Short-Run Dynamics of the Canadian Wood Pulp Industry: A Vector Autoregression Analysis
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The short-run dynamic impacts of macroeconomic variables on the Canadian pulp industry and the interactions among pulp sector variables are investigated using the vector autoregression (VAR) approach. In contrast to the findings of earlier studies, our results show that an increase in the value of the Canadian dollar will result in an increase in pulp production. We also find that Canadian pulp exporters decrease their prices in response to a rise in the value of the Canadian dollar, suggesting that maintaining market share is important to Canadian pulp producers. Impulse response functions suggest that pulp price is more volatile than production in response to shocks in macroeconomic and pulp sector variables. This result is thought to be due to the inventory levels being maintained to follow a "production smoothing" strategy. We also find that pulp exports and domestic use of pulp are not very responsive to an increase in Canadian pulp price. This suggests that paper manufacturers' demand for pulp may be inelastic because of their capacity constraints.