The role of expenditure switching in the global imbalance adjustment

► We examine time variation in the scale of expenditure switching. ► We develop a multi‐sector two‐and‐a‐half‐country model. ► We estimate the model over two sub‐samples, before and after the early 1990s. ► U.S. imports and exports have become much less responsive to exchange rates. ► Exchange rates have to move by a much larger amount to reduce U.S. trade deficit.