The U.S. Dollar and the Trade Deficit: What Accounts for the Late 1990s?
42 Pages Posted: 6 Feb 2006
Date Written: October 2003
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: Balassa-Samuelson Effect, Learning, Productivity Shocks, Real Exchange Rate, Risk Premium Shocks, Trade Balance, U.S. Economy
JEL Classification: F43, F47, O41
Suggested Citation: Suggested Citation
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