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The Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from the Cointegration Analysis and Error-Correction Models

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  • Drama, Bedi Guy Herve
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    Abstract

    This paper investigates the effect of real exchange rate on the balance of trade of Cote d’Ivoire using multivariate cointegration tests and vector error correction models with time series data covering the periods of 1975-2007. Our investigation results confirm the existence of long-run relationships among Trade Balance(TB), Real Exchange Rate(RER), and foreign and domestic incomes for Cote d’Ivoire. Estimated results also demonstrate that the (RER) has a significant positive influence on Cote d’Ivoire’s trade balance in both short and long-run under fixed real exchange rate management policies for the considering period. The Granger Causality test shows that the (RER) does Granger causes the trade balance then, based on the estimations, the Marshall-Lerner condition in Cote d’Ivoire’s data is explored by utilizing the Impulse Response Function (IFR) which traces the effect of (RER) on the trade balance viewing the J-curve pattern.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21810.

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    Date of creation: 02 Apr 2010
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    Handle: RePEc:pra:mprapa:21810

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    Keywords: Key words: Real exchange rate; Trade balance; Cointegration test; VAR model; Granger Causality; IFR.;

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    1. Frankel, Jeffrey A, 1996. "Recent Exchange-Rate Experience and Proposals for Reform," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 153-58, May.
    2. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
    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, Elsevier, vol. 30(3-4), pages 301-316, May.
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    7. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(1), pages 53-68, July.
    8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    9. George S. Tavlas, 2003. "The Economics of Exchange-Rate Regimes: A Review Essay," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 26(8), pages 1215-1246, 08.
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    11. Bahmani-Oskooee, Mohsen & Niroomand, Farhang, 1998. "Long-run price elasticities and the Marshall-Lerner condition revisited," Economics Letters, Elsevier, Elsevier, vol. 61(1), pages 101-109, October.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
    13. Singh, Tarlok, 2002. "India's trade balance: the role of income and exchange rates," Journal of Policy Modeling, Elsevier, Elsevier, vol. 24(5), pages 437-452, August.
    14. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
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    Cited by:
    1. Chassem, Nacisse Palissy, 2011. "Effets de long terme du taux de change réel sur la balance commerciale nominale et réelle en zone Franc africaine
      [Long-run effects of real exchange rate on the nominal and real trade balance in
      ," MPRA Paper 30252, University Library of Munich, Germany.

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