Academic journal article Australasian Journal of Regional Studies

Modelling Manufactured Exports: Evidence from Australian States

Academic journal article Australasian Journal of Regional Studies

Modelling Manufactured Exports: Evidence from Australian States

Article excerpt

ABSTRACT: This paper looks at the determinants of national manufactured exports through the use of a panel of Australian states. The panel approach is taken to assess whether the coefficient instability present in direct estimates of export elasticities can be alleviated by utilising the cross-state variation present in both manufactured exports and their determinants. Estimates of the price elasticity using this approach are found to be relatively robust to the use of the mean-group or fixed-effects panel estimation, and to a range of different export demand specifications. Income elasticity estimates are found to be stable across models, but sensitive to the inclusion of other variables. However, the degree of coefficient instability is not found to be significantly less in panel models than when using direct estimates, suggesting that direct estimation remains appropriate. The analysis is then extended to consider the role that domestic factors play in determining manufactured exports. In line with theory, it is found that manufactured exports are inversely related to domestic final demand and capacity utilisation.

1. INTRODUCTION

Overseas exports form an important part of the Australian economy, accounting for around 20 percent of total GDP and around 30 percent of average annual GDP growth over the past decade. Despite this, there has been a surprising paucity of research that attempts to model the determinants of Australian exports. This is particularly evident when the focus is narrowed to particular broad categories of exports; most recent studies have modelled total exports in a single framework, despite the accepted wisdom that agricultural and resource exports are supply determined, while manufactured exports are largely demand determined.

This paucity of research may in part be due to difficulties finding robust results in export models. Australian estimates, like those of other countries, tend to be characterised by income and price elasticities which are quite sensitive to changes in model specification, even when similar data, methods and sample periods are used. One method that might allow for more robust estimation is to separately model exports from each of the Australian states and then combine these results into a single implied national estimate. This method has the potential to result in more robust estimates of national elasticities by taking advantage of cross-state variation in the regressand and regressors. This strategy has been used successfully in other contexts, such as to reduce the problem of collinearity in estimates of consumption functions (Case, et al., 2005 and Dvornak and Kohler, 2003), and to mitigate the effects of technological innovation through time on estimates of the income elasticity of money demand (Fischer, 2006).

Such cross-state variation is inherently present in state manufactured exports, but it is not immediately clear that there is variation in the determinants of manufactured exports. However, if allowance is made for differences in the trade orientation of each state's exports, it is possible to produce price and foreign income series that are more closely matched to the conditions facing the average exporter in each state, and which vary across states. This is the approach used in this paper. It is found that there is indeed quite marked cross-state variation in the share of exports going to each trading partner, and that this has a noticeable impact on the profile of state-specific real exchange rates and trading partner GDP. It is also found that there is some variation in the coefficients of each state's model, which further distinguishes this approach from conventional, national, estimates.

The remainder of this paper is structured as follows. Section 2 reviews the previous research on modelling exports. Section 3 discusses the construction of the state-specific data used in the estimation and examines the cross-state variation. …

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