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Article
Publication date: 30 August 2022

Mouyad Alsamara, Karim Mimouni, Karim Barkat and Diana Kayaly

This paper aims to examine the effects of the real exchange rate on trade balance in Algeria and investigates whether it represents a viable tool to sustain and improve trade

Abstract

Purpose

This paper aims to examine the effects of the real exchange rate on trade balance in Algeria and investigates whether it represents a viable tool to sustain and improve trade performance using the nonlinear autoregressive distributed lag (NARDL) estimation technique and data from Algeria over the period 1980–2018. This study also highlights the role of trading partners with large income endowments in enhancing the trade balance.

Design/methodology/approach

The NARDL model is used to unveil potential short and long run nonlinear responses of the trade balance to shocks in real exchange rates and detect whether these responses are different in terms of sign and magnitude. The paper also provides a dynamic multiplier analysis that tests the existence of a J-Curve pattern in Algeria with several policy recommendations.

Findings

The findings confirm the existence of a J-curve pattern in Algeria where domestic currency depreciation will worsen the trade balance in the short run and improve it in the long run. The authors also find that the asymmetrical effect of real exchange rate on trade balance is different in sign and magnitude. Finally, the results indicate that an increase in trade partners' income increases the trade balance in Algeria. The findings are of utmost importance with several policy implications.

Originality/value

While some works investigated the nonlinear response of trade balance to real exchange rate movements, their results remain inconclusive and seem to depend on the characteristics of the country/region of study. Moreover, the role of trade partners and their potential impact on trade balance has been relatively overlooked in the literature. The authors fill this gap by examining the asymmetric impacts of real exchange rate and the effect of trade partners' income on trade balance in Algeria.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 25 March 2022

Oliver E. Ogbonna and Hyacinth E. Ichoku

The experience of rising trade imbalance between Nigeria and its key trading partners in recent years motivated this study. Previous studies on this issue either ignored bilateral…

Abstract

Purpose

The experience of rising trade imbalance between Nigeria and its key trading partners in recent years motivated this study. Previous studies on this issue either ignored bilateral level or assumed that the effect of crude oil price and/or exchange rate changes on trade balance is symmetric. Consequently, this study investigates whether Nigeria's bilateral trade balance with Belgium, China, United Kingdom (UK) and USA is responding symmetrically or asymmetrically to changes in oil price and exchange rate.

Design/methodology/approach

The authors used nonlinear autoregressive-distributed lag (NARDL) model that decomposed oil price and exchange rate into partial sum processes of positive and negative changes over the period 1999Q1–2019Q4.

Findings

The study finds that the effects of oil price hike and plunge asymmetrically influence Nigeria's trade balance with the UK and USA. Further evidence indicated that oil price plunge exerts greater influence than price hike in all the cases, except the UK in the long run. Furthermore, Nigeria's trade balance responds asymmetrically and significantly to changes in exchange rate with China in the long run and with China and the UK in the short run. Specifically, the depreciation effect is more prominent than appreciation.

Originality/value

Significant contributions to the existing literature in Nigeria include the recognition that the effects of oil price and exchange rate changes on trade are asymmetric and the disaggregation of trade into bilateral level to identify country-specific effect.

Details

Journal of Economic Studies, vol. 50 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 22 June 2018

Zelealem Yiheyis and Jacob Musila

The purpose of this study is to examine the temporal relationships between inflation and exchange rate changes and their implications for the trade balance in Uganda, which saw…

1466

Abstract

Purpose

The purpose of this study is to examine the temporal relationships between inflation and exchange rate changes and their implications for the trade balance in Uganda, which saw persistent trade deficits, rising inflation and disinflation episodes, as well as significant exchange-rate realignments and other liberalization measures over the sample period considered.

Design/methodology/approach

The short-run dynamics of the variables in question and the pattern of their long-run relationships are examined applying the bounds testing approach to cointegration on quarterly data.

Findings

The estimates suggest that, in the long run, a real depreciation leads to an increase in inflation; and that both real depreciation and inflation exert no significant effect on the trade balance. The estimated short-run dynamics suggest a causal relationship between the trade balance and the real exchange rate and between the real exchange rate and inflation, which is also found responsive to developments in the foreign sector. Taken together, the short-run and long-run multipliers seem to provide a weak support for the J-curve effect, while no evidence is found for the presence of the S-curve effect.

Originality/value

The study sheds light on the relationship among real exchange rate, inflation and the trade balance in the context of a small developing economy; it highlights that an improvement in the trade balance requires more than an appropriate exchange rate policy and underscores the importance of other policies in strengthening the external sector of the economy.

Details

International Journal of Development Issues, vol. 17 no. 2
Type: Research Article
ISSN: 1446-8956

Keywords

Article
Publication date: 1 November 2002

Tantatape Brahmasrene and Komain Jiranyakul

This study investigates the impact of real exchange rates on the trade balances between Thailand and its major trading partners. Previous empirical evidence gave mixed results of

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Abstract

This study investigates the impact of real exchange rates on the trade balances between Thailand and its major trading partners. Previous empirical evidence gave mixed results of the impact of real exchange rates on trade balances. In this study, Augmented Dicky‐Fuller and Phillips‐Perron tests for stationarity followed by the cointegration tests are implemented. All variables in the model are nonstationary but cointegrated. In cointegrating regressions, biases are introduced by simultaneity and serial correlation in the error. The specification that deals with these problems is the non‐linear specification of Stock and Watson (1989). By using this non‐linear model as modified by Reinhart (1995), the results show that the impact of real exchange rates (Thai baht/foreign currency) on trade balances is significant in most cases. Therefore, the generalized Marshall‐Lerner condition seems to hold. Furthermore, the results show that the real exchange rates play a more important role in the determination of the bilateral trade balances than other factors. Since the real exchange rate variable plays a major role in this study, the policy recommendation is to prevent exchange rate misalignment. A policy that can neutralize the changes in nominal exchange rates and relative prices should be introduced to prevent further deterioration of the trade balance.

Details

Managerial Finance, vol. 28 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 May 1994

John Doukas and Steve Lifland

The essence of the modern asset‐market approach to the analysis of exchange rate behavior includes the role of the trade balance account. We examine the relationship between…

Abstract

The essence of the modern asset‐market approach to the analysis of exchange rate behavior includes the role of the trade balance account. We examine the relationship between exchange rate changes and US trade balance announcements. Statistically significant exchange rate adjustments to these announcements are documented using for the first time the comparison period approach to testing the significance of trade balance announcements on exchange rates. The evidence is consistent with the predictions of the modern asset‐market exchange rate model. There is also evidence that the foreign exchange market is more sensitive to increasing rather than decreasing trade balance deficit announcements. To date, a number of theoretical papers have investigated the possible sources of the exchange rate determination process (see, Dornbusch [1976,1980], Dornbusch and Fisher [1980], Frenkel [1976, 1981], Kouri [1976], and Mussa [1982], among others). There is no consensus on how exchange rates are determined and why they have exhibited increased volatility lately. The interpretations vary widely among the various theories, ranging from the flow‐market approach to the modern asset‐market view. The asset‐market approach of exchange rates is based on the principle that the current value of the exchange rate (i.e. the relative price of two national currencies) is influenced not only by current economic conditions but also by expectations of its future value and, therefore, by the information that underlies these expectations. The asset‐market literature on the determination of exchange rates establishes a direct relationship between changes in the exchange rate and the current account (or trade balance account). For example, Mussa [1982] shows that the equilibrium exchange rate depends on expectations about the exogenous factors that affect the current account in present and future periods. A central implication of the asset‐market view is that “innovations” in the current account induce unexpected changes in the exchange rate. This is because an innovation in the current account, defined as a deviation of the current account balance from its previously expected level, conveys information about changes in economic conditions relevant for determining the equilibrium exchange rate (see Mussa [1982]). For example, if a country experiences an unexpectedly strong trade balance performance, this might be perceived to imply changes in relative economic efficiency, product demand, or international competitiveness that will improve the current account in future periods leading to an appreciation of the foreign value of the domestic currency. In essence, the asset‐market view argues that information about changes in real economic conditions requiring exchange rate adjustments can be inferred from innovations in the trade balance and/or the current account. Dornbusch and Fischer [1980] also argue that while asset markets determine exchange rates, it is the current account through its effect on net asset positions, and subsequently on asset markets, which influences the path of the foreign exchange rate. Thus, it can be argued that unanticipated current account announcements should be associated with exchange rate movements immediately following such announcements. While the relationship between the current account and the exchange rate has been extensively analyzed, the empirical evidence pertaining to the association between exchange rates and the current account has produced mixed results. Hardouvelis [1988] examines the effects of macroeconomic news, including US trade balance announcements, on three interest rates and seven exchange rates over the October 1979 to August 1984 period. He reports that announcements of the trade deficit have no statistically significant effects on interest rates, with the exception of the three‐month T‐bill rates and the exchange rates. The evidence with respect to the short‐term interest rate reactions may be associated with the fact that the “Federal Reserve Bank throughout the 1977–1984 period was unable to establish full credibility among market participants about its fight against inflation” (see Hardouvelis [1988]). Deravi et al [1988] have also investigated the financial market's response to US balance of trade announcements. They find similar results to those reported in Hardouvelis [1988] for the February 1980 to February 1985 period, but they report a significant exchange rate response to trade deficit announcements over the March 1985 to July 1987 period. Irwin [1989], however, uncovered a significant breakdown in the relationship between trade balance announcements and dollar exchange rates during the month of June 1984; that is, larger trade deficits were found to be associated with the dollar's depreciations only in the post‐June 1984 period. Contrary to previous studies, Hogan et al [1991] find larger US trade balance deficits to have a significant effect on exchange rates throughout the 1980s. Because expected trade balance figures are available from the Money Market Service Inc. and since the trade balance figures according to Crystal and Wood [1980] represent 85 percent of the US current account, it apears that the trade balance serves as a good proxy for the current account. Therefore, we are able to test more directly the impact of the US trade balance announcements on the exchange rate. The purpose of this paper is to analyze the relationship between exchange rate changes and merchandise balance announcements using a sample of US trade figures spanning the period from August 1986 to April 1989. In the following, we refer to this relationship as the “current account hypothesis”. Unlike previous research, the analysis is based on unanticipated trade balance announcements in order to study the interaction between exchange rates and information contained in the trade balance announced figures as the asset‐market approach to exchange rate determination process predicts. Dornbusch [1980] used the official forecast errors of the Organization for Economic Co‐operation and Development (i.e. biannual six‐month forecasts for current account and exchange rates). In this study, we focus on the major component of the current account‐the trade balance‐to test the current account hypothesis. The trade balance account is by far the best proxy for the current account. Another differentiating aspect of this study from the previous research is that it relies on systematic trade balance announcements. The use of the Commerce Departments' announcements concerning the US merchandise trade balance has also been motivated by the growing financial and non‐financial press coverage of the monthly trade balance reports. Examples of how the financial press covers the monthly trade balance announcements include: 1. “A wider trade deficit jolts a fragile market, shares off 101 points, dollar falls, and interest rates surge as big gap surprises investors, central bankers”, The Wall Street Journal, April 5,1988. 2. “London stocks rise sharply on US trade news; shares close firmer in Tokyo for the second day”, The Wall Street Journal, May 18,1989. 3. “Tricks of the Trade. The huge current‐account imbalances of the 1980s are disappearing fast. Good news? Maybe. But be warned: trade flows are less and less useful as indicators of economic performance” The Economist, March 30, 1991. 4. “Trade deficit grew in April to $6.97 billion… as exports continued to drop and imports jumped. The April deficit was the biggest monthly imbalance since a $9.49 billion deficit in November 1990. The trade gap in March was $5.58 billion. Economists say sluggish economic activity abroad is making it more difficult for US companies to sell their goods.” The Wall Street Journal, June 19, 1992. The different views registered in the financial press about the importance of the current account and trade balance imbalances in influencing exchange rate changes have further motivated the present study. Contrary to the current account hypothesis, it has been argued that because of the increasing integration of world capital markets, it is easier to finance current account deficits and therefore the trade balance or current account figures might be less useful as far as the determination of exchange rates is concerned. In addition, as a result of the increasing foreign investment activity, trade deficits may no longer represent purely national concepts. For example, a significant portion of a country's exports and imports may be accounted for by foreign firms with corporate operations there. Furthermore, US firms may decide to supply an overseas market either by exporting or by locating production abroad. Locally produced sales by US firms overseas, however, do not count as exports, nor do their local purchases of inputs count as imports. But from the firm's point of view, the local sales of a US subsidiary are viewed as being similar to exports. Therefore, it is argued that US trade balance deficits measured on the basis of residency rather than nationality of ownership, which is currently the norm, may mean less than it once did. Consequently, what emerges from the above is that the correlation between exchange rates and the information contained in the trade balance figures may be weaker than predicted by the asset‐market approach. Whether the current account or trade balance figures do matter as far as the determination of exchange rates is concerned is an empirical question. This article presents a first attempt at analyzing the impact of “innovations” in the US trade balance account on the exchange rate. An event study analysis is performed for the first time using trade balance announcement data from August 1986 to April 1989. The event methodology provides an appropriate direct test for the asset‐market model which predicts that unexpected changes in the exchange rate should be related to innovations in the current account (trade balance). The article is arranged as follows. Section II describes the data and methodology used. Section III presents empirical evidence on the relationship between exchange rates and innovations in the trade balance account. The article concludes with Section IV.

Details

Managerial Finance, vol. 20 no. 5
Type: Research Article
ISSN: 0307-4358

Open Access
Article
Publication date: 14 March 2024

Ivan D. Trofimov

In this paper we examine the validity of the J-curve hypothesis in four Southeast Asian economies (Indonesia, Malaysia, the Philippines and Thailand) over the 1980–2017 period.

Abstract

Purpose

In this paper we examine the validity of the J-curve hypothesis in four Southeast Asian economies (Indonesia, Malaysia, the Philippines and Thailand) over the 1980–2017 period.

Design/methodology/approach

We employ the linear autoregressive distributed lags (ARDL) model that captures the dynamic relationships between the variables and additionally use the nonlinear ARDL model that considers the asymmetric effects of the real exchange rate changes.

Findings

The estimated models were diagnostically sound, and the variables were found to be cointegrated. However, with the exception of Malaysia, the short- and long-run relationships did not attest to the presence of the J-curve effect. The trade flows were affected asymmetrically in Malaysia and the Philippines, suggesting the appropriateness of nonlinear ARDL in these countries.

Originality/value

The previous research tended to examine the effects of the real exchange rate changes on the agricultural trade balance and specifically the J-curve effect (deterioration of the trade balance followed by its improvement) in the developed economies and rarely in the developing ones. In this paper, we address this omission.

Details

Review of Economics and Political Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2356-9980

Keywords

Book part
Publication date: 30 September 2020

Lawrence H. Officer and Samuel H. Williamson

We develop the concept of the slave-trade balance of payments and generate its table for the United States for 1790–1860. In the process, we construct new data for the slave trade

Abstract

We develop the concept of the slave-trade balance of payments and generate its table for the United States for 1790–1860. In the process, we construct new data for the slave trade, including both the physical movement and revenue figures, and we analyze these numbers. The balance of payments includes slave imports, carrying trade in slaves, purchases of slaves that fail to be imported, outfitting and provisioning slave ships, and slave-ship sales. The slave-trade balance is integrated into the standard balance of payments. Among the findings are the following: slave imports were dominated by natural growth except for one decade; US ships had the greater role than foreign ships in the import trade, but were of small—and eventually nil—consequence in the carrying trade; federal and state laws to prohibit the slave trade in all its aspects were generally effective; and the slave-trade balance of payments was a small component of the overall balance.

Abstract

Details

Economics, Econometrics and the LINK: Essays in Honor of Lawrence R.Klein
Type: Book
ISBN: 978-0-44481-787-7

Article
Publication date: 3 November 2020

John Adams and Ali Metwally

The purpose of this paper is to examine to what extent evidence can be found for the presence of the Marshall–Lerner (ML) condition regarding the trade balances of Egypt. The…

Abstract

Purpose

The purpose of this paper is to examine to what extent evidence can be found for the presence of the Marshall–Lerner (ML) condition regarding the trade balances of Egypt. The theoretical basis of the ML is presented and then tested using Egyptian trade data from 1965 to 2017.

Design/methodology/approach

The data are analysed via standard ordinary least squares models subject to the constraints imposed by economic theory, specifically ML theory, in which the coefficients represent elasticities. A range of tests are undertaken to establish the validity of the models and the model results including multicollinearity, unit root and co-integration in order to avoid spurious regressions.

Findings

The export model strongly suggests that real exports of Egyptian goods and services are elastic with respect to changes in the real effective exchange rate (REER), with a coefficient weight of −1.64 and is significant at 1%. However, for the import model the coefficient weight of the REER −1.17 and is significant at 1%. This result contradicts ML theory, where an increase in the REER makes imports cheaper and thus causes them to increase.

Research limitations/implications

The limitations of the study are two in particular, the first is that the frequency of the data employed is annual, not monthly or even quarterly, which means that the sample size would have been larger, and the estimated parameters could have been more accurate in forecasting the future behaviour of exports and imports. There could be several other indicators that might have clear impacts on exports and imports. In other words, it is possible that a model with consumer spending and government spending as well as terms of trade, inflation, interest rate spread and taxes is going to capture more of the variation that occurs in Egypt's trade balance components.

Practical implications

The results suggest that the Egypt-International Monetary Fund plan (depreciation) is likely to have a positive effect on the economy. However, this does not mean that the deficit of the trade balance is going to change into a surplus once the policies of the plan are fully applied, but it does mean the deficit will reduce. Only in the long run is the trade balance likely to record a sustainable surplus. But the latter will heavily depend on the structure of exports and imports and maintaining price stability, both of which are key government policy areas.

Originality/value

The paper builds on previous theoretical and empirical work in this field and in particular is focussed on Egypt. There are extremely few analyses of the ML condition regarding Egypt. This paper provides new information on this and can also be utilized by researchers to further develop the analysis and method through identification of other potentially relevant variables within a single country ML study.

Details

African Journal of Economic and Management Studies, vol. 12 no. 1
Type: Research Article
ISSN: 2040-0705

Keywords

Article
Publication date: 1 May 1985

Ciaran Driver, Andrew Kilpatrick and Barry Naisbitt

This article uses a 22‐industry breakdown of the UK manufacturing sector to examine the effects on employment of various changes in the structure, but not the overall level, of

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Abstract

This article uses a 22‐industry breakdown of the UK manufacturing sector to examine the effects on employment of various changes in the structure, but not the overall level, of exports, imports, and trade balances within an input‐output framework. The analyses reported relate to greater specialisation in trade, faster structural adjustment and import substitution. The results show both the industrial pattern and overall net effect of employment changes and the distinction is made between the direct employment consequences of changes in the trade balances of the industries concerned and induced employment changes via derived demands for intermediate inputs.

Details

Journal of Economic Studies, vol. 12 no. 5
Type: Research Article
ISSN: 0144-3585

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