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Testing the Marshall-Lerner condition between the U.S. and other G7 member countries

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  • Dong, Fang

Abstract

This paper examines the Marshall-Lerner condition for the six bilateral trade balances between the U.S. and Canada, France, Germany, Italy, Japan, and the U.K. from 1985 to 2016. The main contribution of this paper is that it tests for and incorporates nonlinearity into the balance of trade equation of Boyd, Caporale, and Smith (2001). My results indicate that price elasticities for exports and imports hardly satisfy the Marshall-Lerner condition in either of the two regimes. This means that higher real exchange rate depreciation may not necessarily improve the U.S. bilateral trade balance with all of the other G7 member countries.

Suggested Citation

  • Dong, Fang, 2017. "Testing the Marshall-Lerner condition between the U.S. and other G7 member countries," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 30-40.
    • Handle: RePEc:eee:ecofin:v:40:y:2017:i:c:p:30-40
    DOI: 10.1016/j.najef.2017.01.003
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    References listed on IDEAS

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    1. Yu Hsing, 2010. "Test of the Marshall-Lerner Condition for Eight Selected Asian Countries and Policy Implications," Global Economic Review, Taylor & Francis Journals, vol. 39(1), pages 91-98.
    2. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    3. Guglielmo Maria Caporale & Luis Alberiko Gil-Alana & Robert Mudida, 2015. "Testing the Marshall–Lerner Condition in Kenya," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 253-268, June.
    4. Shigeyuki HAMORI, 2008. "Trade Balances and the Terms of Trade in G-7 Countries: Penal Cointegration Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 13-22.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    6. Mohsen Bahmani & Hanafiah Harvey & Scott W. Hegerty, 2013. "Empirical tests of the Marshall‐Lerner condition: a literature review," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(3), pages 411-443, July.
    7. Boyd, Derick & Caporale, Gugielmo Maria & Smith, Ron, 2001. "Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 187-200, July.
    8. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-560, August.
    9. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    10. Mohsen Bahmani & Hanafiah Harvey & Scott W. Hegerty, 2013. "Empirical tests of the Marshall-Lerner condition: a literature review," Journal of Economic Studies, Emerald Group Publishing, vol. 40(3), pages 411-443, May.
    11. Zacharias Psaradakis & Martin Sola & Fabio Spagnolo, 2004. "On Markov error-correction models, with an application to stock prices and dividends," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 69-88.
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    13. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-125, May.
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    3. Ilyas Siklar & Merve Celik Kecili, 2018. "Estimation of the Marshall-Lerner Condition and J Curve Dynamics for Turkey," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 4(5), pages 125-130, 05-2018.
    4. Mesagan, Ekundayo Peter & Alimi, Olorunfemi Yasiru & Vo, Xuan Vinh, 2022. "The asymmetric effects of exchange rate on trade balance and output growth," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).

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    More about this item

    Keywords

    Marshall-Lerner condition; Cointegration; Regime shift; Threshold;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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