Working paper

Dissecting the Dynamics of the US Trade Balance in an Estimated Equilibrium Model

In an estimated two-country DSGE model, we find that efficiency shocks specific to investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign investment-specific shocks have a substantial impact on the variability of the imbalance. Total factor productivity shocks do not matter for the variance and even lead to procyclicality in the trade balance.

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