An analysis of trade balance movement

The behavior of the trade balance is examined in this dissertation. The short-run behavior of the trade balance is examined by looking at the theoretical behavior of the trade balance in two-country real business cycle models and by a direct empirical examination of the causes of trade balance movements. The long-run behavior of the trade balance is analyzed by looking at the long-term relationships between the trade balance and other economic variables in different industrialized countries.;The behavior of the trade balance is examined within the framework of a two-country, two-good international real business cycle model. Adding consumer durable goods to the model allows it to replicate the behavior of consumption estimated from the data. An intermediate goods sector is also added to the model which enables it to replicate the high volatility of the trade balance observed in the data.;In order to examine the interaction between the trade balance and other real and nominal variables in G-7 countries, an econometric system is estimated. The system is identified using the long-run restrictions generated from a two-country real business cycle model. A J-curve effect is found in the response of the trade balance to an exogenous terms of trade shock in six of the seven countries. Following a supply shock, the terms of trade depreciates in five of the countries and the trade balance deteriorates in every country. These results are compared to the predictions from the model.;The long-term relationships between the trade balance and other economic variables are determined by examining the means of these variables over the past thirty years for each of twenty-one industrialized countries. Countries which have run a larger than average budget deficit are found to be more likely to have experienced a larger than average trade balance deficit, a larger than average value of consumption as a share of output and higher than average rates of inflation. An overlapping generations model in which Ricardian equivalence does not hold is put forth in order to explain these regularities.