A Reassessment of Long-Run Elasticities of Japanese Import Demand

Abstract

Unlike the findings of Mah (1994) [Mah, J.S. (1994) Japanese Import Demand Behaviour: The Cointegration Approach. Journal of Policy Modeling 16:291–298] who, based on the Engle–Granger test of cointegration, fails to find evidence of a long-run relationship among variables associated with an import demand function for Japan, in this analysis the Johansen's MLE multivariate cointegration procedure reveals that such variables seem to be cointegrated, and thus share a long-run equilibrium relationship. Furthermore, the recently prescribed Stock and Watson (1993) Dynamic OLS (DOLS) procedure, which, apart from being superior to a number of alternative estimators, is robust to small sample and simultaneity bias as well as being able to accommodate higher orders of integration, is employed to derive long-run import price and income elasticity estimates. Results reveal that both price and income variables do affect import demand significantly, and more interestingly, contrary to previous findings, play an important role in explaining Japanese import demand, at least over the long run. This finding is quite intuitive in that, although nonmarket forces did play a role in destablilizing Japanese import demand, this was most likely a short-run phenomena. Over the long term, however, such theoretically postulated economic influences outweighed short-run disturbances in achieving an equilibrium relationship. Finally, the innovative analytical techniques used in this study have a far-reaching potential for use in future applied research in a variety of fields.