Import demand with domestic price endogeneity : the South African case

Ramkolowan, Yash

Import demand with domestic price endogeneity : the South African case

Master Thesis

2006

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

This paper uses the imperfect substitutes model to derive an import demand function. However, here domestic prices are endogenised within a simultaneous framework in order to assess the full effect of a currency depreciation. The Johansen multivariate cointegration approach is used to estimate the import demand model as it accounts for nonstationary data and allows simultaneity between the variables. Prior to its use, the "small country assumption", which allows for import price exogeneity, is tested for South Africa. Two di ffering tests indicate that this assumption holds although further exploration reveals that there is scope to clarify the issue. Ultimately the paper shows that import price elasticities generally found in import demand curves (stemming from the elasticities approach) may significantly overstate the effect of an exchange rate depreciation on the trade balance.

Description

Word processed copy.

Includes bibliographical references.

Keywords

Economics

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Masters

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