STOCHASTIC TRENDS AND ECONOMIC-FLUCTUATIONS IN A LARGE OPEN-ECONOMY

This study examines the role of stochastic trends in real exchange rat es and foreign output in explaining economic fluctuations in the Unite d States. While many of the results are consistent with recent closed- economy studies, the evidence shows that external shocks have signific ant short-run effects on economic fluctuations, even in a large countr y. A real appreciation of the dollar leads to permanent decreases in n et exports and temporary decreases in output. Permanent shocks to real exchange rates have surprisingly large effects on output over the cou rse of the normal business cycle. (C) 1998 Elsevier Science Ltd. All r ights reserved.