Yuan-Dollar Real Exchange Rate and the U.S. Real Trade Balance with China: Long-Run Cointegration and Short-Run Dynamic Analysis

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

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Research On Monetary Neutrality: Evidence From Exchange Rate And Trade Balance Of G-7 Countries

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v24i2.1351 ◽

2011 ◽

Vol 24 (2) ◽

Cited By ~ 1

Author(s):

Doh-Khul Kim

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Monetary Shocks ◽

Font Size ◽

Long Run ◽

Short Period ◽

Short Run ◽

Monetary Neutrality ◽

Nominal Shocks

According to a recent paper by Fisher and Huh (2002), in contrast to a long-run neutrality hypothesis, nominal shocks have long-run effects on a country’s real exchange rate and trade balance. However employing a similar method (VAR) with identical restrictions (long-run neutrality and short-run recursive hypotheses), this paper shows that the effects on the real exchange rate are much shorter in this G-7 country study than what Fisher and Huh (2002) contend. Further, the trade balance improves for a short period of time, from which it can conclude there is a shorter existence of the depreciation effect in response to expansionary monetary shocks, which supports the long-run neutrality hypothesis in an open macroeconomic framework.

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The dynamics of inflation, exchange rates and the trade balance in a small economy

International Journal of Development Issues ◽

10.1108/ijdi-12-2017-0209 ◽

2018 ◽

Vol 17 (2) ◽

pp. 246-264 ◽

Cited By ~ 2

Author(s):

Zelealem Yiheyis ◽

Jacob Musila

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Exchange Rate Policy ◽

Content Type ◽

The Real ◽

Weak Support ◽

Long Run ◽

Curve Effect ◽

Short Run

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.

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EFFECT OF EXCHANGE RATE VOLATILITY ON UGANDA'S TRADE BALANCE

Advances in Social Sciences Research Journal ◽

10.14738/assrj.85.10017 ◽

2021 ◽

Vol 8 (5) ◽

pp. 532-574

Author(s):

Qianling Shen ◽

Henry Orach ◽

Pu Chen ◽

Shiying Wei ◽

Hassan Ssewajje ◽

...

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Real Exchange Rate ◽

Trade Balance ◽

Real Exchange Rates ◽

Exchange Rate Volatility ◽

Data Generation ◽

Long Run ◽

Short Run ◽

Adf Test

This study examines the long-run and the short-run relationship between the real exchange rate, GDP, FDI, inflation (INF), gross capital formation (GCF), Net official's development assistance (NODA), GNI, and trade balance in Uganda for the period 1994-2018. We used an Augmented Dickey-Fuller (ADF) test for the stationarity test, and we use the Johannsen cointegration approach to prove the existence of cointegration. The ADF tests show that the series was non-stationary in level but became stationary after the first difference. The Johannsen cointegration test indicates the long and short-run relationship between all the explanatory and trade balance in Uganda. Under such circumstances, a Vector Error Correction Model (VECM) is employed since the results offer more information than other data generation processes. Our findings are as follows: Real exchange rates, FDI, GCF and have a positive relationship with Trade balance. It means that Uganda can depreciate the Exchange rate to improve its Trade balance. The results proved the J-Curve effect's existence (i.e., the long-term impact of exchange rate on trade balance). The recommendations from this study are - Uganda's monetary policy management should emphasize more efforts on the stability and minimization of the volatility of exchange rates of the shillings since its movements affect international prices both negatively and positively, leading to either a decline or trade boost. Keywords: Trade balance; Real exchange rate; Net official's development assistances; GNI; VECM model; Uganda

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Currency Depreciation, Trade Balance and Intra-Industry Trade Interactions in Turkey’s OECD Trade

International Journal of Economics and Finance ◽

10.5539/ijef.v8n4p8 ◽

2016 ◽

Vol 8 (4) ◽

pp. 8 ◽

Cited By ~ 1

Author(s):

Mehmet Demiral

Keyword(s):

Exchange Rate ◽

Trade Balance ◽

Real Effective Exchange Rate ◽

Series Data ◽

Adjustment Process ◽

Industry Trade ◽

Long Run ◽

Effective Exchange ◽

Short Run ◽

Effective Exchange Rate

This study re-examines the determinants of Turkey’s trade balance in its manufactures trade with 33 OECD-member countries for the short-run and the long-run. Unlike other studies, in the relationships we also control the moderating effects of the availability of import substitutes proxied by intra-industry trade. We analyze quarterly aggregated time-series data of the period spanning from 1998.QI to 2015.QIII, following the autoregressive distributed lag (ARDL) bounds testing approach to the cointegration and the error correction modeling. Estimation results reveal that real effective exchange rate, together with domestic and foreign incomes are still among the core determinants of Turkey’s trade balance in the manufacturing sectors. There is no significant impact of domestic final oil prices that also include all the taxes on gasoline. The trade balance depends on domestic income negatively and the aggregated income of the OECD countries positively. The finding that real depreciation of Turkish lira against to those of Turkey’s OECD trade partners improves trade balance in both the short-run and the long-run, indicates no evidence of J-curve adjustment process. Unsurprisingly, the intra-industry trade seems to be an important factor that moderates the elasticities of trade balance to its determinants, especially to real effective exchange rate and domestic income. Overall results underline the importance of import-substitution capability besides the export-oriented production to ease the longstanding large trade deficits for Turkey.

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Different Approaches to Merchandise Trade Balance in Pakistan

Global Business Management Review (GBMR) - Vol 12 No 2 (2020): Global Business Management Review ◽

10.32890/gbmr2020.12.2.2 ◽

2020 ◽

Vol 12 (Number 2) ◽

pp. 19-30

Author(s):

Yousuf Aboya ◽

Arsalan Hussain ◽

Rohail Hassan ◽

Hassan Mujtaba Nawaz Saleem ◽

Aamir Hussain Siddiqui

Keyword(s):

Exchange Rate ◽

Trade Balance ◽

Trade Deficit ◽

Real Effective Exchange Rate ◽

Series Data ◽

Long Run ◽

Effective Exchange ◽

Short Run ◽

Merchandise Trade ◽

Effective Exchange Rate

The current study empirically examines the three major approaches to trade balance for Pakistan by utilizing the yearly data from 1972 to 2016. Monetary, elasticity, and absorption approaches were tested by developing a model that incorporates all three approaches. The significant contribution of the study is that it uses only the merchandise trade deficit account, which includes trade of only physical goods. The study used time-series data; therefore, variables have been tested for the stationarity, and it is found that there is a combination of I (0) and I (1) variables, so ARDL bounds testing approach to co-integration has been employed to find the short run and long run associations among the variables. The bound test results discovered that there is a presence of stable long-term association among the merchandise trade deficit account, real broad money supply, real effective exchange rate, and real domestic absorption. The results further revealed that merchandise trade discrepancy is determined purely by the real effective exchange rate, which specifies that the exchange rate's devaluation increases the deficit in the long run whereas in the short-run increase in domestic absorption decreases the merchandise trade deficit.

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The Determinants of Pakistan’s Trade Balance: An ARDL Cointegration Approach

THE LAHORE JOURNAL OF ECONOMICS ◽

10.35536/lje.2010.v15.i1.a1 ◽

2010 ◽

Vol 15 (1) ◽

pp. 1-26 ◽

Cited By ~ 13

Author(s):

Waliullah Waliullah ◽

Mehmood Khan Kakar ◽

Rehmatullah Kakar ◽

Wakeel Khan

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Money Supply ◽

Trade Balance ◽

Exchange Rate Regime ◽

Annual Data ◽

Impulse Response Functions ◽

Bounds Testing ◽

Distributed Lag ◽

Long Run

This article is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Pakistan’s economy. Income and money variables are included in the model in order to examine the monetary and absorption approaches to the balance of payments, while the real exchange rate is used to evaluate the conventional approach of elasticities (Marshall Lerner condition). The bounds testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1970 to 2005 in order to investigate whether a long-run equilibrium relationship exists between the trade balance and its determinants. Additionally, variance decompositions (VDCs) and impulse response functions (IRFs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that exchange rate depreciation is positively related to the trade balance in the long and short run, consistent with the Marshall Lerner condition. The results provide strong evidence that money supply and income play a strong role in determining the behavior of the trade balance. The exchange rate regime can help improve the trade balance but will have a weaker influence than growth and monetary policy.

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Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners

Japan and the World Economy ◽

10.1016/j.japwor.2012.07.001 ◽

2012 ◽

Vol 24 (4) ◽

pp. 266-273 ◽

Cited By ~ 19

Author(s):

Chun-Hsuan Wang ◽

Chun-Hung A. Lin ◽

Chih-Hai Yang

Keyword(s):

Exchange Rate ◽

Trade Balance ◽

Rate Change ◽

Exchange Rate Change ◽

Long Run ◽

Trading Partners ◽

Short Run

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Exchange Rate and Economic Growth

Journal of South Asian Development ◽

10.1177/0973174117702712 ◽

2017 ◽

Vol 12 (1) ◽

pp. 42-64 ◽

Cited By ~ 6

Author(s):

Mohammad A. Razzaque ◽

Sayema Haque Bidisha ◽

Bazlul Haque Khondker

Keyword(s):

Economic Growth ◽

Exchange Rate ◽

Real Exchange Rate ◽

Development Strategy ◽

Analytical Framework ◽

Policy Option ◽

Exchange Rate Policy ◽

Long Run ◽

Exchange Rate Movements ◽

Short Run

This article aims to understand the effects of exchange rate movements on economic growth in Bangladesh. Using a suitable analytical framework to derive an empirical specification, we construct a real exchange rate series and employ cointegration techniques to determine the output response to Bangladeshi currency depreciations. Our results suggest that in the long run, a 10 per cent depreciation of the real exchange rate is associated with, on average, a 3.2 per cent rise in aggregate output. However, a contractionary effect is observed in the short run so that the same magnitude of real depreciation would result in about a half per cent decline in GDP. While the long-run expansionary effect of real depreciations may be appealing for considering exchange rate policy as a development strategy, the likelihood of rising inflationary pressures needs to be kept in mind while pursuing this policy option.

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DETERMINANTS OF REAL EXCHANGE RATE IN ETHIOPIA

International Journal of Research -GRANTHAALAYAH ◽

10.29121/granthaalayah.v4.i6.2016.2652 ◽

2016 ◽

Vol 4 (6) ◽

pp. 183-210

Author(s):

Nandeeswara Rao ◽

TassewDufera Tolcha

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Impulse Response ◽

Variance Decomposition ◽

Capital Inflow ◽

Terms Of Trade ◽

Nominal Exchange Rate ◽

The Real ◽

Long Run ◽

Short Run

Real exchange rate has direct effects on trade particularly on international trade and has indirect effects on productions and employments, so it is crucial to understand the factors which determine its variations. This study analyses the main determinants of the real exchange rate and the dynamic adjustment of the real exchange rate following shocks to those determinants using yearly Ethiopian time series data covering the period 1971 to 2010. It begins with a review of literatures on Exchange rate, real exchange rate, determinants of the real exchange rate and provides an updated background on the exchange rate system in Ethiopia. An empirical model linking the real exchange rate to its theoretical determinants is then specified. This study had employed the cointegration and vector autoregression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long run effects and short run dynamic effects on the real exchange rate. Share of investment, foreign exchange reserve, capital inflow and government consumption of non-tradable goods were the variable that have been found to have a long run relationship with the real exchange rate. The estimate of the speed of adjustment coefficient found in this study indicates that about a third of the variation in the real exchange rate from its equilibrium level is corrected within a year. The regression result of VECM reveals that terms of trade, nominal exchange rate, and one period lag of capital flow were the variables significantly affects the real exchange rate in the short run. However, the impulse response and variance decomposition analysis shows a better picture of the short run dynamics. The their analysis provided evidence that the Shocks to terms of trade, nominal exchange rate, capital inflow and share of investment have persistent effects on the real exchange rate in the short run. In general the regression results of both long run and short run models mostly suggest that the fluctuations of real exchange rates are predominantly responses to monetary policies shocks rather than fiscal policy shocks.

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