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The Real Exchange Rate And The U. S. Economy 2000 - 2008

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  • John J. Heim

    ()
    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

Abstract

This paper is a revision of Rensselaer Polytechnic Institute’s Working Papers in Economics Series, No. 803, entitled “How Falling Exchange Rates 2000 – 2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve’s Real Broad Exchange Rate)”. It expands the analysis to measure exchange rate effects on the U.S. economy through 2008. It also utilizes a significantly improved method for assessing the meaning of the regression coefficient on the exchange rate variable in consumption and investment functions, removing ambiguity as to whether they should be interpreted as income or substitution effects. The paper attempts econometrically, using a seven behavioral equation model, to determine the total impact during 2000-2008 of the U.S. real exchange rate’s 13.8% decline. Using projections based on an econometric model of the U.S. economy 1960 – 2000, the paper suggests that the effect on demand for domestically produced consumer goods (and exports) is positive, but strongly negative for investment goods. The estimated overall negative effect of declining real exchange rates on the GDP is 1.9% over the eight years, or about a quarter percent decline a year. This revised estimate is less than half the estimated impact reported Working Paper 803. It is estimated the decline reduced the trade deficit $189 billion from what it otherwise would have been, down from $244 billion reported Working Paper 803.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0905.

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Date of creation: Aug 2009
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Handle: RePEc:rpi:rpiwpe:0905

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  1. John J. Heim, 2009. "A MethodFor Separating Iincome & Substitution Effects Of Exchange Rate Changes On Aggregate Demand," Rensselaer Working Papers in Economics 0901, Rensselaer Polytechnic Institute, Department of Economics.
  2. John J. Heim, 2008. "The Consumption Function," Rensselaer Working Papers in Economics 0805, Rensselaer Polytechnic Institute, Department of Economics.
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