Price adjustment for forest products under fixed and floating exchange rate regimes

This paper examines the effects of exchange rate regimes on the price adjustment for forest products. A two-period, non-competitive model is utilized in which customers are assumed to have switching costs. The model is dynamic in that the future matters to the exporters, and uncertainty about future exchange rates affects their pricing behavior. The model is estimated using the Johansen's cointegration method for data on Finnish, Swedish, and Canadian pulp and paper exports to Germany and the United Kingdom. The results indicate that exporter perception of exchange rates affects price adjustment. Perception of exchange rates, in turn, is affected by exchange rate regime and other factors such as the perceived credibility of a fixed exchange rate regime. The results have implications for the price adjustment process in the new European single currency market.