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The Relationship Between The Real Exchange Rate and The Trade Balance: An Empirical Reassessment

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  • Hassan Shirvani
  • Barry Wilbratte
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    Abstract

    This paper presents an empirical reassessment of the relationship between the real exchange rate and the trade balance, using the multivariate cointegration approach. Based on bilateral trade between the U. S. and the other G7 countries, we find evidence that the trade balance is unresponsive to the exchange rate in the very short run but is significantly affected by it within two years. We also find evidence supporting the empirical validity of the Marshall-Lerner condition, indicating that devaluations do improve the trade balance in the long run.[F32]

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168739700000003
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 11 (1997)
    Issue (Month): 1 ()
    Pages: 39-50

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    Handle: RePEc:taf:intecj:v:11:y:1997:i:1:p:39-50

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    1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    2. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
    3. Rose, Andrew K., 1991. "The role of exchange rates in a popular model of international trade : Does the 'Marshall-Lerner' condition hold?," Journal of International Economics, Elsevier, vol. 30(3-4), pages 301-316, May.
    4. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    6. Mohsen Bahmani-Oskooee, 1992. "What Are the Long-Run Determinants of the U.S. Trade Balance?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 15(1), pages 85-97, October.
    7. Miles, Marc A, 1979. "The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 600-20, June.
    8. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
    9. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
    10. Mohsen Bahmani-Oskooee & Janardhanan Alse, 1994. "Short-Run versus Long-Run Effects of Devaluation: Error-Correction Modeling and Cointegration," Eastern Economic Journal, Eastern Economic Association, vol. 20(4), pages 453-464, Fall.
    11. Bahmani-Oskooee, Mohsen, 1991. "Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?," Economics Letters, Elsevier, vol. 36(4), pages 403-407, August.
    12. Gylfason, Thorvaldur & Risager, Ole, 1984. "Does devaluation improve the current account?," European Economic Review, Elsevier, vol. 25(1), pages 37-64, June.
    13. Haynes, Stephen E & Stone, Joe A, 1982. "Impact of the Terms of Trade on the U.S. Trade Balance: A Reexamination," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 702-06, November.
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    Cited by:
    1. Huseyin Kalyoncu & Ilhan Ozturk & Seyfettin Artan & Kahraman Kalyoncu, 2009. "Devaluation and trade balance in Latin American countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 27(1), pages 115-128.
    2. M. Ali Kemal & Rana Murad Haider, 2004. "Exchange Rate Behaviour after Recent Float: The Experience of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 829-852.
    3. Groenewold, Nicolaas & He, Lei, 2007. "The US-China trade imbalance: Will revaluing the RMB help (much)?," Economics Letters, Elsevier, vol. 96(1), pages 127-132, July.
    4. Reinhard Schumacher, 2013. "Deconstructing the Theory of Comparative Advantage," World Economic Review, World Economics Association, vol. 2013(2), pages 83, February.
    5. Martin Falk, 2008. "Determinants of the Trade Balance in Industrialized Countries," FIW Research Reports series I-013, FIW.
    6. M. Faruk Aydin & Ugur Ciplak & Eray M. Yucel, 2004. "Export Supply and Import Demand Models for the Turkish Economy," Working Papers 0409, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    7. Kodongo, Odongo & Ojah, Kalu, 2013. "Real exchange rates, trade balance and capital flows in Africa," Journal of Economics and Business, Elsevier, vol. 66(C), pages 22-46.
    8. repec:ebl:ecbull:v:6:y:2007:i:26:p:1-12 is not listed on IDEAS
    9. repec:asi:ajoerj:2013:p:605-617 is not listed on IDEAS

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