Dissecting the dynamics of the US trade balance in an estimated equilibrium model

Release date
01/10/2013
Reference
DP2013/04
Authors
Punnoose Jacob; Gert Peersman
Published as

Jacob, Punnoose and Gert Peersman (2013). ‘Dissecting the dynamics of the US trade balance in an estimated equilibrium model’, Journal of International Economics, Elsevier, Volume 90(2), Pages 302-315, DOI: https://doi.org/10.1016/j.jinteco.2013.01.004.

In an estimated two-country DSGE model, we find that shocks to the marginal efficiency of investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign marginal efficiency shocks generate a strong effect on the variability of the imbalance, through shifts in international relative absorption. On the other hand, shocks to uncovered interest parity and foreign export prices, which transmit mainly via the terms of trade and exchange rate, have a strong influence at short forecast-horizons, before the investment disturbances begin their dominance.