U.S.-Japan interdependence in a detailed econometric model of trade and industry

The economic relationship between the U.S. and Japan has become a central concern of policymakers in both countries. In this dissertation, I analyze macroeconomic and sectoral aspects of U.S.-Japan interdependence using a disaggregated econometric model. I estimate the relative influence of each economy on the partner country, and I evaluate the consequences of exchange rate adjustment and bilateral tariff reductions. The country models, the Wharton Long Term Model of the U.S. and the Tsukuba Model of Japan, are linked at the industry level by trade volume and price equations. These relationships are integrated with the input-output production structures of the models. To capture global feedback, the models are incorporated into the Project LINK world model. Comparing policy simulations in Japan and the U.S., I find an asymmetrically strong influence of U.S. economic activity on the Japanese economy, caused by the larger size, larger multiplier and greater import responsiveness of the U.S. The effects of Japanese expansion on the U.S. economy are small. Industry-level impacts depend on production and trade responses in other sectors through the system of interindustry demand. Exogenous changes in exchange rates significantly redistribute economic activity between countries. Actions by Japanese exporters to limit pass-through of exchange rate changes to export prices can substantially reduce their losses under a Yen appreciation. An analysis of the microeconomic determinants of pass-through behavior suggests that little of the industry variation is explained by market structure. Considering a potential U.S.-Japan free trade area, I simulate the elimination of tariffs on bilateral trade. Because the average level of existing tariffs is low, macroeconomic effects are small, although there are significant impacts in some sectors. While Japanese activity increases, U.S. output declines because of higher U.S. import price elasticities and the relatively smaller size of the Japanese import market. The results point to a greater role for the U.S. than for Japan in macroeconomic efforts to address the trade imbalance, although direct measures to influence trade can be successfully implemented in either country. Design of appropriate industry-level policies requires consideration of both direct and interindustry effects