We are grateful to anonymous referees for constructive comments on an earlier version of this paper. The usual disclaimer applies.
The US Trade Deficit and the Rate of Interest
Version of Record online: 15 AUG 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 21, Issue 4, pages 614–626, September 2013
How to Cite
Batra, R. and Beladi, H. (2013), The US Trade Deficit and the Rate of Interest. Review of International Economics, 21: 614–626. doi: 10.1111/roie.12059
- Issue online: 15 AUG 2013
- Version of Record online: 15 AUG 2013
It is well known that nations with high trade deficits normally have higher interest rates than those with surplus or balanced trade. However, such has not been the case with the USA, which has seen a relentless trade deficit since 1982. Its interest rates have been lower than those prevailing in many trade-surplus nations. Furthermore, these rates fell even as the trade shortfall shot up, generating an interest-rate paradox. This paper demonstrates that, unlike for other nations, the rising trade deficit itself became the cause of lower US interest rates, and this happened because of the world's strong interest in maintaining a high value of the dollar.