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

Luca De Benedictis () and Marco Gallegati ()

International Trade from EconWPA

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 .

Keywords: trade variables; wavelet correlation analysis; generalized additive models (search for similar items in EconPapers)
JEL-codes: C12 C22 E30 F10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-mac
Date: 2005-12-27
Note: Type of Document - pdf; pages: 15
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