We study empirically and theoretically the dynamics of the US trade balance. We propose a theoretical decomposition of fluctuations in the trade balance into terms related to trade integration (global and unilateral) and terms related to asymmetries in the business cycle. We find three main results. First, the relatively large trade deficits as a share of GDP of the US in the 2000s compared to the 1980s mostly reflect a rise in trade share of GDP. Second, between 40 to 50 percent of the fluctuations in ratio of the trade balance to trade reflects an uneven pace of trade liberalization. Third, while asymmetries in the business cycle account for 50 to 60 percent of fluctuations in the trade balance over trade, over two-thirds of the business cycle induced movements in net trade flows are a lagged response to changes in the terms of trade and real exchange rate. That is, the short-run Armington elasticity is about 0.15 while the long-run is closer to 1.7 with only 7 percent of the gap closed per quarter. Constant elasticity models of trade explain less than 10 percent of the movements in the trade balance.

The Dynamics of the U.S. Trade Balance and the Real Exchange Rate: The J Curve and Trade Costs? with George Alessandria (University of Rochester and NBER)

Tue 8 Mar 2016 12:00pm1:00pm


Room 629, Colin Clark Building (#39)