Aggregate Shocks and the Relationship between U.S. Business Cycle Fluctuations and Export Performance

Aggregate Shocks and the Relationship between U.S. Business Cycle Fluctuations and Export Performance

In contrast to the preceding literature, we study the relationship between domestic economic activity and export performance within the framework of vector autoregressive representations of the U.S. macroeconomy that explicitly recognize the potential importance of the type of shocks that initiate co-movements between aggregate activity and export volume. Our results verify that the relationship between aggregate activity and export volume depends upon the type of shock. If the initiating shock is an increase in the relative price of oil or a monetary shock (either contractionary or expansionary), the resulting correlation between export performance and domestic activity is positive. On the other hand, if the initiating shock is a change in government purchases, the correlation is negative. These results are fully consistent with a broad interpretation of the capacity pressure hypothesis that allows for the possibility that monetary and other shocks have important effects on the costs of committing resources to the export sector. Our results also suggest that far from being anomalous, the procyclical capacity pressure effect reported in earlier studies is fully consistent with the capacity pressure hypothesis in that it merely reflects the importance of oil price and monetary shocks during the sample periods considered in those studies. (JEL Classification: E32, F10)