The trade balance and the real exchange rate: the US evidence from 1973: 3 to 1994: 9

Abstract

Based upon the trade balance determination models developed by Razin (1984), Greenwood (1984), and Hill (1990), there exists bidirectional causality between the trade balance and the real exchange rate. By applying Geweke's linear feedback measures for the US from 1973:3 to 1994:9, the results indicate that the magnitude of feedback from the real exchange rate to the trade balance is very close to that from the reverse direction and confirm that causality between them is indeed bidirectional.