Real exchange rates and U.S. bilateral trade

The persistence of the US trade deficit despite the significant depreciation of the dollar in the second half of the 1980s prompted several studies seeking an explanation for this phenomenon. There has been a renewed interest in the exchange rate trade linkage as the US trade deficit reached a record high despite steady depreciation of the dollar in early 1995. A paper presents an empirical analysis of the relationship between real exchange rate and US exports to Canada and Japan. The major finding is that real income and real exchange rates changes are important determinants of bilateral trade flows.