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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

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]

Suggested Citation

  • Hassan Shirvani & Barry Wilbratte, 1997. "The Relationship Between The Real Exchange Rate and The Trade Balance: An Empirical Reassessment," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 39-50.
    • Handle: RePEc:taf:intecj:v:11:y:1997:i:1:p:39-50
    DOI: 10.1080/10168739700000003
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    References listed on IDEAS

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