Jaime Marquez, The Econometrics of Elasticities or the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 471-481

This paper characterizes the statistical distribution of the response of the U.S. trade account to a dollar depreciation. To accomplish this task, the paper builds and estimates an econometric model of U.S. bilateral trade. Given an exchange-rate shock, this distribution is generated empirically by stochastically simulating this model using random drawings for both innovations and trade elasticities. The paper finds that the distribution of trade-account responses is not stationary, that its variance is directly related to the size of the exchange-rate shock, that the dominant source of uncertainty lies with imports' price elasticities, and that the dispersion of these responses is more pronounced in the short run than in the long run. Based on these properties, the analysis applies Chebychev's inequality to the sample of trade-account responses and finds that hysteresis in price elasticities has a low probability of accounting for the persistence of the U.S. trade deficit. ; These findings have two practical implications. First, forecasts of trade-account responses to exchange-rate shocks should include the associated confidence intervals. Uncertainty in these responses is potentially large and omitting the corresponding confidence intervals is analogous to omitting standard errors of regression estimates. Second, deriving confidence intervals needs to recognize that parameter estimates are random variables and that they contribute, quite significantly in this application, to the width of these intervals.

This paper estimates income and price elasticities for bilateral world trade. In addition to testing the properties of the error terms, the dynamic specification, and the assumption of parameter constancy, the analysis presents the first application of the Bank Spectrum estimator to bilateral trade flows for all countries. The paper finds that bilateral trade elasticities exhibit enough of a dispersion to suggest that the direction of trade is sensitive to changes in income and prices. Using the bilateral elasticities as raw data, the analysis obtains the associated multilateral estimates and finds that they are both consistent with the literature and suitable to addressing questions involving multilateral trade. But the evidence also reveals that sole reliance on multilateral elasticities conceals valuable information for both policy applications and empirical analyses of international trade.

Income and price elasticities for non-oil exports of non-OPEC developing countries play an imp ortant role in the development of policy responses to the debt crisis. These elasticities are estimated for the major Standard Internation al Trade Classification commodity groups. Based on two-stage least sq uares and quarterly data for 1973 to 1984, the income elasticity for non-oil exports ranges between 1.4 and 1.9. The analysis also tests t he properties of the error term, the dynamic specification, and para- metric stability. The sensitivity of the results is assessed using Sh iller's lags and band spectrum estimation.

Yock Y. Chong and David F. Hendry (1986) propose the concept of forecast encompassing--the lack of additional information in another model's forecasts. The corresponding test statistic is based on the regression of one model's forecast errors on the other model's forecasts. This paper generalizes Chong and Hendry's statistic to include sets of dynamic nonlinear models with uncertain estimated coefficients generating multistep forecasts with possibly systematic biases. Using stochastic simulation, the generalized statistic is applied to forecasts over 1985Q1-1987Q4 from six models of the U.S. merchandise trade balance, revealing misspecification in all models.

This paper provides a comprehensive study of the interplay between the Federal Reserve’s balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves. Treating outright securities holdings of the Federal Reserve as a policy tool, we estimate the effects of unconventional monetary policy on overnight funding rates. Further, we offer the first empirical assessment of the FOMC’s principles of the exit strategy. Assuming a path for removing monetary policy accommodation that is consistent with the FOMC’s exit principles, we project that the federal funds rate increases to 70 basis points by 2016, settling in a corridor bracketed by the discount rate and the interest rate on excess reserves, as excess reserves of depository institutions decline to near zero.