The U.S. Dollar and the Trade Deficit: What Accounts for the Late 1990's?

Benjamin Hunt and Alessandro Rebucci ()

No 2003/194, IMF Working Papers from International Monetary Fund

Abstract: Based on a version of the IMF’s new Global Economic Model (GEM), calibrated to analyze macroeconomic interdependence between the United States and the rest of the world, this paper asks to what extent an asymmetric productivity shock in the tradable sector of the economy may account for real exchange rate and trade balance developments in the United States in the second half of the 1990s. The paper concludes that the Balassa-Samuelson effect of such a productivity shock is only part of the story. A second shock, a broadly defined “risk premium” shock, and some uncertainty about the persistence of both shocks are needed to match the data more satisfactorily.

Keywords: WP; exchange rate; risk premium; Balassa-Samuelson Effect; Learning; Productivity Shocks; Real Exchange Rate; Risk Premium Shocks; Trade Balance; U.S. Economy; productivity shock; response to a productivity increase; expenditure switching; nontradable goods; productivity acceleration; trade balance deterioration; trade balance equilibrium; steady-state effect of a productivity shock; sector productivity shock; risk premium shock; persistence of the productivity shock; effect of a productivity shock; Productivity; Real exchange rates; Return on investment; Exchange rates; Global; East Asia; South Asia; Europe (search for similar items in EconPapers)
Pages: 41
Date: 2003-10-01
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Citations: View citations in EconPapers (7)

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Journal Article: The US Dollar and the Trade Deficit: What Accounts for the Late 1990s? (2005)
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