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The Dynamics of the U.S. Trade Balance and the Real Exchange Rate: The J Curve and Trade Costs?

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  • Horag Choi

    (Monash University)

  • George Alessandria

    (University of Rochester)

Abstract

We study empirically and theoretically the dynamics of the US trade balance. We propose a the- oretical decomposition of ‡uctuations in the trade balance into terms related to trade integration (global and unilateral) and terms related to asymmetries in the business cycle. We …nd three main results. First, the relatively large trade de…cits as a share of GDP of the US in the 2000s compared to the 1980s mostly re‡ect a rise in trade share of GDP. Second, between 40 and 80 percent of the ‡uctuations in ratio of the trade balance to trade re‡ects an uneven pace of trade liberalization. Third, while asymmetries in the business cycle account for 20 to 60 percent of ‡uctuations in the trade balance over trade, over two-thirds of the business cycle induced movements in net trade ‡ows are a lagged response to changes in the terms of trade and real exchange rate. That is, the short-run Armington elasticity is about 0.15 while the long-run is closer to 1.7 with only 7 percent of the gap closed per quarter. Constant elasticity models of trade explain less than 10 percent of the movements in the trade balance.

Suggested Citation

  • Horag Choi & George Alessandria, 2016. "The Dynamics of the U.S. Trade Balance and the Real Exchange Rate: The J Curve and Trade Costs?," 2016 Meeting Papers 1539, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1539
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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