Endogenous export prices and the Taiwan-US trade imbalance
To explain the perplexing issue of why Taiwan's trade imbalance with the US has persisted despite the depreciation of the dollar, we estimate a four equation model to determine the direct pass-through (DPT) and indirect cost adjustment (ICA) effects of exchange rate changes on Taiwan's export prices. The ICA effect is important in the case of Taiwan because it imports mostly intermediate goods for the production of manufactured goods that are exported. Our findings support the view that DPT and ICA effects reduce the effectiveness of exchange rate as a mechanism for international trade adjustment.
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