The effects of exchange rate changes on prices and quantities in U.S. foreign trade

Abstract

The recent devaluation of the dollar has had a puzzlingly slow effect on the U.S. merchandise trade balance. This article examines the effects of exchange rate changes on U.S. import and export prices and then examines the effects of price changes on trade flows. Estimates are developed for aggregate imports and exports and aggregate imports and exports minus crude materials and crude foods. It appears that exports respond much more quickly than imports to exchange rate fluctuations. Specifically, it may take up to three years for a real exchange rate change to fully affect the quantity of imports. These results seem more consistent with recent experience than the results of standard single-equation models which tend to indicate a much shorter lag from exchange-rate changes to changes in trade flows.

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