CESSA WP 2014-02

Marston (1990) redux in Japanese autos at the retail level:
How much Pricing-to-Market is really going on?

Craig R. Parsons
Yokohama National University
June 2014

Center for Economic and Social Studies in Asia (CESSA) Working Paper
Downloadable from:http://www.econ.ynu.ac.jp/cessa/publication/workingpaper.html

Center for Economic and Social Studies in Asia, Department of Economics
Yokohama National University

Marston (1990) redux in Japanese autos at the retail level: How much
Pricing-to-Market is really going on?

Craig R. Parsons, Yokohama National University
e-mail: parsons@ynu.ac.jp
Abstract
This paper estimates the extent of Pricing to Market (PTM) for Japanese
automobiles exported to the US market over the 1987-2000 period. The price data used isthe annual, model-specific, manufacturer’s suggested retail price (MSRP) of identicalcars (17 models in total), all made in Japan, but sold in both the US and Japan. These
prices ratios (of foreign over domestic) are regressed on the real exchange rate, real
wages and US and Japanese real GNI as in the seminal work of Marston (1989) which
originally used industry level price data. As with Marston, I find a high degree of PTM
behavior, indeed over 100% PTM, somewhat higher than Marston (1990). Moreover, itappears that this PTM behavior has fallen somewhat over time. This implies increasingexchange rate pass-through, contrary to Taylor’s (2000) conjecture.
Keywords: Exchange-Rate Pass-through, Pricing-to-Market, Japanese autos, Retail data
JEL Categories: F31, F12, F32, F14

I Introduction
Thirty percent of all merchandise exports in 2008 from Japan to the US was“passenger cars” (UN Comtrade).1 Thus, understanding the effect of exchange
movements on US import prices in this dominant sector is important in explaining theeffect of yen/dollar movements on the US-Japan trade balance. The measurement issue
has been approached from both micro and macro levels in numerous papers (see Campaand Goldberg, 2002, inter alia). However, even in these micro-level studies, aggregation
may mask the true pricing behavior in response to exchange rate changes for specificcommodities. In this paper, I examine very detailed price data (firm and model-specificretail-level data) for exact matches of 17 models sold both in the US and Japanesemarkets. I conduct a Marston-style (1989, 1990) econometric analysis to definitelydetermine exchange pass-through in this industry from 1987-2000 and give concreteanswers to questions typically only addressed at high levels of aggregation.
As a byproduct of the renewed interest in exchange-rate pass-through (ERPT) in
recent years, many have observed a considerable decline in ERPT rates.2 Often, earlier
estimates on a fairly detailed industry level (see Knetter, 1993) found pass-through rates
for major exporters of manufacturers like Japan, Germany to be around 50% for many
goods. More recently, many authors have found declining pass-through, on a macro level(Taylor, 2000) and also at a more disaggregated industrial level. Marazzi and Sheets(2007), for example, find that ERPT rates in US imports prices fell from an average of1

For Japanese exports to the world, this figure is typically a little more than 10%.
See Goldberg and Knetter (1997) for a review of the literature up until then, and Campa and Goldberg(2002) for one of the many papers which rekindled interest in the area and Taylor (2000) for an oft-cited
paper on declining pass-through.
21

50% in the 1970s and 1980s to 20% or so in the late 1990s and early 2000s. However, at
far a greater level of detail (9-digit-level trade data), Parsons and Sato (2008) found that
ERPT rates for Japanese exports to the US have no clear trend, up or down, over time.
Interestingly, they do find that the ERPT rates for Japanese autos to the US fell, which
corroborates Marazzi and Sheets results for auto imports in the US.
In their summary of the previous 20 years of exchange-rate pass-through (ERPT)
and pricing-to-market (PTM) literature, Goldberg and Knetter (1997) use the example ofthe 1994 Toyota Celica. While the yen appreciated approximately 34% in the course of
the year, the retail price of the Celica only rose about 2% during that same time. This
paper essentially conducts this exercise (albeit econometrically, and more rigorously) for
17 models and varieties (“trims” and “generations” of models) over the course of 14
years. But also, more importantly, I simultaneously look at the behavior of Japaneseprices of the identical product.
Many pass-through and PTM papers, unfortunately, use only one set of(aggregate) price data. That is to say, when examining pass-through into US imports, they
will use destination prices only. For example, a study may use US import prices, or theexporting country’s export prices to the US to look at ERPT in the US. Very rarely dothey use both. The seminal paper by Marston (1990) used both domestic and foreign
price indices at a product level (e.g. “passenger cars”, “light trucks”, etc.). Using modelspecific prices as done in the present paper allows for a far more accurate estimation of
PTM and/or ERPT. Most of the PTM and pass-through models (Dornbusch, 1987;
Krugman, 1987 inter alia) are based on firm-level models (either monopolistic,2

oligopolistic, or monopolistically competitive), selling it two or more markets, so it
makes sense to use data from more than one market, if possible.
The challenge, however, is finding prices for identical products in more than twomarkets. This is, of course, the same challenge which faces research into the Law of One
Price. The strength of this study is that we do have virtually identical products producedin the same factory, yet shipped to two different markets. Again, this paper is not uniquein the regard, but it is still rare. (See Pinelopi Goldberg and Frank Verboven’s 2001 paper,for perhaps the only other example for autos.)
A valid question might be: why is it necessary to re-do the study of Marston(1990)? The merits of the current paper are three-fold. The first two merits are related.
This paper improves upon the Marston paper, by using matched product data, whereas
Marston only used aggregrate indices. At the same, other more detailed studies passthrough or PTM papers at the time only used a single country’s (import or export pricesonly) data, thus could not benefit from the more complete Marston model of international
price discrimination and his method of estimating PTM. As such, we can obtain truer
estimates of Japanese pricing behavior in the 1980s which will help confirm or reject
these often-cited estimates in seminal works. Third, as autos are almost a third of all
Japanese merchandise exports to the US, understanding what the true exchange rate
response is has important implications for ‘global imbalances’ and efforts to reduce them.
As we will see, there still appears to be a great deal of PTM (implying little or no passthrough), so a dollar depreciation may do little to stem the (increasing) tide of Japanese
imports, at least in autos.

3II. Is pass-through really declining?

While many have argued (Marazzi and Sheets, 2007, inter alia) that ERPT has
declined, most of those studies have used import data (typically trade data), i.e. not the
final prices consumers pay. José Campa and Linda Goldberg (2006), however, argue thatwhile import price ERPT may have indeed fallen, ERPT to consumer prices has risen,
according to their results of price series at very aggregate levels (i.e. they look at priceseries for manufactured goods, energy, food, etc.). As we will see shortly, the finding
here (the apparent increase in pass-through in cars) is consistent with Campa andGoldberg (2006), but in contrast to Taylor (2000), Marazzi and Sheets (2007) and others.
Whether this is due to the use of very detailed retail price data, or a phenomenon specificto cars only is something which warrants more study.

III. Data description

Retail Price Data
The discussion and subsequent econometric analysis is done using retail pricedata obtained from various issues of Ward’s Automotive Yearbook for the US prices andthe Jidousha Gaidobukku (Japanese Motor Vehicles Guide Book) for the Japanese prices.
The main prices used are the Manufacturer’s Suggested Retail Prices (MSRP) for each
make, model and “trim” for any given year. Initially, I gathered the earliest data in 1980
and the latest from 2006. However, as the US-Japan VER was in effect from 1981-1986
or so, I have chosen to start after that date, i.e. from 1987 onwards. Furthermore, due tothe difficulty of matching identical models year to year, my initial data was further

4

truncated to 2000 in this study. This price data is only available once per year. Prices ofmodels were considered for all of the major Japanese automobile producers, namely,
Honda, Toyota, Mazda, etc. as well as their spin-off companies (Acura: Honda; Lexus:
Toyota). Ultimately, only Honda models are examined in this paper. The reasons for the
narrow scope are the following. Nissan was not included as I could find only a few
Nissan models that did not change often over the time frame.3 Mazda had a joint venturewith Ford for much of the period, and thus may have had an unusual, and perhaps
collusive pricing strategy to the US market. Honda and Toyota are both good candidate
firms, having never merged and having a good number of particular models, relatively
unchanged over time. Ultimately, due to the very tedious and labor-intensive nature of
the matching process, however, the final data set only includes Honda/Acura models.
The data is very detailed in the sense that each price corresponds to a particularmake (e.g. Honda), model (e.g. Accord) and trim (e.g. “2 door” as opposed to “4 door”).
Indeed, the level of detail goes further than this, as I have delineated as distinct any
model which had a substantial change in attributes or appearances over time. Thus, forexample, the Honda Accord, one of the most popular cars, had various “generations”,
specifically: 1977-81, 1982-1985, 1986-1989, 1990-1993, 1994-1997, 1998-2002, 20032007. Thus, I consider an “Accord DX 4-dr sedan, fwd” in 1989 to be a different car (anentirely separate cross-section observation) than one with the same name in 1990.
In this way great detail is gained, and thus overcomes the major deficiency in any
aggregate data set. Import and export data, which is typically used in ERPT and PTM
studies such as Marston, use very highly disaggregated data. More recently, Parsons and3This is in part due to Datsun/Nissan’s own behavior in the 1980s as far as branding and re-inventing their
popular models and also in part to the alliance with Renault in 1999.

5

Sato (2008), for example, use even more detailed 9-digit data for Japanese exports.
Despite such detailed data, such categories are: 1) still heavily aggregated and 2) though
the category name may not change, the actual product sold may have experienced
substantial quality or other attribute changes. Even the very detailed 10 digit USITC
data4 , which distinguishes by country, includes data from all Japanese producers, andcontains dozens or more models (e.g. Camry, Celica, Mazda GLC, etc.) and all the subcategories or “trim” (2-dr or 4-dr, etc). Moreover, if any or all of these cars change overtime (for example a bigger engine, or FWD rather than RWD, etc.) this would all bemasked in the aggregation.
This large increase in detail does not come without costs, however. As models
change frequently (on average, every few years), and there are often changes within a“generation” which may be significant enough to consider it a “break” in the data, thepanel of data constructed here will be unbalanced, and with very short time series. The
shortest change in price is over two years (i.e. the change from last year and this year),and longest continuous price series for a virtually unchanged “make/model/trim” is five
years. All models chosen are made in Japan exclusively (and then either sold in Japan orshipped to the US).5 This initial sample included over 400 data points across the threemakers for the US price data, but ultimately, as mentioned above, only 35 models of
Honda/Acura were perfectly matched with Japanese price data.
The use of retail price data, in pass-through studies, has become somewhat lessrare. Bourdet (1996) used suggested retail prices for cars in a study of Swedish
automobile pass-through. A handful of other studies have looked at detailed retail pass4

http://dataweb.usitc.gov/scripts/query.asp.
Honda and Toyota had started building some models in the US since the 1980s. Those models are notincluded in this sample.
5

6

through in the US, Hellerstein (2008) being one recent example. Goldberg and Verboven(2001) examine the Law of One Price (intimately related to ERPT, of course) using
similar data in their study of the European retail car market just prior to currency
unification. Feenstra and Levinsohn (1995) and Berry, Levinsohn and Pakes (“BLP”)(1995) in seminal studies of hedonic demand regressions for the US automobile market
also use retail automobile data, though they do not investigate pass-through issues.
Indeed, as the last paper (BLP) uses very similar data (MSRP data from
“Automotive News Market Data Book”, another trade magazine) to this paper, it shares
the same shortcomings. While far more detailed than unit values or import price indicesfrom trade data, the main concern is, of course, that the data is “suggested” retail price,
rather than the actual price paid. While trade data is highly aggregated, at least incomparison to the data used here, it at least reflects an average of the actual contracted
import price. Thus, the results and discussion here rest on the assumption that MSRP
movements are actual prices paid by consumer are highly correlated.
While actual price paid for the various automobiles was not available, the“invoice” price is, at least for recent years (typically from 1997 onwards). While“invoice” data from the last 10 years or so is insufficient for our purpose here, namely to
track the decline in pass-through over the past 25 years or so, its examination may shedsome light on the “ERPT to import prices versus consumption prices” debate (Campa andGoldberg, 2006). Invoice prices are the prices dealers pay the maker for the car. Thus, ina sense it is a wholesale price. Invoice prices, like MSRP, suffers from the problem of alack of a true observed contract price. The invoice price is set by the maker, but the actual
price paid by the dealer varies, with the maker often giving rebates, and other financing,7thereby altering the actual price paid by the dealer. Nonetheless, I was interested to see
the relationship between the two.
In the appendix, I have included the results of a simple regression of US dealer
invoice prices and MSRP for each model. The correlation is strong, and nearly unity.6
That is to say, MSRP and invoice prices move in an almost one-to-one correspondence inpercentage terms. Thus, to the extent that we can rely on these prices as a reliable proxy
for the actual price paid, our pass-through results should generally apply to invoice prices
as well.7
However, to conduct Marston-style analysis, domestic (Japanese) prices for thesame car are also needed. And to maintain the integrity of the experiment, I had to select
only vehicles which were identical and sold in both the Japanese and US markets. This
reduced the sample dramatically. While there are many reasons why the Japanese and US
models differed and were dropped, one example would be engine size. For essentially theidentical make and model (save for the steering wheel, which is always on the oppositeside), the US model will sometimes have a larger engine. This is no doubt in large partdue to Japan’s motor vehicle tax which is based on engine size: the larger the engine, thehigher the tax, which is several hundred dollars. As the engine size is an importantcriteria for willingness-to-pay for a car, as evidenced by hedonic studies by Feenstra(1989) and Berry, Levinsohn and Pakes (1995), this was deemed to be a “different car”
and thus excluded from the sample. As such, for Honda (including Acura), the only
6

I did not conduct a similar regression for Japanese MSRP data as the invoice data was not readily
available.
7
The degree in which invoice prices represent import prices is yet another important question. In general, as
Toyota in Japan may set the invoice price to be paid by dealers in the US, this does represent an importprice. Thus, there may be a decline or disappearance of ERPT in not only retail prices, as I seem to findhere, but also in import prices. Relatedly, Bourdet (1996) (conveniently?) argues that MSRP prices betterreflect firms’ pricing behavior rather than actual transactions data (typically unavailable), as the MSRP as
set by the firm’s themselves. I believe there is some strength to this argument.

8

“true” matches that could be made thus far over the 1987-2006 period were 17 models (or“specs”) and 35 observations.

Sample selection bias
Obviously, going from dozens of Honda models to only 17 raises serious sampleselection issues. It may very well be the case that the cars that do not change over timevery much (“long-sellers”), i.e. those cars included in the present sample may have very
different pricing behavior than those where the model is constantly changing, improving,
etc. To this very real concern, I offer two replies. First, it is not clear a priori which way
the bias might be. Perhaps popular long-sellers in the US have a lower elasticity ofdemand, which would imply, ceteris paribus (under Marston assumptions of demand,etc.) lower PTM. Or perhaps, it is the converse: that is, cars that do change very much areat the low-end, targeting the very elastic consumer, who just wants a car at the cheapest
price regardless of the newest options. Poring over the data, which contains a variety of
automobiles, both high and low-end suggested no obvious a priori one way or the other.
Second, with the small sample size, some type of Heckit-style sample-selection
correction is simply not possible.
As the data set is small, no sophisticated econometrics is done here. A simple
pooled OLS estimation corrected for heteroskedasticity is conducted. There are no doubt
time components, but the longest model, unchanged, is only five years, most much
shorter. Moreover, the entire estimation is done in percentage changes, thus nullifying
any potential non-stationarity issues. A larger message in this study is that the number
and variety and quality of cars produced by any one maker, let along the industry overall,changes quite a bit from year to year. Moreover, new varieties are being developed every

9few years or so. To extract any long-run properties on an individual product would bevery dubious. This may be possible when examining, say, Coca-Cola or crude oil, but
automobiles and many other products simply are not static in their nature.

Right-hand side variables

Following Marston, the real exchange rate is used, which is simply the nominal
yen/dollar rate adjusted by US and Japanese CPI. Exchange rate data is from IMF’s
International Financial Statistics, and the CPI data are from the US BLS and JapaneseBank of Japan websites.8
Real wages are constructed in similar fashion as Marston, but at a greater level ofdetail. Whereas he used a nominal yen-based manufacturing index of yearly remuneration
for all industries, I used the far narrower index for “Manufacturing of Transportation
Equipment”, which is of course, the most appropriate for the auto sector.9 This data isavailable online at www.stat.go.jp. This nominal wage index was deflated by theJapanese “WPI”, now called the “Corporate Goods Price Index” available from the BOJ’s
website.10

8

In Marston (1990) he used effective exchange rates as he examined exports to a variety of destination
markets. Here, we only look at the US market and thus the bilateral rate is appropriate. As we only use
yearly data year, no complicated attempts at modeling exchange expectations were made. Likewise, more
long-term pass-through effects through the use of lagged exchange rates were also not done. This is largely
due to the very short series for each of the models. Having said that, a yearly average may be a reasonableproxy for Japanese makers’ expectation for the exchange rate to be that year as new cars (used to) typicallycome out in the fall in the US.
9This series is pre-tax and incorporates bonuses as well.
10
An important concern, at least if one is concerned with long-run pass-through, is the fact that thewholesale price index declined approximately 40% in autos since the 1980s as productivity has madecontinual, significant increases during this time. Marston (1991) argues that this may have offset the risingyen, thus reducing pass-through of the higher yen. Athukorala and Menon (1994) examined Japanese
exports and used labor costs and a time-trend to capture production costs and the productivity increaseduring the period of their study (1980-1992) and obtained reasonable results for both cost and exchange
rate pass-through. As this paper looks at very short run changes only, this is probably not a concern. But it

10

For the “real income” variables for Japan and the US, I used nominal Gross
National Incomes obtained from the IMF IFS database, and deflated them by theirrespective CPIs.
Marston included a fifth right-hand side variable, the price of imported materials
deflated by the Japanese WPI. However, as imported components have historically been,
and continue to be miniscule in the auto sector, I have not included this variable.11.
IV. Methodology
As mentioned above, due to the small sample, and short time series properties, theregression is a pooled OLS corrected for heteroskedasticity. As such, no information
particular to a specific model is used. It is simply a regression of all the percent changes
in relative prices on the percent changes in the various right-hand side variables. As thevariables are already in percentage changes, there is no need for a logarithmictransformation. As such, the estimated equation is as follows:(1) % X i  c   1 (% RXRt )   2 (% RWage) i   3 (% RYJ t )   4 ( RYUS i )  ei

where X, as in Marston, is the price in the foreign (i.e. US) market of the car converted
into yen, divided by the Japanese price of the same car, in yen. RXR is the yearly averagefor the real dollar/yen exchange rate adjusted by the US and Japanese CPIs as mentioned
above. The RWage is the nominal wage index in Transportation Equipment
Manufacturing deflated by the Japanese “WPI” as described above. Finally RYJ andis certainly something to keep in mind, especially when comparing pass-through in the 1980s and today(with far less growth in productivity.)
11
Import of parts as a percent of total automobile costs in Japan in 1994 was 0.7%. Compare this with the
US (16.7%) and Germany (27.9%). In Japan, this is rising somewhat, but is still small (Diehl, 2001).

11

RYUS are the real National Incomes for Japan and the US as described in the previous
data section. Here, an increase in RXR implies a weak yen, and thus should imply a valueof zero if there is no PTM, i.e., complete exchange rate pass-through. In other words, theexchange rate changes but the price in yen does not, which implies that the price in US
dollars does. At the same time (under reasonable, Marston-style assumptions) this meansthat a positive value of 1 implies at least some PTM, with a value of 1 being perfect
PTM and no pass-through.
The subscripts or i and t may be a bit confusing as this is a pooled regression. The
time scripts t denotes the change that particular macro variable in the same year that thegiven price change occurred. The i refers to the each price (year on year) change for all ofthe (17) models, without any grouping among the same model. That is to say, there are no
fixed effects. Thus, one observation might be the percent change in the Japan and US
price ratios of an “Acura Integra RS 2dr from 1994-95”, another observation would be
for the same model, but for 1995-6, and yet a third observation would be for “Acura
Integra GS-R 4dr, over the 1994-1995 period.”

V. Results
Table 1 presents the results of the preferred estimation. Initially, all four righthand side variables were included. In all regressions the real exchange rate parameter issignificant at the 1% or greater level. Japanese income was always found to be
insignificant as was the real wage. The US real income parameter had a negative andsignificant sign. That is, the stronger the US national income, the lower the price ofrelative price of autos sold in the US in yen-terms. Ceteris paribus, strong US income
and demand should translate into higher US dollar prices and correspondingly higher yen

12prices. To the extent that the strong US economy coincided with a strong yen throughmuch of the 1990s, this may help to explain the perverse result. Interestingly, in
Marston’s study using data in the 1980s, he found the National Incomes to be irrelevant
and dropped them from discussion.

Table 1: Estimates from Pooled OLS 1987-2000, 17 models
Dependent variable: % change in Price Ratio
Real XR

Coeff
1.12

s.e
0.22

p-value
0.00

Const

0.04

0.016

0.015

Number of observations: 35
Adj. R-squared: 0.60
n.b. errors are White Heteroskedasticity ConsistentThus, the main parameter of interest, the RXR parameter is found to have a valueof 1.12. This implies no exchange rate pass-through or complete Pricing-to-Market overthe 1987-2000 period. In other words, Honda was taking 100% of the exchange rate risk
upon itself. Interestingly, with Marston’s far more aggregate data, he found a PTM
coefficient of 0.885. As ‘more PTM means less exchange rate pass-through’, one could
argue that these findings suggest that pass-through has fallen somewhat in autos. This isalso what Parsons and Sato (2008) find at a 9-digit level in Japanese autos. However,direct comparison with the results of Marston’s is a challenge as he used aggregate data,and spanned the tumultuous early 1980s with an auto VER regime
Instead, using this unique micro-level data, I have run tentative regression on thetiny subsamples up to 1992 and from 1992 onwards. I find that from 1987-1992 the PTM
is a staggering 1.9, whereas from 1992-2000 it falls to 0.60 (both coefficients still13

significant at the 1% level). Thus, ERPT in Japanese autos appears to be rising, notfalling. With the short subsamples, these results are suggestive but not definitive,
however.

Currency Invoicing
The larger message is the relatively consistency with Marston’s original work, i.e.
high PTM in Japanese auto exports. This is, of course, consistent with PTM behavior asmodeled in Marston, 1990. If so, this tells us a great deal about Japanese autos behavior
in a micro-economic, industrial organization sense. However, there are at least two otherreasons why perceived PTM may be so high. One possibility is that perhaps Japanese
auto makers respond in lock-step with US auto makers prices. While US auto prices were
not included in this study, a working paper (Parsons, 2008), did find the prices to have atentative correlation. This is also consistent with pass-through papers which are modeledoligopolistically, such as Dornbusch (1987). A second real possibility is that currency
invoicing matters. Though currency invoicing does not have to necessarily affect passthrough rates, under imperfect competition scenarios with a maker and dealer, it can (seeGoldberg and Tille, 2006). In fact, Japanese automobile makers invoice almost entirely in
US dollars when exporting to the US market (see Ito, Koibuchi, Sato, and Sasaki, 2010).
If indeed, invoice matters, this may help explain the virtually 100% PTM and no passthrough. Of course, this dollar invoicing practice opens up new questions. For example,
why is it that they (auto makers) choose to invoice in dollars, while some other firms do
not? There is naturally some relationship between the market structure of the industry

14

itself, and the various benefits to choosing various invoicing strategy which needs to be
explored more. This paper’s unique combination of domestic and foreign prices is part of
the answer to that puzzle.12
A final comment on the very nature of the price ratios themselves: the average ofprice ratios, for the whole sample, is very close to unity, with no clear trend one way or
the other. This also does not appear to vary across time. That is to say, the cars cost about
the same price, in yen terms, whether they are sold in the US or Japan. Maybe there isless international market segmentation than is commonly believed?

VI. Conclusions
While the possible explanations for PTM and incomplete pass-through are many,
the data used and empirical results in this paper are somewhat straightforward. Thereseems to be 100% pricing to market (PTM) in Japanese (specifically Honda) auto exports
to the US, at least over the 1987-2000 period. This is similar (but stronger PTM) to what
Marston found in his study using earlier data at far more aggregate level. This PTM may
be declining over time, but without a larger sample it is hard to tell.
With respect to the three goals of the paper, these results tentatively suggest thefollowing. First, as Marston found PTM in autos in strong, but perhaps it was stronger
than he thought. This also implies that pass-through is much smaller than the 50% or so,some others have found. This difference may be due to the highly detailed data as well as
the higher accuracy gained by using Marston’s price ratio methodology which utilizes
both domestic and foreign prices. Second, though the sub-samples are short, it appears
that PTM in autos may be declining. This suggests there has been an increase in pass12

Ito, Koibuchi, Sato and Sasaki (2010) explore the possible determinants of invoicing in their highly
illuminating paper.

15

through in the sector, something not typically found in aggregate data such as Taylor(2000) or Marazzi and Sheets (2007). Third and last, these results, if they hold for more
recent data, imply that a weaker dollar will do little to reduce the largest component of
the US-Japan trade deficit, passenger cars. Naturally, a next step in the research frontier
is to conduct similar, detailed studies for other economically important sectors.

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Appendix:

As mentioned in the text, MSRP has been used before as a proxy for contract prices.
Unfortunately, contract prices were not found on a systematic historical basis. However,invoice prices, or the price paid by dealers to the makers, is to some extent available on ahistorical basis and may better reflect movements in actual prices paid. Note, however,that invoice prices are also a proxy, as the dealer may ultimately pay a different pricethan the invoice price due. There are often dealer incentives and “holdbacks” offered by
the maker that may increase the dealer’s profit margin. (See Consumer Reports “carpricing” at www.consumerreports.org)

To see how well MSRP acts as a proxy for the presumably better invoice price, I
regressed the former on the latter, i.e.

(A1) ln MSRPit   i  Invoiceit  eit

MRSP should be a function of invoice plus some markup for the dealer. As with XRPT,
this mark-up too could change from year to year, thus complicating the analysis.

Surprisingly perhaps, I found (for US data) that the two series are highly correlated, andnearly one-to-one, suggesting that dealer markups do not vary much year to year. This
also implies that using MSRP (which is available for much longer periods) is areasonable proxy to measure “retail” XRPT.

19The invoice data is available at www.cargurus.com for many cars, but typically only goesback as far as 1997. This website also provides the MSRP for each make, which differ
slightly from Ward’s. So to be consistent for this test, only cargurus.com data was used.
The longest series I was able to construct was 1997-2007, annually. With 17 foreignmodels, my number of observations for this regression was 50. In a simple fixed-effects
regression I found the beta, or invoice parameter, in equation A1 above to be 0.92 andsignificant at beyond a 1% level of significance.

As such, while actual prices paid would be ideal, the use of MSRP appears no worse thaninvoice prices, which may indeed be close to actual prices paid. As MSRP prices from
Ward’s go back to the 1980s and further, these prices were used in the analysis in the text.

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