Ain Pd-081+.443A1n W.224A1n QMH+.020 in

taken as a whole do not suggest the presence of an asymmetry in the effect of import price changes on domestic price changes.

Aggregate price changes, 1958-70

Because empirical relationships in the general wage-price determination area have often proved to be quite unstable over time, it is worth investigating whether the empirical results for the 1958-73 period apply to other time periods as well. Given the limited number of observations available with annual data and given that the 1971-73 period was a turbulent transition period as regards the exchange rate regime, it seemed reasonable to regard the 1958-70 (fixed exchange rate) period as an attractive supplementary estimation period. As such, the asymmetry tests were redone for the 1958-70 period on both the pooled data (for all fivè countries) and on the individual country data. The pooled results are given in Table 15 while the individual country results appear in Tables 16-20 in Appendix I.

Looking first at the pooled results (in Table 15), the most salient finding is that (as in the pooled results for the 1958-73 period) there is no evidence of an asymmetry in the effect of import price changes on domestic prices. More specifically, in none of the five models tested is either of the slope dummy variables on import price changes significantly different from zero; nor is the adjusted, R2 in the equations with the slope dummies (PMN and PÊN ̧ higher than that in the equations where positive and negative import price changes are constrained to have the same effect on domestic prices. Thus, for the five industrial countries taken as a whole, there is no more support for the asymmetry hypothesis in the 1958-70 period than there was in the 1958-73 results.

Nt-1) ever

Table 15 also contains a number of other results that are worth mentioning, if only briefly. First, there is no clear indication that the effect of import prices on domestic prices was different during the two periods; for example, PM plus PM for Models I, II, and V display somewhat larger coefficients on the 1958-70 period than for the 1958-73 period but Models III and IV givel

the opposite result (see Table 14). Second, there is some evidence from the estimates of Model V that the influence of past domestic price changes on the current rate of inflation was lower in the 1958-70 period than in the 1958-73 period. Estimates of the Laidler-Cross model (Model VI) on the pooled data set Third, (not reported in Tables, 14 and 15) yield the same general conclusion. the structural price-change equations that include the change in money wages as an explanatory variable, i.e., Models I and II, again seem to have substantially higher explanatory power than the reduced-form models that endogenize money wages (Models III-V).

7.031Aln PMN + .011 DUK + .017 DG + .033 DJ + .019 DI

(.21)

t-1

(1.94)

(2.34) (2.95) (2.73)

.432
SEE - .0144

35

Turning to the asymmetry results for individual countries, it can be seen from Table 16 that the U.S. results for the 1958-70 period are similar to those for the 1958-73 period. Again, the asymmetry variables almost always carry the expected negative sign and these variables are significantly different from zero at the 5 per cent confidence level in two of the five models tested--namely, in Models III and IV. Also, the sizes of the estimated coefficients on PMN and PẴN where significant, again indicate support for 't-1' the strong form of the asymmetry hypothesis.

The asymmetry results for Germany (Table 17), and the United Kingdom (Table 19) are also quite similar to the asymmetry results for the 1958-73 period. That is, the equations for Germany and the U.K. consistently find no evidence of an asymmetry. The 1958-70 results for Italy (Table 20) provide less support for the asymmetry hypothesis than did the 1958-73 results--with only one model (Model III) indicating a significant asymmetry coefficient for the earlier period. A sharper contrast with the 1958-73 results occurs in the case of Japan (see Table 18) where the 1958-70 results find no evidence of the asymmetries associated with import prices that were so pervasive in the 1958-73 equations (see Table 11). This suggests in turn that the import price changes during the 1971-73 period were exercising perhaps undue influence on the earlier asymetry results for Japan. At the same time, however, it is not obvious (in the absence of additional testing) just what this influence was. While import price changes were larger during the 1971-73 period than for 1958-70, this was true of both positive and negative import prices; in fact, the positive (Japanese) import price changes of 1971 and 1973 were larger relative to the average positive import price change of 1958-70 than was the large negative import price change of 1972 relative to the negative changes of 1958-70. Thus, on the surface, it would not appear as if the 1958-73 asymmetry results for Japan would be attributable to large/small differences in the size of import price changes. Clearly, further work on the Japanese equations would be desirable.

Disaggregate price changes, manufactures 1958-73

In the equations reported thus far, the rate of change of domestic prices. has been related, inter alia, to the rate of change of import prices where both the domestic and import price indices covered a wide variety of goods and where different categories of imports had presumably different degrees of substitutability with domestic goods. This situation can be contrasted with much of the theoretical literature on the effect of import prices on domestic prices where it is common to assume that imported and domestic (tradeable) goods are close substitutes. In such a case, one is led to the conclusion that the sole

determinant of the domestic price of good i will be the import price of good f

and further that the coefficient on the import price variable will be unity.

1 See Isard [16].