US trade deficit, a reality check: New evidence incorporating asymmetric and non‐linear effects of exchange rate dynamics

In the context of the debate on the global imbalances, this study investigates the determinants of US trade balance in a non‐linear ARDL framework, which accounts for the asymmetric and non‐linear effects of real effective exchange rate dynamics. Drawing on the data from 1994Q1 to 2018Q1, our key empirical findings suggest significant evidence of short‐ and long‐run asymmetries in the relationship between the real effective exchange rate, US trade balance and its determinants. An asymmetric cumulative dynamic multiplier analysis shows evidence of an asymmetric J‐curve. Furthermore, we find that the price stability, productivity, domestic savings and fiscal deficit/discipline are crucial for the US trade balance in the short to long term. Empirical findings of this study contribute to the contemporary debate on the US trade deficit and have profound policy implications for the competitiveness of the US economy and its external balance.