RDP 9707: Internationalisation and Pricing Behaviour: Some Evidence for Australia 5. Conclusions

This paper provides a number of pieces of evidence on how pricing behaviour has changed in Australia over the past three decades. The analysis presented in the paper is not conclusive, but suggests that internationalisation of the Australian economy may have been an important driver of these changes.

First, we take a long-term perspective and examine changes in the relative prices charged by Australian producers compared with foreign producers (expressed in a common currency) in different manufacturing industries. Over the 25 years between 1969 and 1994, we find that these relative prices fell in most manufacturing industries. Since this was a period during which the international exposure of Australia's manufacturing sector increased considerably, it is likely that, by increasing competitive pressures, internationalisation was partially responsible for this reduction in prices and costs.

Second, we find some evidence that domestic and foreign prices have been more closely linked since the mid 1980s than during the 1970s and early 1980s, suggesting that domestic price setting has become more sensitive to foreign prices over time. Across the manufacturing sector, we also find clear evidence that domestic price setters are more sensitive to import prices in more open industries.

These results imply that the dynamics of inflation may well have changed with the process of internationalisation. They suggest that, in the short-run, domestic inflation is becoming increasingly sensitive to shocks to foreign prices and the exchange rate. Previous work has established the direct effect that changes in import prices have on consumer prices, and has noted that this effect increases as imports make up a larger share of the consumption basket. This paper suggests that the indirect effect of changes in import prices on consumption prices also increases as the economy opens up, as the prices of domestically produced goods, especially traded goods, become increasingly sensitive to imported goods prices.

While the inflation rate is ultimately determined by monetary policy, this paper suggests that the process of internationalisation may have provided some disinflationary pressure over the last couple of decades and has likely changed the dynamics of inflation, particularly by increasing the importance of the exchange rate in determining short-run inflation outcomes.