Factors Influencing United States' Trade Balance with Italy

Factors determining United States’ trade balance with Italy (NE) are examined, and tests for long run relationships performed. Results suggest the main determinant of NE is the output ratio, followed by the price ratio, real exchange rate, lending rate ratio, and the money supply ratio, which explain 95% of the variation in NE. NE responds to rising and falling exchange rate regimes asymmetrically if intercepts change, leading to a premium in NE of $1,093.23 due to falling exchange rates. NE and its determinants are cointegrated at 1%, NE and the nominal exchange rate are cointegrated at 1%, but NE and the real exchange rate are cointegrated at 5%. The nominal exchange rate and the price ratio are cointegrated at 1%, suggesting long run purchasing power parity. The estimated model may monitor and predict NE.