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Incomes, Exchange Rates and the US Trade Deficit, Once Again *
Author(s) -
Chinn Menzie D.
Publication year - 2004
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1367-0271.2004.00145.x
Subject(s) - economics , exchange rate , balance of trade , depreciation (economics) , recession , liberian dollar , boom , monetary economics , international economics , terms of trade , macroeconomics , microeconomics , profit (economics) , capital formation , finance , environmental engineering , financial capital , engineering
Abstract The chronic and expanding US trade deficit has refocused attention upon the responsiveness of trade flows to exchange rate and income changes. I estimate import and export equations over a period spanning the 1990s New Economy boom and the subsequent recession and dollar depreciation. The results indicate (1) a low responsiveness of imports to exchange rate changes, and (2) a diminution (but not disappearance) of the income elasticity asymmetry first noted by Houthakker and Magee. The combination of low price elasticity of imports with the present size of the trade deficit means that any reduction of the trade deficit will necessarily be accompanied by large exchange rate and income trend adjustments.