How sensitive is US-Sweden trade to the kronor-dollar rate: evidence from industry data

Previous research that investigated the response of Swedish trade balance to currency depreciation either used trade data between Sweden and rest of the world or between Sweden and her major trading partner. They did not find any long-run significant impact of depreciation on Swedish trade balance, especially with the USA. We wonder whether lack of any significant relation between bilateral trade balance between the two countries and the real kronor-dollar rate is due to aggregation bias. To this end, we disaggregate the trade data and use exports and imports data from 87 industries that trade between the two countries. Application of bounds testing approach to cointegration and error-correction modelling supports the notion that real depreciation of kronor-dollar rate has short-run effects on the trade flows of majority of the industries. Although, the short-run effects do not last into the long-run in most industries, 1% real depreciation of the dollar against kronor is predicted to improve the US trade balance with Sweden by 2%.