QUEST II. A Multi-Country Business Cycle and Growth Model

market. If SWP is zero then export prices are determined entirely by domestic conditions.
This behaviour would for example be consistent with the model of monopolistic
competition among small firms where each firm assumes that its influence on other firms is
negligible. In alternative models of competition, especially those assuming that there are
strategic interactions between firms, i.e. firms are sufficiently large in the market, and
where it is assumed that there are special fixed costs involved in setting up an export market
in a particular country, market share considerations will play a much larger role and
consequently firms will adjust prices to competitors prices. Similar pricing behaviour would
also be expected of course in markets for very homogenous products with high competition
between domestic and foreign firms.

Table 3 summarises the parameters of the price equations in the model. The price
adjustment parameter sdGM was estimated on quarterly data where that was possible. The
openness variable 6‘ measures the share of imports in total domestic demand and
converges in the steady state to average levels observed in the 1990s (see table). Estimates
of the pricing to market parameter sWp are based on estimation of equation (20) in first
differences in order to measure the short term response best. These regressions were
estimated over the period 1975-1995.

Table 3: Parameters of price equations

Note:      * Steady state level of openness, based on average shares of imports in total domestic demand

over the 1990s

** Estimates based on regressions of eq. (20) in first differences, over period 1975-1995.

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