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Abstract:
Virtually all we know about the behavior of U.S. imports rests on studies estimating income and price elasticities with postwar data. But anyone examining the evolution of U.S. trade cannot avoid asking whether the postwar period provides enough information to characterize that behavior. From 1890 to 1940, the United States became an increasingly closed economy and experienced the most pronounced fluctuations in income and prices of this century. Is our current understanding of the behavior of U.S. imports consistent with those features of the U.S. economy? Being consistent with the distant past might not appear as relevant for forecasting, but the literature ignoring that past offers a range of elasticity estimates wide enough to suggest that the role of income and prices in determining imports is not known with any precision. This paper offers the first analysis of that role using data since 1890. Estimating the elasticities of the most popular model in the literature with 1890-1992 data, I find that income and prices do not affect imports whereas the opposite conclusion arises with postwar data. The difference in results stems from differences in the time-series properties of the data in the two samples. As an alternative, I consider several models consistent with both optimization and the time-series properties of the data. These models predict substantial secular changes in income and price elasticities and confirm the importance of optimization for characterizing the behavior of U.S. imports. What is new about the results is that only through optimization can one recognize the implications of the evolution of U.S. trade for estimating elasticities.
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