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Does Exchange Rate Matter To Agricultural Bilateral Trade Between The United States And Canad?
Abstract
This study examines the effects of the U.S.-Canada exchange rate on bilateral trade of agricultural goods between the two countries and on U.S. farm income. Special attention is given to agricultural trade between the two countries under the Canada - United States Free Trade Agreement (CUSTA). This study utilizes two time series models: the vector error correction model (VECM) and the vector moving average model (VMA) with quarterly time series data from 1983 to 2000. This study found that exchange rates have a significant impact on U.S. agricultural trade with Canada and that the exchange rate between the two currencies is weakly exogenous in the U.S. agricultural sector, indicating that it is not influenced by U.S. agricultural trade with Canada and U.S. farm income.
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In-sample and out-of-sample Granger causality tests are applied to determine whether the real trade-weighted agricultural exchange rate helps predict monthly real prices and export sales of wheat, corn, and soybeans. An ARIMA model, alternative univariate and bivariate autoregressive models, and a restricted bivariate autoregressive model based on HsiaoÂ’s procedure are specified for each variable. Results of the causality are shown to be sensitive to specification choice. Forecasting performance of the models is compared and out-of-sample Granger causality is determined using univariate and bivariate models with the best (lowest mean-square forecast error) forecasting accuracy. These tests provide evidence supportive of Granger causality from the exchange rate to export sales, while the evidence on causality from the exchange rate to prices is mixed.
Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this paper, and it is argued that taken together they make it unlikely that macroeconomic models are in fact over identified, as the existing statistical theory usually assumes. The implications of this conclusion are explored, and an example of econometric work in a non-standard style, taking account of the objections to the standard style, is presented.
A quantity adjustment cost model is developed in the context of international trade along the lines proposed by Krugman (1987). The model implies that prices adjust dynamically to exchange rate fluctuations. The price adjustment speed is determined as a function of foreign demand responsiveness, the appropriate discount rate, and an adjustment cost parameter. Pass-through is incomplete and increases over time and with the speed of price adjustment. A preliminary empirical analysis finds that the speed of price adjustment from the time series by industry and then in a cross-sectional regression tentatively relates the obtained adjustment speeds to their theoretical determinants.
A vector autoregression is fit to recent U.S. data on wheat prices, wheat export sales, wheat export shipments, and exchange rates. Forecast error decompositions and out-of-sample forecasts indicate that exchange rates have little influence on wheat sales and shipments.