9,088 research outputs found
The Real Exchange Rate And The U. S. Economy 2000 - 2008
This paper is a revision of Rensselaer Polytechnic Institute’s Working Papers in Economics Series, No. 803, entitled “How Falling Exchange Rates 2000 – 2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve’s Real Broad Exchange Rate)”. It expands the analysis to measure exchange rate effects on the U.S. economy through 2008. It also utilizes a significantly improved method for assessing the meaning of the regression coefficient on the exchange rate variable in consumption and investment functions, removing ambiguity as to whether they should be interpreted as income or substitution effects. The paper attempts econometrically, using a seven behavioral equation model, to determine the total impact during 2000-2008 of the U.S. real exchange rate’s 13.8% decline. Using projections based on an econometric model of the U.S. economy 1960 – 2000, the paper suggests that the effect on demand for domestically produced consumer goods (and exports) is positive, but strongly negative for investment goods. The estimated overall negative effect of declining real exchange rates on the GDP is 1.9% over the eight years, or about a quarter percent decline a year. This revised estimate is less than half the estimated impact reported Working Paper 803. It is estimated the decline reduced the trade deficit 244 billion reported Working Paper 803.
Which Interest Rate Seems Most Related to Business Investment? A Few Preliminary Findings from an Ongoing Study
This paper examines (econometrically) which interest rates seem most systematically related to investment and the GDP and how long the lag time is before changes in these interest rates affect the GDP. We conclude that the Prime interest rate has the most important and systematic influence on these variables and that it affects investment and the GDP after a two year lag due to the lengthy periods required to design, bid and build new factories, commercial facilities and some machinery. Other rates examined, but not found related to investment - triggered GDP growth, include the Aaa and Baa corporate bond rates, the Mortgage interest rate and the 10 year Treasury bond rate. Our results also suggest the magnitude of the effect of interest rate changes on the economy is relatively modest, and that therefore the Federal Reserve's ability to influence the economy by changing rates may also be somewhat constrained.
Which Interest Rate Should We Use In The Is Curve?
Do interest rates effect investment and the GDP? If so, which ones, and by how much? Research on this topic over 5 decades has produced conflicting results. Yet, this question is of critical importance to the viability of Keynesian macroeconomics. This paper attempts to explain why results have been conflicting. It also attempts to determine with some finality which rate(s), if any, are related to GDP through the standard Keynesian mechanism: the IS curve. The paper tests exhaustively (1) a variety of real and nominal rates, (2) different hypotheses about how businesses calculate “real” interest rates (3) how the number of lags used affects results, (4) whether small sample size inherent in annual time series data adversely affects results, and (5) whether lack of hetroskedasticity and autocorrelation controls in earlier studies influenced their findings. This paper concludes only the real prime or Federal funds rates, lagged two years and the nominal current mortgage rate are significantly related to variation in the GDP, and running the prime rate alone picks up most of the variation in both. The prime rate was found to be twice as important as the mortgage rate. It also finds relatively small size (40 observation) annual data sets do not lead to problems achieving statistical significance, at least in simple IS curve models. It also finds that post - 1980 White and Newey - West correction methods for hetroskedasticity make it far more likely that any of a wide variety of interest rates and lags will be found statistically significant than was the case in earlier studies, but that correcting for multicollinearity between rates again leaves only the real prime and Federal funds rate lagged two periods and perhaps the current nominal mortgage rate significant. The effect of changes in the prime rate and mortgage rates on the GDP, though systematic, appears to be small, implying the IS curve may be nearly vertical and the Fed’s interest rate policy of little significance unless rate changes are draconian. We estimate that even a five percentage - point change in the real Federal funds and prime rates changes GDP only 2.4%, and employment only 1.2% maximally (using Okun’s law). Other findings were that nominal interest rates deflated by adaptive expectations models of inflation using the past two year’s inflation seem to best describe how businesses calculate real rates. Rational expectations models were least successful. Other rates examined include the ten year treasury rate, the Aaa and Baa corporate rates. They were seldom found statistically significant, but the mortgage rate’s estimated marginal effect seems to also capture these rates’ effect on the economy.
Does A Strong Dollar Increase Demand For Both Domestic And Imported Goods?
Rising exchange rates strengthen the dollar and lower prices on imported consumer goods. Lower import prices have two effects. (1) A substitution effect that shifts demand from domestically produced goods to imports. (2) An income effect that increases demand for imports even further. However, it also allows some income previously spent on imports, but no longer needed due to lower import prices, to be shifted to purchases of domestic goods. This paper finds that for the U.S., 1960 - 2000, the income effect overwhelmed the substitution effect. As a result, econometric results suggest declining import prices increased both import demand and demand for domestically produced consumer goods. The estimated increase in demand for domestically produced consumer goods and services was 3.4 times as large as the increase in demand for consumer imports. Also, because of the large increase in GDP resulting from growth in domestic demand, the trade deficit grew slower than domestic output of consumer goods. This finding suggests that while the trade deficit grows as a result of a strengthening dollar, the increase, as a percent of U.S. GDP, is small, about four tenths of a percent for a ten percent strengthening of the dollar.
Does Consumer Confidence, As Measured By U. Of Michigan Indices, Affect Demand For Consumer And Investment Goods (Or Just Proxy For Things That Do)?
Declining consumer confidence is cited as a cause of declining consumer demand, independent of changes income, wealth, etc. If so, it may also affect demand for investment goods, as businesses adjust production to reflect changes in consumer confidence and its anticipated effect on demand. This paper examines the University of Michigan’s Index of Consumer Sentiment (ICS), and the Index of Consumer Expectations (ICE), a subcomponent of ICS also used in the Index of Leading Economic Indicators Index. Using simple two variable regressions ICS lagged one year explained considerable variance in current consumption (but not vice versa). Both the ICS and ICE lagged one year were found systematically related to consumer demand for nondurable goods, but not durable goods, services, or total consumer demand when an extensive list of other factors affecting demand such as income, wealth, interest rates, credit availability and the exchange rate were controlled for. Neither ICS nor ICE was found related to any component of investment.
How Falling Exchange Rates 2000-2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve's G-10 Exchange Rate)
Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was virtually no substitution effect out of imported goods when import prices rose due to a falling exchange rate. Declining real income also caused decreased demand for domestically produced investment goods. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effect of declining income. The decrease in demand for domestic goods and services was 3.6 times as large as the decrease in demand for imports. Therefore, the trade deficit fell far less in dollars than the GDP. The study estimates that, other things equal, the trade deficit would fall from 4.3% to 2.1% of the GDP as a result of a large twenty percent weakening of the dollar, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the U.S. economy would have been 3.7%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates, reduces the size of the annual transfer of U.S. assets to foreigners needed to finance the deficit, but does not result in a faster rate of net growth for U.S. assets, because declining income also reduces domestic savings by a comparable amount.
Does Consumer Confidence, As Measured By The Conference Board’s Index Of Consumer Confidence, Affect Demand For Consumer And Investment Goods(Or Just Proxy For Things That Do)?
Declining consumer confidence is cited as a cause of declining consumer demand. If so, it may also affect business spending on investment goods, as businesses adjust production in response to changes in consumer confidence that will affect demand. This paper examines effects on consumption and investment of changes in the conference Board’s Index of Consumer Confidence (ICC), and its subcomponent Index of Consumer Expectations (ICE). Using simple two variable regressions prior year values of ICS were found significantly related to current year consumption (but not vice versa). Using more sophisticated models, in which other variables that influence consumer demand are controlled for, the ICC, again lagged one period, was found also found systematically related to total consumer spending and spending on each of its parts: durable and nondurable goods, and services. Control variables included income, wealth, interest rates, consumer credit availability and exchange rates. No ICE relationship with any kind of consumer demand was found. With controls for other factors affecting investment, including the accelerator, depreciation allowances, interest rates, profits and stock market levels, the ICC was not found related to any type of investment. However but the 3 year average value of ICE (current and past two years) was found related to both inventory investment and housing investment. The magnitude of the impact of 2008 changes in ICC was found to be very large, capable of explaining the entirety of the estimated decline in GDP during 2009.
The Investment Function: Determinants Of Demand For Investment Goods
This paper seeks to identify the major factors that affect the demand for investment goods in the United States. A review of Keynes’ theoretical literature on investment and previous empirical studies identified eight possible variables for testing. The testing procedure was stepwise linear regression. Hypothesized determinants of investment were added one by one to a regression equation to measure their ability to explain variance, and to test for the stability of their regression coefficients. Single stage or two stage least squares regression was used, as appropriate. The following, in order of importance, were found to be significant determinants of investment demand during the1960 – 2000 period: 1) crowd out problems caused by government deficits, 2) available depreciation allowances, 3) rates of growth of the economy, 4) changes in the prime interest rate, 5) growth in stock values, 6) exchange rate changes and 7) company profitability. The results explained 90% of the variation in investment demand. Regressions missing important explanatory variables had regression coefficients that varied widely with even small changes to the model. More complete models had more stable coefficients.
How Falling Exchange Rates 2000-2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve's Nominal Broad Exchange Rate)
Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was a 2.52 billion substitution effect out of imported goods when import prices rose due to a one point drop in the nominal Broad exchange rate. Declining real income also caused decreased demand for domestically produced investment goods. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effect of declining income. The decrease in demand for domestic goods and services was 2.0 times as large as the decrease in demand for imports. Therefore, the trade deficit fell less in dollars (321B) in real dollars. The study estimates that, other things equal, the trade deficit would fall from 4.3% to 2.3% of the GDP as a result of a large 16.1 percent drop in the nominal Broad exchange rate index, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the U.S. economy would have been 3.2%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates (8.28B per point decline in the index) during the same period.
Does the Exchange Rate Really Affect Consumer Spending?
This paper examines the extent to which changes in imports or exports of U.S. consumer goods and services occurs in response to a change in the exchange rate, 1960 -2000. The data used are taken from the Economic Report of the President, 2002. The findings indicate that an increase in the trade weighted exchange rate of about one percent is associated with an increase in imports of consumer goods of approximately 0.75 billion dollars.
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