Why a Dollar Depreciation May Not Close the U.S. Trade Deficit

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Current Issues in Economics and Finance

Why a Dollar Depreciation May Not Close the U.S. Trade Deficit

June 2007 Volume 13, Number 5

JEL classification: F3, F4

Authors: Linda Goldberg and Eleanor Wiske Dillon

With the U.S. trade deficit at high levels, many look to a dollar depreciation to curb the U.S. appetite for foreign goods by pushing up the cost of imports. Yet three factors—the use of the dollar in invoicing U.S. trade, the market share concerns of exporters, and sizable U.S. distribution costs—could keep U.S. import prices from rising enough to reduce demand significantly. Evidence suggests that a weaker dollar will boost foreign demand for U.S. exports, but this adjustment by itself is unlikely to close the deficit.

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7 pages / 162 kb

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