US Trade Deficit, a Reality Check: New Evidence Incorporating Asymmetric and Nonlinear Effects of Exchange Rate Dynamics

Abstract

In the context of the debate on the global imbalances, this study investigates the determinants of US trade balance in a Non-linear ARDL framework which accounts for the asymmetric and nonlinear effects of real exchange rate dynamics. Drawing on the data from 1994Q1 to 2018Q1, our key empirical findings suggest significant evidence of short and long run asymmetries between the real effective exchange rate, US trade balance and its determinants. An asymmetric cumulative dynamic multiplier analysis showed evidence of an asymmetric J-curve. Furthermore, our empirical results showed that price stability, productivity, domestic savings and fiscal discipline are crucial for determining the US trade balance in the short to long term. Empirical findings of this study contribute to the contemporary debate on the US trade deficit and have profound policy implications for the competitiveness of the US economy and its external balance.

Keywords: Global Imbalances, Competitive Devaluation, Savings, Price Stability, Productivity, Fiscal Deficit, Asymmetric J-Curve, NARDL

JEL Classification: E2, F13, F14, F31, F32, F41