RDP 2001-02: Changes in the Determinants of Inflation in Australia Appendix C: Second Stage Import Price Equation

Jacqueline Dwyer and Kenneth Leong

May 2001

The second stage pass-through relationship is estimated from the September quarter 1978 to the June quarter 1999, after which the retail import price series is discontinued. Results from error-correction equations are shown below. The first table presents results for the case in which motor vehicles are included in the retail price of imports. The second table presents results for the case in which they are excluded and a dummy is imposed from the June quarter 1998 to control for the effects of the Asian financial crisis. In both cases, linear homogeneity is accepted and has been imposed.

Table C1: Explaining Retail Import Prices(a)
Estimated from 1978:Q3 to 1999:Q2
  Coefficient Std error
Independent variable
Constant −16.6578 3.7844***
Retail import prices (lag 1) – Unit labour costs (lag 1) −0.0834 0.0166***
Landed import prices (lag 1) – Unit labour costs (lag 1) 0.0541 0.0088***
Change in retail import prices (lag 2) 0.4261 0.0996***
Change in retail import prices (lag 3) −0.0014 0.0858
Change in retail import prices (lag 4) 0.2352 0.0972**
Retail output gap (lag 2) 0.0017 0.0004***
Long-run elasticities
Unit labour costs 0.3509 0.0939
Landed import prices 0.6491 0.0939
Adjusted R2 0.8048  
Residual autocorrelation LM(4)   {0.0664}
Breusch-Pagan heteroscedasticity test   {0.2251}
Jarque-Bera normality test   {0.2143}
Linear homogeneity(b)   {0.2672}

Notes: (a) ***, ** and * represent significance at the 1, 5 and 10 per cent levels. Numbers in braces {} are p-values. All variables in log-levels are multiplied by 100 (so growth rates are in percentages).
(b) Linear homogeneity implies that the long-run elasticities on unit labour costs and landed import prices sum to unity.
Table C2: Explaining Retail Import Prices, Excluding Motor Vehicles(a)
Estimated from 1978:Q3 to 1999:Q2
  Original With dummy variable
Coefficient Std error Coefficient Std error
Independent variable
Constant −15.3484 3.5867*** −15.5766 3.5026***
Retail import prices (lag 1) – Unit labour costs (lag 1) −0.0583 0.0196*** −0.0652 0.0194***
Landed import prices (lag 1) – Unit labour costs (lag 1) 0.0506 0.0109*** 0.0561 0.0110***
Change in retail import prices (lag 2) 0.2657 0.0957*** 0.2365 0.0944**
Change in retail import prices (lag 3) 0.0207 0.0830 −0.0140 0.0826
Change in retail import prices (lag 4) 0.3021 0.0939*** 0.2841 0.0921***
Retail output gap (lag 2) 0.0015 0.0004*** 0.0016 0.0003***
Dummy 1998:Q2–1999:Q2     −0.5589 0.2616**
Long-run elasticities
Unit labour costs 0.1315 0.1669 0.1396 0.1439
Landed import prices 0.8685 0.1669 0.8604 0.1439
Adjusted R2 0.7399   0.7522  
Residual autocorrelation LM(4)   {0.3884}   {0.1421}
Breusch-Pagan heteroscedasticity test   {0.9904}   {0.9131}
Jarque-Bera normality test   {0.5714}   {0.6600}
Linear homogeneity(b)   {0.5983}   {0.8968}

Notes: (a) ***, ** and * represent significance at the 1, 5 and 10 per cent levels. Numbers in braces {} are p-values. All variables in log-levels are multiplied by 100 (so growth rates are in percentages).
(b) Linear homogeneity implies that the long-run elasticities on unit labour costs and landed import prices sum to unity.