Waterloo economics series | 2004

Abstracts of working papers

#04-001 -- Ken Stollery and Stan Kardasz

Exchange rate pass through in Canadian manufacturing: its direct and indirect components (submitted to applied economics) (PDF)


Changes in the exchange rate have direct and indirect effects on the prices of domestically produced goods and imports in the domestic market. The direct effects originate with the impact of the exchange rate on the marginal cost of imports; the indirect effects, with its impact on the price of materials used by domestic producers and hence on their marginal costs. Direct and indirect exchange rate pass-through elasticities are estimated for thirty-seven Canadian manufacturing industries and their determinants are examined in a cross-section analysis. We find that the direct and indirect elasticities are approximately equal in size for domestic goods, while the direct effect is dominant for imports. For a small number of industries, the net result of the direct and indirect effects is that a depreciation of the domestic currency increases the competitiveness of imports, contrary to conventional analysis. Important determinants of the direct (indirect) elasticities are the import share and non-tariff barriers (the responsiveness of domestic costs to changes in the exchange rate, and concentration).

#04-002 -- Ken Stollery

Growth with depletable resources need not be unstable: a special Hartwick-rule taz in the Stiglitz model (PDF)


The basic competitive, general equilibrium growth model with nonrenewable resource depletion suggests that, due to the lack of perfect foresight, there is no way to guarantee that an economy using a depletable resource will follow an efficient path to a steady-state of sustainable per capita consumption. In contrast, we find that stability can be guaranteed with a Hartwick-rule tax on resource rents with a special deduction, proportional to the ratio of physical to natural capital. This tax makes the saving rate respond to the levels of the capital stocks, and compensates for myopia on the part of market participants.

#04-003 -- Joseph DeJuan

Testing the cross-section implications of Friedman's permanent income hypothesis (with John J. Seater, North Carolina State University, Dept. of Economics, Raleigh, NC 27695)


We use modern household data and econometric methods to conduct some of the original tests of the Permanent Income Hypothesis (PIH) suggested and used by Friedman (1957). The data and methods are superior to those available to Friedman, allowing us to refine Friedman’s tests and perform tests he could not do. The results provide overall but not universal support for PIH.