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.The figure suggests a reasonably close fit,as does the adjusted R2.25.The countries and shares are: China, 0.064; Germany, 0.087; Hong Kong, 0.095; Korea,0.098; Singapore, 0.072; Thailand, 0.057; United States, 0.47; and United Kingdom, 0.064.THE IMPACT OF U.S.EXTERNAL ADJUSTMENT ON JAPAN 199Copyright 2003 Institute for International Economics | http://www.iie.com Figure 9A.1 Predicted and actual ratio z of Japanese nonoilimports of goods and services to exports of goodsand services, 1980Q1-2000Q2.Source: See text.These estimates place the sum of export and import price elasticities( 1) at a relatively high value of 2.However, they also place leakageassociated with pass-through ratios (captured in regression coefficients2 and 5) relatively high.As shown in Cline (1995), the elasticity of theratio of the value of nonoil imports of goods and services to exports ofgoods and services with respect to the real exchange rate is: 1 25.This expression is analogous to the excess of the sum of export andimport price elasticities over the threshold of unity in the Marshall-Lernercondition for devaluation to help correct the external deficit.In this esti-mate, this magnitude has shrunk to 0.33, from an estimate of 0.58 inCline (1995), suggesting a deterioration in pass-through ratios in recentyears from the standpoint of efficacy of adjustment through exchangerate changes.As indicated in Cline (1995), the current account impact parametersshowing the effect of a 1 percent change in real exchange rate (aftercompletion of lags) or a one percentage point change in growth are esti-mated as:2) BR* X0z0[ 1 2 5][.01]for the real exchange rate;3) Bgd X0z0 3[.01]for domestic growth; and200 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com 4) Bgf X0z0 4[.01]for foreign growth, where z0 is the ratio of imports of nonoil goods andservices to exports of goods and services in the base period and X0 is thevalue of exports of goods and services in the base period.The main textuses the empirical estimates of this appendix for the parameters i andthe average of 2000 and 2001 values for X0 and z0 to obtain the impactestimates reported in table 9.5.An alternative approach is to use stylized parameters from the literaturefor the underlying elasticities and pass-through ratios that comprise themodel coefficients of equations 1) through 4).Hooper and Marquez (1995)place pass-through parameters as: 1 (complete pass-through forimport prices) and 0.15 (85 percent pass-through for export prices;see Cline 1995, 77).Obstfeld (2002, 6) suggests that recent estimates forinternational experience more generally might place both pass-throughratios at only about 0.5 for a one-year time frame but at complete pass-through over time.Hooper and Marquez place both the import and exportincome elasticities at unity ( 1), a result confirmed in Cline (1995,22-25).Hooper, Johnson, and Marquez (1998, 3) estimate the long-runprice elasticity at 1.0 for Japanese exports ( ) but only 0.3 for Japaneseimports ( ).The same study places the income elasticity of Japaneseexports at 1.1 and imports at 0.9.Consideration of these various estimates suggests the following.First,in decomposing the sum of import and export price elasticities ( 1) intotheir two respective components, a larger (absolute) value may be appro-priate for the export price elasticity than for the import price elasticity.Second, somewhat less than complete pass-through seems appropriate onboth the import and export sides for the time frame of two to three years.Experimentation with stylized parameter values, moreover, shows thatwhen the sum of price elasticities is as high as 2 (as in both the RFM95and RFM02 models), when the pass-through parameters are raised abovetheir low levels implied by these regression estimates toward high butbelow-complete pass-through, the result is to overpredict swings in theimport/export ratio associated with swings in the real exchange rate.Onthis basis, some narrowing of the sum of price elasticities toward therelatively low 1.3 found by Hooper, Johnson, and Marquez (1998) seemsappropriate.Finally, the low export income elasticity estimated in the new resultsabove likely reflects the shift of the foreign income variable to includesuch rapidly growing economies as China and Korea.For use with thisforeign income series, somewhat below unity seems appropriate for theexport income elasticity.THE IMPACT OF U.S.EXTERNAL ADJUSTMENT ON JAPAN 201Copyright 2003 Institute for International Economics | http://www.iie.com Table 9A.1 Stylized parameter valuesParameter Concept ValueImport price elasticity (absolute value) 0.55Export price elasticity 0.95Import income elasticity 1.0Export income elasticity 0.8Import price pass-through 0.85Export price pass-through minus unity 0.21 - 1.52 - [ (1 ) ] 0.273 1.04 - 0.85 [ ] 0.65Table 9A.1 presents a resulting set of stylized parameter values.ReferencesAhearne, Alan, Joseph Gagnon, Jane Haltmaier, and Steve Kamin.2002.Preventing Deflation:Lessons from Japan s Experience in the 1990s.Federal Reserve Board of Governors,International Finance Discussion Papers No.2002-729.Washington: Federal ReserveBoard of Governors.Balassa, Bela.1964.The Purchasing-Power Parity Doctrine: A Reappraisal.Journal of PoliticalEconomy 72 (December): 584-96.Bank of Japan.2002a.Bank of Japan Statistics and Other Key Statistics.Tokyo: Bank of Japan.http://www.boj.or.jp.Bank of Japan.2002b.Developments in Profits and Balance Sheets of Japanese Banks inFiscal 2001 (Summary).Tokyo: Bank of Japan.http://www.boj.or.jp/en/ronbun/ron0208b.htm.Bureau of Economic Analysis.2002a.US International Transactions: Second Quarter 2002.Bureau of Economic Analysis, US Department of Commerce, September 12.http://www.bea.doc.gov.Bureau of Economic Analysis.2002b.Gross Domestic Product: Second Quarter 2002 (Final).Bureau of Economic Analysis, US Department of Commerce, September 27.http://www.bea.doc.gov.Cline, William R.1989.United States External Adjustment and the World Economy.Washington:Institute for International Economics.Cline, William R.1995
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