The impact of shocks to exchange rates and oil prices on U.S. sales of American and Japanese automakers

Abstract

Since 1973, floating exchange rates and significant oil-price changes have coincided with dramatic market-share gains (losses) by Japanese (American) automakers in the U.S. market. This paper analyzes and empirically estimates the extent to which exchange rate and oil price changes have contributed to this market shift. We first develop a dynamic Cournot model of long-run profit-maximizing firms that operate in a macroeconomy characterized by shocks to income, exchanges rates, oil prices, and firm-specific demands and supplies. Using the solutions for quantities sold from this model, we then construct a structural vector autoregression (VAR) to estimate and identify a reduced-form VAR. The empirical results indicate that a strong yen increases quantities sold by American automakers and decreases quantities sold by Japanese automakers; this exchange-rate effect accounts for approximately four percent of the variance of changes in monthly-sales quantity for automakers. Oil-price increases reduce the quantity of automobiles sold by American automakers, but, contrary to the common belief, have little effect on Japanese automakers; this oil-price effect accounts for 6.5 percent of the variance of changes in monthly-sales quantities for American automakers. Over the two decades we analyze, however, the real value of the dollar has almost steadily declined against the yen, and the real price of oil has ended up unchanged, so these variables cannot explain the decline (rise) of American (Japanese) automakers. Clearly, automobile sales are exposed to exchange rate, oil price, and income risk; between 10 and 20 percent of the changes in monthly-sales quantities can be explained by the macroeconomic variables that we analyze. However, we conclude that firm-specific policies probably account for the bulk of gains and losses actually experienced by the automakers.