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

Author

Listed:
  • Luca De Benedictis

    (University of Macerata, Italy)

  • Marco Gallegati

    (DEA, Università Politecnica delle Marche, Italy)

Abstract

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 .

Suggested Citation

  • Luca De Benedictis & Marco Gallegati, 2005. "Trade balance and terms of trade in U.S.: a time-scale decomposition analysis," International Trade 0512016, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpit:0512016
    Note: Type of Document - pdf; pages: 15
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/it/papers/0512/0512016.pdf
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    References listed on IDEAS

    as
    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    2. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    3. Christoph Schleicher, 2002. "An Introduction to Wavelets for Economists," Staff Working Papers 02-3, Bank of Canada.
    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. David Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    7. 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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    More about this item

    Keywords

    trade variables; wavelet correlation analysis; generalized additive models;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F10 - International Economics - - Trade - - - General

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