The U.S. Dollar and the Trade Deficit: What Accounts for the Late 1990's?
International Monetary Fund, Oct 1, 2003 - Business & Economics - 41 pages
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.
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acceleration in productivity adjustment costs algorithm arg max Balassa-Samuelson effect baseline calibration basket budget constraint business cycle capital capital deepening Corsetti and Dedola deﬁned demand Denoting depreciation distribution costs distribution sector domestic elasticity of substitution Erceg exchange rate appreciation expectations ﬁnancial ﬁrms producing ﬁrst order conditions ﬁve-year-ahead forecasts Foreign and Home Foreign bond Foreign tradables GDP Growth Guerrieri Home agents Home and Foreign home bias Home economy Home ﬁrms Home households Home tradable implies incomplete pass-through increase indexed intermediate nontradable International Monetary Fund Laxton macroeconomic markup model calibrated Monetary Policy NOEM model nominal interest rates non-linear parameter percent persistent component Pesenti price of tradables price setting productivity growth productivity shock proﬁts real exchange rate real growth risk premium shock seigniorage signiﬁcant Simulation Results Speciﬁcally steady-state stylized facts temporary components total factor productivity tradable intermediate tradable sector trade balance U.S. Dollar variance Year-on-year