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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.

Suggested Citation

  • John J. Heim, 2009. "The Real Exchange Rate And The U. S. Economy 2000 - 2008," Rensselaer Working Papers in Economics 0905, Rensselaer Polytechnic Institute, Department of Economics.
  • Handle: RePEc:rpi:rpiwpe:0905
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    File URL: http://www.economics.rpi.edu/workingpapers/rpi0905.pdf
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    References listed on IDEAS

    as
    1. John J. Heim, 2008. "The Consumption Function," Rensselaer Working Papers in Economics 0805, Rensselaer Polytechnic Institute, Department of Economics.
    2. 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.
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    More about this item

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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