On the Long-Run Determinants of the U.S. Trade Balance: A Comment

Kiho Kim

47 citations0/0 files storedJournal of Post Keynesian Economics

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Abstract

In a recent article in this joumal, Bahmani-Oskooee (1992) used the augmented Dickey-Fuller (ADF) test and a cointegration technique to detennine what variables have long-run relationships with the U.S. current account and trade balance. He finds that ffie only variable that has a long-run relation with the current account or the trade balance is the full-employment budget (p. 90). On the basis of this finding, the author concludes that there is strong support for the use of fiscal policy as a tool for coping with U.S. trade problems. Furthennore, he goes on, our results indicate that a real ornominal effective exchange rate and tenns of trade do not have any long-run relation with the current account or the trade balance' (p. 92). The purpose of this note is to point out that the statistical finding on which Bahmani-Oskooee bases his conclusion was derived on a particular method of hypothesis testing and econometric analysis. As I will show, these methods are somewhat outdated and inefficient, and had different and more powerful techniques been applied, the finding and conclusion would have been different. In fact, the research supported by these alternative and newer methodologies indicates that, contrary to the conclusions of Bahmani-Oskooee, (a) the current account (CA) and trade balance (TB), respectively, have long-run relationships with the M2 money supply, the tenns of trade (TOT), and the nominal exchange rate (NEX), and (b) TB is not

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References

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