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Trade balance and terms of trade in U.S.: a time-scale decomposition analysis

  • Luca De Benedictis

    (University of Macerata, Italy)

  • Marco Gallegati

    (DEA, Università Politecnica delle Marche, Italy)

The aim of this paper is to provide evidence on the nature of the relationship between the terms of trade and the trade balance for US on a scale-by-scale basis using wavelet analysis. Thus, after decomposing the two variables into their time-scale components using to the maximum overlap discrete wavelet transform (MODWT) we analyze the time scale relationships between the terms of trade and the trade balance through the wavelet correlation analysis, and nonparametric regression models(GAMs). Wavelet correlation analysis indicates that, if the association between the trade balance and the terms of trade depends mainly on the elasticity of substitution between foreign and domestic goods, the Armington elasticities may be di¤erent across scales, and in particular, tend to get larger as the time horizon of the agents increases. Moreover, the long-run relationship between the trade balance and the terms of trade from the nonparametric …tted functions seems to provide support to the existence of the Harberger-Laursen-Metzler e¤ect .

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File URL: http://econwpa.repec.org/eps/it/papers/0512/0512016.pdf
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Paper provided by EconWPA in its series International Trade with number 0512016.

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Length: 15 pages
Date of creation: 27 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpit:0512016
Note: Type of Document - pdf; pages: 15
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Working Papers 02-3, Bank of Canada.
  2. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  3. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  4. Elliott, Graham & Fatas, Antonio, 1996. "International business cycles and the dynamics of the current account," European Economic Review, Elsevier, vol. 40(2), pages 361-387, February.
  5. Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers 02-02, C.V. Starr Center for Applied Economics, New York University.
  6. Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
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