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Cross-Price Effects and US Trade Elasticities

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  • Bornali Bhandari

    (The author is Fellow, National Council of Applied Economic Research (NCAER), Parisila Bhawan, I.P. Estate, New Delhi–110002, India, Tel: (91–11) 23452629, Fax No: (91–11) 2337–0164, email: bbhandari@ncaer.org)

Abstract

This article examines the interactions of the import and export markets through cross-prices. The idea is that import demand is affected by export prices, because imports and exports are likely substitutes in consumption. Additionally, import supply is also affected by export prices as exports may be intermediate inputs in the production of imports. The traditional partial equilibrium model of trade is extended to include these cross-price effects in demand and supply. Theoretically, it is shown that these cross-price effects can impede trade balance adjustment in the presence of exchange rate and income shocks. Using quarterly US and rest-of-the-world data from 1975 to 2002, a fully modified general method of moments estimation of the structural equations demonstrates significance of cross-price effects in both the demand and supply of non-petroleum merchandise imports.JEL Classification: F1

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Bibliographic Info

Article provided by National Council of Applied Economic Research in its journal Margin: The Journal of Applied Economic Research.

Volume (Year): 7 (2013)
Issue (Month): 3 (August)
Pages: 273-313

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Handle: RePEc:sae:mareco:v:7:y:2013:i:3:p:273-313

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Web page: http://www.ncaer.org/

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Keywords: Cross-Price Effects; US Trade Balance; Imports; Exports;

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  1. Matthieu Bussière & Giovanni Callegari & Fabio Ghironi & Giulia Sestieri & Norihiko Yamano, 2011. "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-09," NBER Working Papers 17712, National Bureau of Economic Research, Inc.
  2. Menzie D. Chinn, 2004. "Incomes, Exchange Rates and the US Trade Deficit, Once Again," International Finance, Wiley Blackwell, vol. 7(3), pages 451-469, December.
  3. Haynes, Stephen E. & Stone, Joe A., 1984. "Cross-price effects in demand between exports and imports," Journal of Macroeconomics, Elsevier, vol. 6(2), pages 181-195.
  4. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
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  9. Cheng Hsiao, 1997. "Cointegration and Dynamic Simultaneous Equations Model," Econometrica, Econometric Society, vol. 65(3), pages 647-670, May.
  10. Damiano Sandri & Pau Rabanal & Isabelle Méjean, 2011. "Current Account Rebalancing and Real Exchange Rate Adjustment Between the U.S. and Emerging Asia," IMF Working Papers 11/46, International Monetary Fund.
  11. Escaith, Hubert & Lindenberg, Nannette & Miroudot, Sébastien, 2010. "International Supply Chains and Trade Elasticity in Times of Global Crisis," MPRA Paper 20478, University Library of Munich, Germany.
  12. Haynes, Stephen E & Stone, Joe A, 1985. "A Neglected Method of Separating Demand and Supply in Time Series Regression," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 238-43, June.
  13. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  14. Haynes, Stephen E & Stone, Joe A, 1983. "Specification of Supply Behavior in International Trade," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 626-32, November.
  15. Marquez, Jaime, 1999. "Long-Period Trade Elasticities for Canada, Japan, and the United States," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 102-16, February.
  16. Catherine L. Mann, 2002. "Perspectives on the U.S. Current Account Deficit and Sustainability," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 131-152, Summer.
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