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The U.S. Dollar and the Trade Deficit

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  • Ben Hunt
  • Alessandro Rebucci

Abstract

Based on a version of the IMF’s new Global Economic Model (GEM), calibrated to analyze macroeconomic interdependence between the United States and the rest of the world, this paper asks to what extent an asymmetric productivity shock in the tradable sector of the economy may account for real exchange rate and trade balance developments in the United States in the second half of the 1990s. The paper concludes that the Balassa-Samuelson effect of such a productivity shock is only part of the story. A second shock, a broadly defined “risk premium” shock, and some uncertainty about the persistence of both shocks are needed to match the data more satisfactorily.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/194.

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Length: 41
Date of creation: 01 Oct 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/194

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Related research

Keywords: Trade policy; Budget deficits; Real effective exchange rates; exchange rate; real exchange rate; intermediate goods; elasticity of substitution; tradable goods; nontradable goods; international trade; exchange rate pass; exchange rates; open economy; exchange rate risk; exchange rate appreciation; real exchange rate appreciation; nominal interest rates; domestic firms; nominal interest rate; current account balance; exchange rate regimes; political economy; nominal exchange rate; imported goods; home currency; exchange rate movement; accelerating growth; real exchange rate dynamics; state real exchange rate; exchange rate volatility; world economy; aggregate demand; exchange rate dynamics; factor markets; import demand; real exchange rates; perfect competition; trade effects; current account deficit; price discrimination; intermediate inputs; trade deficit; seigniorage revenues; import prices; asset market; closed economy; price stability; balance of payments; export ratios; market segmentation; domestic demand; open economies;

References

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  1. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers, Bank of England 156, Bank of England.
  2. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  3. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 3-18, February.
  4. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 835, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(2), pages 329-359, April.
  6. Morrison, C J, 1994. "The Cyclical Nature of Markups in Canadian Manufacturing: A Production Theory Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(3), pages 269-82, July-Sept.
  7. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers, Trinity College Dublin, Department of Economics 993, Trinity College Dublin, Department of Economics.
  8. Robert Kollmann, 2005. "Macroeconomic effects of nominal exchange rate regimes: new insights into the role of price dynamics," ULB Institutional Repository 2013/7624, ULB -- Universite Libre de Bruxelles.
  9. Galí, Jordi & Gertler, Mark & Lopez-Salido, Jose David, 2002. "Markups, Gaps and the Welfare Costs of Business Fluctuations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3212, C.E.P.R. Discussion Papers.
  10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 584.
  11. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  12. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(4), pages 489-501, April.
  13. Margarida Duarte & Alan C. Stockman, 2001. "Rational Speculation and Exchange Rates," NBER Working Papers 8362, National Bureau of Economic Research, Inc.
  14. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  15. McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers, Stockholm University, Institute for International Economic Studies 644, Stockholm University, Institute for International Economic Studies.
  16. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
  17. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Series, European Central Bank 0128, European Central Bank.
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  19. repec:sae:niesru:v:167:y::i:1:p:86-105 is not listed on IDEAS
  20. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(8-9), pages 1291-1318, August.
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Citations

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Cited by:
  1. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, Springer, vol. 15(2), pages 193-215, 04.
  2. Ogawa, Eiji & Iwatsubo, Kentaro, 2009. "External adjustments and coordinated exchange rate policy in Asia," Journal of Asian Economics, Elsevier, Elsevier, vol. 20(3), pages 225-239, May.
  3. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
  4. Fabio Ghironi & Viktors Stebunovs, 2010. "The Domestic and International Effects of Interstate U.S. Banking," Boston College Working Papers in Economics, Boston College Department of Economics 765, Boston College Department of Economics.

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