International trade and macroeconomic dynamics: The case of U.S. bilateral trade with G-7 countries

The short- and long-run effects of exchange rates, income, interest rates and government spending on U.S. bilateral trade with the other G-7 countries are investigated using an autoregressive distributed lag (ARDL) model. The primary contribution of this study is to consider separating the analysis of exports and imports in an integrated model that empirically encompasses four major schools of thoughts – elasticity, Keynesian income, absorption and monetary approaches – in order to identify macroeconomic linkages to U.S. bilateral trade with the other G-7 countries accurately. Results suggest that, in both the short- and long-run, U.S. imports and exports are highly sensitive to changes in U.S. and foreign income, while U.S. imports and exports are relatively insensitive to changes in bilateral exchange rate. It is also found that both exports and imports are more responsive to changes in government spending than changes in interest rates in both the short- and long-run.

► This paper examines the effects of macroeconomic variables on U.S. trade with G-7 countries.
► An autoregressive distributed lag approach (ARDL) is applied to quarterly data for 1989–2011.
► U.S. exports and imports are found to be highly responsive to domestic and foreign incomes.
► U.S. exports and imports are relatively insensitive to bilateral exchange rates.
► U.S. exports and imports are found to be more responsive to government spending than interest rates.