The dancing of the real exchange rate of US dollar and the US real trade balance

Abstract

The current study seeks to re–examine a possible long–run dynamic relationship between the trade–weighted real exchange rate of US dollar and US real trade balance by using the well–known cointegration methodology. The sample period includes observations from the second quarter of 1973 through the second quarter of 1992. The unit root test reveals that the trade–weighted real exchange value of dollar and the US real trade balance are individually nonstationary in levels. The ADF test concludes that there is no systematic long–run association between these two variables even under the flexible exchange rate system.