Import price and activity elasticities for the MONASH Model: Johansen FIML estimation of cointegration vectors

Abstract

This study investigates the relationship between manufactured import flows to Australia and relative prices and domestic economic activity over the period 1981Q3 to 1992Q2. This is done through the estimation of import demand functions for total manufactured imports and 29 import product categories defined at the 2-digit level of the AICC by employing the Johansen FIML procedure. The price and activity elasticities will form part of the elasticity files of the MONASH Model, currently being developed at the Centre of Policy Studies. The price elasticities range from 0.24 to 1.75, with a weightedaverage of 0.60. We also find evidence of upward bias in price elasticity estimates when an aggregate import function is employed in a context where variation in prices of individual products are negatively correlated with their price elasticities, and when a significant portion of imports are subject to quantitative restrictions (QRs). The unit activity elasticity hypothesis was accepted for one third of our sample. The majority of activity elasticities are greater than one, and usually closer to two.

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