TRADE BALANCE NEWS AND EXCHANGE-RATES - IS THERE A POLICY SIGNAL

Contrary to earlier studies, surprisingly large US trade deficits are shown to have a significant effect on exchange rates throughout the 1980s. Three possible reasons for the time-varying effect are considered. The evidence presented yields the following inference: deficit news is likely to have changed expectations of Fed intervention that moved exchange rates; deficit news probably has an effect on revisions of future deficit expectations and exchange rates change as a result; and deficit news may change expectations regarding US trade policy that is reflected in exchange rates. © 1991.