To What Extent Are the Appreciation of the US Dollar and Inflation Rates Responsible for the United States’ Continuous Trade Deficit with India?

Through the application of multiple regression analysis, vector autoregression and autoregressive distributive lag modelling, this paper empirically studies the relationship between the United States’ bilateral trade deficit with India with the Dollar/Rupee exchange rate and the rates of inflation both of the United States and India. The principal aim is to quantitatively analyse the actual impact inflation and the exchange rate have on the dollar and determine if deviations in these variables result in changes to the trade balance. Through an analysis of monthly data, the investigation reveals the following two conclusions:1. Inflation in the United States, India, and the exchange rate of the dollar against the Indian National Rupee can be attributed, after appropriate linearisation of data, to at most 57% of the variation in the United States’ trade balance with India.2. The exchange rate of the dollar against the rupee granger-causes the US’ trade balance with India; no such causality exists with inflation.The results of this paper may be applied in the understanding the impacts of the Rupee depreciating and/or the dollar appreciating, the nature of Indo-American trade and the impact of Keynesian demand-management policies (which typically aim to achieve a low and stable rate of inflation) on net exports