Pricing to Market in a Small Open Economy

Abstract

The determinants of Norwegian import prices of manufactures are investigated over the period 1970(1)-1991(4). Multivariate cointegration analysis establishes a long-run relationship between import prices, foreign prices, the exchange rate, and domestic unit labor costs. Normalized on import prices, the long-run elasticities are 0.63 (foreign prices and the exchange rate) and 0.37 (domestic costs). Deviations from this relationship are highly significant in a structural import price equation, which also contains positive effects of growth in domestic demand and inflation as well as a negative effect from the Norwegian unemployment rate. The estimated parameters appear reasonably stable within the sample. Copyright 1996 by The editors of the Scandinavian Journal of Economics.