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Modelling U.S. services trade flows: a cointegration-ECM approach

  • Juann H. Hung
  • Sandra Viana
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    The U.S. service surplus soared from near zero in 1985 to about $60 billion in 1992, offsetting about two thirds of the goods trade deficit. Could this merely reflect improvement in data collection? Or does this mean U.S. services industries are more competitive internationally than goods industries? Is the services surplus likely to continue to rise? This paper estimates a forecastable model of U.S. services trade to address the above questions. We find that data improvement actually had a negative net impact on the services surplus, since it affected imports more than exports. Instead, the surge in the services surplus was mainly due to strong foreign growth and, to a lesser extent, dollar depreciation. An increase in either outward or inward foreign direct investment asset (FDIA) has a significant and positive impact on both exports and imports of other private services, but has only a modest net effect on the U.S. services balance. Thus, the outlook for the U.S. services balance largely depends on the growth prospect of foreign economies.

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    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9518.

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    Date of creation: 1995
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    Handle: RePEc:fip:fednrp:9518
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    1. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
    2. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    3. Richard H. Clarida, 1992. "The real exchange rate and US manufacturing profits: a theoretical framework with some empirical support," Research Paper 9214, Federal Reserve Bank of New York.
    4. Irving B. Kravis, 1983. "Services in the Domestic Economy and in World Transactions," NBER Working Papers 1124, National Bureau of Economic Research, Inc.
    5. William Helkie & Lois Stekler, 1987. "Modeling investment income and other services in the U.S. international transactions accounts," International Finance Discussion Papers 319, Board of Governors of the Federal Reserve System (U.S.).
    6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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