EMU AND FOREST PRODUCTS PRICING AND EUROPE

In previous literature, the degree of exchange rate pass-through to importing country’s currency has often been found to be incomplete, which supports the idea of imperfect competition in the forest products markets. In this study, exchange rate pass-through is examined by employing a mark-up model for the UK and German pulp and newsprint markets for 1986–97. Two specifications are compared, one where exchange rates in importing countries are employed and the other that attributes for the fact that US dollar is largely used in pricing for forest industry products in Europe. In contrast to previous studies, our estimates indicate very low degrees of pass-through, which is consistent with competitive European markets for pulp and paper. Consequently, depreciations of exchange rates are found to be mainly transmitted to variable mark-ups over wood prices rather than to prices in importer’s currency. Furthermore, the use of the US dollar nominated pricing is found to have practically no effect at all on this result.