United State’s Dollar & Economic Escalation: A Co Integration Case

Affect of increase and decrease in balance of trade is observed in determination of balance of payments of country. Balance of payment and exchange rate has significant relationship with each other. This research investigates that the determinants of trade i.e. Import, export, industrial growth, consumption level and oil prices fluctuation brings changes in exchange rate and its influence eventually on balance of payments in United state of America (USA). Data of defined variables is collected on annual basis for thirty one years. By applying cointegration, it is estimated that there exist a long run relationship. USA has significantly and correctly signs the short run dynamic. Exchange rate does not Granger cause balance of payment and balance of payment does not granger cause exchange rate. In conclusion, we found that determinatnts of balance of trade affect the exchange rates, also, these rates have an considerable effect (positive or negative) on balance of payments. Therefore, for the macroeconomic stability within a country; economists, policy makers and government should collectively device appropriately matched and synchronized monetary, trade and fiscal policies which stabilize the exchange rate and sustain the balance of payment objectives.