuatos. addto, although t s expected that the prce dces of exported goods wll rse due to reducto the value of domestc. Assocate Professor, Departmet of Ecoomcs, Uversty of Mazadara, Babolsar, ra (Correspodg Author: sharfy@umz.ac.r).. Assstat Professor, Departmet of Ecoomcs, Uversty of Mazadara, Babolsar, ra (taghzadeh@gau.ac.r). 3. Uversty of Mazadara, Babolsar, ra (valead59@yahoo.com).

2 86/ he mpact of Exchage Rate Devaluato o Prce dces currecy, the level of the cremet s also depedet o reacto of prmary factor holders of the ecoomy. Labour forces ad captal owers are two groups amog those who may adust ther eargs because of prce cremets. hese adustmets wll tesfy the effect of a tal shoc to exchage rate. hs paper attempts to vestgate the effects of chage the value of exchage rate ra dfferet scearos. o ths ed, the effects of % devaluato the value of domestc currecy o the sze of prce dces of exported goods are vestgated. cotrast to most prevous studes ra that were based o a tme seres method, ths research exames the relatoshp betwee exchage rate ad Exported Goods Prce dex (EGP) through applyg the putoutput table of ra for the year. he followg sectos of ths paper have bee orgazed as follows: Secto cocers a theoretcal study of the research. Prevous studes are revewed secto 3. he model ad data resources are troduced secto 4. Secto 5 dscusses the emprcal fdgs. Fally, secto 6 cocludes the study.. A heoretcal Study. A Macroecoomc Aalyss Exchage rate pass-through (ERP) s commoly defed as the extet to whch exchage rate chages are evetually reflected traded goods prces. he degree ad speed of ERP play a mportat role the choce of optmal moetary polces ad exchage rate regmes. the lterature, two ssues are of partcular mportace; oe relates to whether the pass-through s complete or complete, ad the other to whether complete pass-through s lely to be more tha ust a shortru pheomeo (Brssms & Kosma, 7). rade prce s flueced by a umber of varables, such as exchage rate, producto cost ad maret power. Although there s a broad cosesus o the exstece of the effect of cost ad maret structure o the prce of mports ad exports, prevous studes have provded cosstet fdgs o the degree of the effect of exchage rate. (Brssms & Kosma, 7). Dorbusch (987) ustfes complete passthrough as arsg from frms that operate a maret characterzed by mperfect competto ad adusts ther mar-up (ad ot oly prces) respose to a exchage rate shoc.

3 ra. Eco. Rev. Vol., No., 7 /87 Oe of the stylzed facts the lterature s that the degree of ERP s tme-varyg ad more specfcally s declg substatally over the last decades (Oza & Erde, 5). Several complemetary explaatos have tred to accout for the decle the ERP ad cross-coutry dffereces over tme. Amog the ma oes there are macro factors, suggested by aylor () who ls the degree of ERP to the flato evromet ad more specfcally to the presece of flato targetg. After the adopto of a framewor, coutres ted to experece a lower pass-through (Casell & Rotma, 6). Aother mportat macro factor s the ature of the factor exchage rate regme. Some authors ustfy that a more stable exchage rate regme s deed lely to duce more local currecy prcg ad a pass-through decrease for mport prces. Fally, further potetal reasos for the decle the ERP could be mcroecoomc factors, such as shfts the composto of the mport budle from hgh pass-through goods such as eergy ad raw materals, to lower pass-through tems such as maufactured goods, a crease trade tegrato or a creasg share of mports deomated the home currecy (María-Dolores, ).. he ERP race a -O Model A devaluato of exchage rate flueces the prces of domestc products through mported goods. rrespectve of the ERP to mported goods prces domestc currecy, a part of ths shoc flueces the total expedture of products through the value of mported termedate puts domestc currecy. hs s the drect mpact of the tal shoc o the total expedture of products. he cremet the level of total expedture of products leads to a cremet the prce of these products. Sce a part of these products s cosumed as termedate put of some products, cosderg the ew prce of products leads to a ew cremet total puts ad cosequetly the prces of the related products drectly. However, sce oly a part of the products s cosumed as termedate put, t s expected that the sze of the future shoc wll ted toward zero. Hece, the process of adustmet wll cotue utl the effects of the shoc are gorable. Aother part of mported products s cosumed as fal demad.

4 88/ he mpact of Exchage Rate Devaluato o Prce dces he cremet the value of mported goods affects the prce of mported fal goods. As a result, ths part of the cremet wll ot drectly affect the prces of domestc products through termedate put. addto, value added compoets are other factors whch may affect the total put of products. O the other had, the prmary factors owers may adust ther eargs wth respect to prce cremets to costat ther welfare. o ths ed, the labour forces may as to adust ther wages wth respect to the Cosumer Prce dex (CP). he captal holders may adust ther recepts wth respect to some dces le the Producer Prce dex (PP). Hece, these prmary factors, as well as the et drect tax, may tesfy the prce dces cremets due to exchage rate devaluato. 3. Lterature Revew here are umerous studes examg the extet of ERP o prces of exported goods. he pheomeo of complete ERP o trade prces has bee largely see the cotext of hgh-come coutres. th global tegrato ad trade reforms, ths ca also be feasble developg coutres marets. Geerally speag, almost all studes have bee carred out usg dfferet techques of the ecoometrcs approach. hus, ths paper fals to fd ay documet cocerg the applcato of a put-output model ths area. For stace, a Autoregressve Dstrbuted Lag (ARDL) model was employed some researches such as orema & razar (5) o the short-term ad log-term effect of exchage rate varato o the EGP of pstacho products. a smlar method, the pass-through of exchage rate volatlty o the prce of o-ol exported goods of ra was vestgated by Asghar-Pour et al. (). he Vector Error Correcto Model (VECM) s aother techque of the ecoometrc approach used a umber of studes. Accordg to our vestgato, VECM was employed by Bashar-Abad et al. () to vestgate the exchage rate pass-through o EGP ra. addto, a 3 Stage Least Square (3SLS) method was mplemeted by Oho (989) to search exchage rate pass-through o EGP Japa ad the US. Moreover, a regresso method was used a umber of researches.

5 ra. Eco. Rev. Vol., No., 7 /89 he effect of exchage rate o exporters prcg polces Japa, the UK, Germay ad the US was vestgated by Ketter (993). Parsos ad Sato (7) have also employed a regresso method to specfy the effect of exchage rate o exported products prces of Japa to the US, Europe ad Easter Asa coutres. A regresso method was used by Ceglos (9) o pass-through EGP cremets Japa. Furthermore, a pael data method was used some studes as well. Usg ths method, the reacto of EGP to exchage rate was studed Mallc & Marques (8). Ad fally, a Vector Auto-Regresso (VAR) method has bee mplemeted some studes as well. Usg the VAR approach, McCarthy (999) fds that ERP o domestc prces s partal dustral ecoomes. Azz et al. (3) has employed a Recursve VAR method to estmate the exchage rate pass-through o the EGP of Bagladesh. he VAR ad regresso methods were mplemeted to specfy the exchage rate pass-through o EGP the US by Choudhr & Haura (). 4. he Model ad Data Sources 4. he Model Our study started wth a case whch the mported commodtes are classfed to termedate mported put ad fal goods cosumed by households or used for other purposes. he effects of exchage rate shoc termedate mported puts are cosdered smlar to those of value added compoets, whereas the mports of fal goods are cosdered smlar to those of other fal commodtes (able ). able : he Schematc of -O able termedate trasacto Households cosumpto Other fal demad otal output Value added compoets termedate mports otal puts mported fal goods otal supply o measure the effect of exchage rate varato o the prce dces of commodtes through termedate mported puts, a modfed verso of the able Adustmet Prce (AP) model proposed by Sharfy ad Sacho () s employed. hs model rus

6 9/ he mpact of Exchage Rate Devaluato o Prce dces based o the -O table adustmet due to a tal shoc value added compoets through several teratos. t s assumed that stads for the prce dex of product due to the drect effect of exchage rate varato. t s equal to the rato of the sze of total puts' value of the th products after tal shoc exchage rate to the correspodg value before the tal shoc. By multplyg ths rato by the correspodg row of the -O table, the chage the prce of the product s cosdered the value of ths product dfferet sectos. hs chage, whch ca be stregtheed by value added compoets, causes a ew shoc the value of total puts for products. Smlarly, s obtaed by the rato of the ew value of total puts for product to the correspodg value after the tal shoc. By cosderg the ew shoc through multplyg by the value of products the correspodg row of the table, le the tal shoc, the secod shoc s also cosdered the table. hs process wll cotue utl t becomes close eough to oe, so that the result of the shoc adustmet leads to a gorable umber. o geeralse the adustmet from oe product to all others, a matrx form s requred. o ths ed, the adustmet process of the table s show as equato (): m m m S S S B A S S S m m m ()

7 ra. Eco. Rev. Vol., No., 7 /9 where ad refer to parttoed matrces of -O the - th ad th terato of the adustmet process, respectvely. hey clude the termedate demad, fal demad, ad value added tems as equato (). or termedate put Households Cosumpto Other Fal Demad () Value Added tems cocers a dagoal matrx of the th terato of the adustmet whch ts elemets s are assocated wth the th product termedate put adustmet. A ad B are two addtoal adustmet coeffcets related to, wages, ad S, operatg surplus, the value added tems of products, respectvely. For stace, the case whch wages are adusted wth respect to Cosumer Prce dex (CP), A, the adustmet coeffcet for the th terato of adustmet, s calculated through the Laspeyres prce dex: g c Q P c Q P CP g Q Q c c P P M c ( g) P f c f M P e g c f M P C C e( g) g ad (-g) deote the share of households cosumpto expedture domestc ad mported products before exchage rate shoc, respectvely. c Q households cosumpto. P ad (3) C C m m refers to the quatty of domestc product P dcate the prce of product after ad before exchage rate shoc, respectvely. f P shows the world prce dex for the th mported fal goods expressed the foreg currecy. M c deotes the quatty of mported fal goods households cosumpto. C ad C refer to the households expedtures o domestc products after ad before exchage rate

8 9/ he mpact of Exchage Rate Devaluato o Prce dces shoc, respectvely. m C adc m dcate the households expedtures o mported products after ad before exchage rate shoc, respectvely. B, the adustmet coeffcets of operatg surplus, ca be replaced by the Producer Prce dex (PP). o ths ed, the Laspeyres prce dex to measure PP s as follows: PP Q Q P P Z Z Q ad Z refer to the quatty ad level of total products value for the th products, pror to ay exchage rate shoc, respectvely. deotes the total value of the th products after the exchage rate shoc too place. C, the adustmet coeffcet for drect tax, s calculated to meet the ad-valorem tax polcy. S M Su. a C. S M Su a a (5) here a, Su, M, S, ad (4) Z deote drect taxes, subsdy, termedate mported put, operatg surplus, wages ad total domestc termedate put for products the th terato of the table adustmet process, respectvely. ad a, Su, refer to the same tems for products the M, S, ( ) terato of the table adustmet process, respectvely. However, the case where oe or more value added tems are ot adusted wth respect to prce shoc, the related adustmet coeffcet would be equal to oe. t s otable that cosderg oe for th C, leads the model to be ft for a utary tax polcy for the related product. he result of the adustmet process of the table leads to t the adusted -O table wth respect to prce exchage rate shoc equato (6).

9 ra. Eco. Rev. Vol., No., 7 /93 refers to the tal -O table, to t the dagoal matrx of adustmet coeffcet of products ad value added compoets the st to t th terato of the adustmet, respectvely. However, due to t 3 t (6) dffereces the sze of C for dfferet products, t would be multpled by the et drect taxes of related products durg the table adustmet process, separately. he values of the prce dex of products, CP ad PP, chage as a result of ay varato exchage rate. hese dexes are computed through multplyg the sze of these compoets by correspodg coeffcets dfferet teratos of adustmet. For stace, the prce dex for the th product,, yelds through equato (7). t 3 Hece, the EGP ca be calculated as follows: t X P E EP (8) X P E X refers to the sze of exported goods or servces, ad (7) E ad E refer to the value of exports before ad after exchage prce shoc, respectvely. Fally, the model s also capable of beg used for the case whch the mported commodtes, for ay reaso, are classfed as termedate put oly. o do so, by puttg zero stead of equato (3), the model would be sutable for ths purpose. hs capablty s oe of the advatages of ths model. M c 4. Data Sources he supply ad use tables of the year that are the last surveybased tables are employed as database of the research (raa Cesus Bureau, 6). hese tables that are based o producer prces were used to provde the commodty by commodty table wth the sector techology. he table has bee balaced wth respect to ecoomc relatoshps. he mports of the coutry have bee dvded to the termedate

10 94/ he mpact of Exchage Rate Devaluato o Prce dces ad fal groups of goods. For coveece ths paper, the results of the tables have bee aggregated to 7 products. 5. Emprcal Fdgs Usg the AP approach, ths study aalyzes ERP o EGP. he model s estmated for three scearos. t s assumed that a regulated prce polcy s domat the exchage maret. O the other had, the exchage rate s fxed after a tal shoc. th respect to a advalorem tax polcy, the et drect tax s calculated based o the value of products cludg termedate goods ad segmets of value added such as wages ad operatg surplus. he frst scearo cocers the case whch wages ad operatg surplus are costat. he secod scearo meets the case whch t s supposed that the labour forces adust ther eargs based o the CP dex. Ad fally, wages ad operatg surplus are supposed to be adusted based o CP ad PP dexes, respectvely the thrd scearo. able : he Effect of % Chages Exchage Rate o the Exported Products Prce dex Dfferet Scearos Scearo Scearo Scearo 3 Exported Products Prce dex.34.4 Resources: Authors th respect to equato (8), the exported products prce dexes are calculated by dvdg the value of exports the fal stage of adustmet by ther value the tal stage. the frst scearo, whch segmets of value added do t adust, percet of devaluato exchage rate rases the EGP by.34 percet (able ). hs dcates that the degree of exchage rate pass-through s low ad complete. o see the factor s fluece the prce dexes of goods, the correlato coeffcets of these dexes wth the share of termedate ad prmary puts total puts of products are dsplayed able 3. Accordg to the results, the share of domestc ad specally mported puts total puts of products mples that they have a strog relatoshp wth the prce dexes of products. O the other had, the prce dexes of products usg hgher domestc or specally mported

11 ra. Eco. Rev. Vol., No., 7 /95 termedate puts wll be affected more due to exchage rate varato ths case. cotrast, products wth hgher value added segmets wll cofrot less chage prce dex varato. the secod scearo whch wages are adusted wth respect to CP, addto to termedate puts, the EGP rses.4 percet, whch s less tha the exchage rate cremet (table ). Hece the ERP s partal. Compared wth the frst scearo, the correlato coeffcet of prce dces of products wth the share of wages total puts has creased. a further vestgato, able 3 demostrates two results: ) he szes of prce dces of all products the secod scearo are a lttle greater tha those of the frst scearo. hs s due to adustmet of wages of labour forces wth respect to CP dex alog wth the termedate puts compoets that tesfy the sze of prce dces cremets. ) Costructo/, textles, clothg ad leather products/ ad chemcal products have the hghest prce dces both scearos, respectvely. cotrast, crude ol ad atural gas/, facal/ ad prvate busess servces have the least prce dces, the frst ad secod scearos, respectvely. hus, the correlato coeffcet of the prce dces of products of these scearos s estmated at about.98. O the other had, these scearos, the effects of exchage rate o prce dces of products are smlar to each other to some extet. o exame the effects of dfferet factors o prce dces of products ad EGP, the correlato coeffcets of these factors wth prce dexes of products are calculated. As t s show able 3, the correlato coeffcets of the share of domestc ad mported termedate puts out of total puts of products wth prce dces of these products are relatvely hgh ad postve. However, due to the role of wage adustmet, the szes of these coeffcets the secod scearo are smaller tha those of the frst oe. cotrast, the sze of the correlato coeffcet of wages share total puts of products wth ther prce dces s -.4, whch s egatve but very low. t seems that there are a umber of reasos for ths pheomeo. Sce a part of households cosumptos s mported, t s ot adusted except the tal shoc. Hece, the wages of labour forces are ot adusted exactly wth respect to prce dces of products. Aother reaso of

12 96/ he mpact of Exchage Rate Devaluato o Prce dces ths pheomeo cocers the small share of wages total products that s about percet. able 3: he Effect of % Exchage Rate Devaluato o Prce dces of Products Dfferet Scearos Goods ad servce Scearos 3 Farmg products Lvestoc products ood ad wood products Fshery Crude ol ad atural gas mg Electrcty, gas ad water Foods, beverages ad tobacco.4.5. extles, clothg ad leather products... Petroleum refery pro Chemcal products.86.. Metallc meral products Other dustres Machery ad equpmet.6.8. Costructo holesalg ad retalg servces Restaurat ad hotel rasportato Post, telephoe ad telegraph Facal termedary servce Resdetal servce ad mputed ret Prvate busess servces Publc admstrato Educato Health Other servces Correl. Coe.* mports share Correl. Coe. termedate puts share Correl. Coe. ages share Correl. Coe. Operatg Surplus share *: Correlato Coeffcets Resources: Authors Fally, as show table 3, the thrd scearo, whch all segmets of value added are adusted wth respect to prce dces to protect the real value of ther eargs, the prce dces of products ad subsequetly the EGP wll chage as much as the tal shoc the exchage rate. hus, the sze of EGP wll rse as much as exchage rate devaluato,.e., ERP s complete. O the other had,

13 ra. Eco. Rev. Vol., No., 7 /97 the case whch all compoets of prmary puts are adusted wth respect to prce shoc alog wth the termedate puts, a exchage rate devaluato polcy leads to a equvalet flato exported goods prces that euter the effect of ths polcy. o dsplay the role of dfferet factors o prce dces of products, the correlato coeffcets of these factors wth prce dces of goods ad servces are calculated. Accordg to the results of the research, the correlato coeffcets of the share of termedate puts ad mports total puts of these products wth the prce dces of products are egatve, whereas the correlato coeffcets of the share of wages ad operatg surplus wth the prce dces of products are postve. other words, the cremets the prces dces of products have cotrary relatoshps wth the share of termedate puts ad mports total puts of these products, whereas the cremets the prces dces of products have smlar relatoshps wth the share of wages ad operatg surplus of these products ther total puts. A comparso amog the prce dces of products scearo 3 wth scearos ad, dcates that ths s due to the role of the adustmet of these factors as well as the adustmet of domestc ad mported puts of these products that leads the prce dces of products to crease by about %. 6. Coclusos he effect of exchage rate devaluato polcy o the prce of exported products ad the EGP s depedet o the stuato of ecoomes. the case whch oe or some of the prmary factors owers do ot adust ther eargs as much as cremets prce dces, the pass-through s partal. Hece, the exchage rate devaluato polcy wll lead to a decrease the real prce of exported goods prces. Cosequetly, the exchage rate devaluato ca expad the level of exports. cotrast, the case whch the exchage rate devaluato s exactly tesfed by ecoomc agets through adustg ther earg wth respect to prce dces cremet to prevet ther welfare, usg ths polcy wll have o beefts for real exported goods prces ad the level of exports ths case. O the other had, the effects of ths polcy are eutered by flato. Hece, due to a complete pass-

14 98/ he mpact of Exchage Rate Devaluato o Prce dces through of exchage rate devaluato, usg ths polcy leads to a crease EGP wthout ay beefts to exported products prces. our case study of ra, the ERP of % devaluato exchage rate cases where all agets wll ot adust ther eargs exactly wth respect to prce dces, are qute cosderable. he level of cremet prce dces of products s to some extet depedet o the share of mported ad domestc termedate puts total puts of products, respectvely. cotrast, the prce dces of products ad the ERP of % devaluato exchage rate the case whch all actors adust ther eargs exactly wth respect to prce dces of products are equal to %. hus, due to a complete pass-through, ths polcy s eutral ad has o decremet the level of real prces of products. Refereces Azz, M. N., Rahma, M. S., Maumder, M. A., & Se. S. (3). Exchage Rate Pass-hrough to Exteral ad teral Prces: A Developg Coutry Perspectve. Joural of Appled Busess ad Ecoomcs, 5(3), Ba, N., & Bswas, B. (7). Exchage Rate Pass-hrough the US Automoble Maret: A Cotegrato Approach. teratoal Revew of Ecoomcs ad Face, 6(), Brssms, S. N., & Kosma,. S. (7). Maret Power ad Exchage Rate Pass-hrough. teratoal Revew of Ecoomcs & Face, 6(),. Casell, F. G., & Rotma, A. (6). No-Lear Exchage Rate Pass-hrough Emergg Marets. MF org Paper, P/6/, Retreved from Dorbusch, R. (987). Exchage Rates ad Prces. Amerca Ecoomc Revew, 77(), Gago, J., & Ketter, M. M. (995). Marup Adustmet ad Exchage Rate Fluctuatos: Evdece from Pael Data o Automoble Exports. Joural of teratoal Moey ad Face, 4(), Mall, S., & Marques, H. (8). Exchage Rate rasmsso to dustry-level Export Prces: A ale of wo Polcy Regmes da. MF Staff Papers, 55(), 93-8.

15 ra. Eco. Rev. Vol., No., 7 /99 María-Dolores, R. (). Exchage Rate Pass-hrough New Member States ad Caddate Coutres of the EU. teratoal Revew of Ecoomcs ad Face, 9(), Msh, F. S. (8). Exchage Rate Pass-hrough ad Moetary Polcy. NBER, org Paper, 3889, Retreved from Oza,., & Erde, L. (5). me-varyg Nature ad Macroecoomc Determats of Exchage Rate Pass-hrough. teratoal Revew of Ecoomcs ad Face, 38(), aylor, J. B. (). Low flato, Pass-hrough, ad the Prcg Power of Frms. Europea Ecoomc Revew, 44(7), Sha, R. S., & Pye, P. K. (). Exchage Rate Pass-hrough ad da s Export Prces. rade ad Developmet Revew, 4(), Vgfusso, R. J., Sheets, N., & Gago, J. (7). Exchage Rate Pass-hrough to Export Prces: Assessg Some Cross-Coutry Evdece. Dscusso Papers, 9, Board of Goverors of the Federal Reserve System teratoal Face, Retreved from ag, K. L., & ag, C. S. (999). Exchage Rate Pass-hrough ad dustry Characterstcs: he Case of awa s Exports of Mdstream Petrochemcal Products. to,., & Krueger, A. O. (Eds.), Chages Exchage Rates Rapdly Developg Coutres: heory, Practce, ad Polcy ssues (-34). Chcago: he Uversty of Chcago Press. Zorz, M. C., Hah, E., & Sachez, M. (7). Exchage Rate Pass-hrough Emergg Marets. org Paper Seres, 739, Retreved from