When a currency depreciates the imports becomes expensive and the ex. May 22, 2007 the purpose of this paper is to study empirically the dynamics of turkish bilateral trade between turkey and her nine trading partners, in addition to aggregate trade balance data. The impact of devaluation on balance of trade depends on the effectiveness of marshall lerner condition. Marshall lerner ml condition postulates foreign exchange market stability if sum of price elasticities of demand for export and demand for imports, in absolute terms, is greater than unity. Index termstrade balance, exchange rate devaluation, marshall lerner condition, cointegration.
Exchange rate and trade balance the case for j curve effect in nigeria published. Define the nominal exchange rate as the units of foreign currency per unit of the domestic currency. Marshalllerner condition and j curve dinesh bakshi. Real exchange rate volatility on the short and longrun. The validity of marshall lerner condition in turkey. The wellknown marshall lerner condition states that a real exchange rate appreciation termsoftrade improvement, i. The study found evidence of a j curve only for the dominican republic but not for others. The effects of real exchange rates and income on the trade. Marshall lerner condition, azerbaijan, j curve, real depreciation, manat, export and. English economist alfred marshall 18421924 and the romanian born economist abba lerner 1905 1985. Asymmetric cointegration relationship between real exchange. The marshall lerner ml condition states that a deficit in the trade balance may be eliminated through currency depreciation, at least in a longrun provided that the absolute sum of the longterm export and import demand elasticities is greater than unity. Marshall lerner condition and the j curve phenomenon for the economy of pakistan using quarterly data for the period of 19702012. Application of cointegration analysis reveals that in many cases, bilateral trade elasticities are large.
In particular, we use quarterly data on the log of real exchange rates, exportimport ratio and relative us income for the time period 1996q1 2011q4, and employ techniques based on the concept of long memory or longrange dependence. The j curve hypothesis is tested for pakistan using quarterly data over 19722002 period. The ardl cointegration approach used quarterly data. It is named after the economists who discovered it independently. Caoalvira y abstract the short and longrun implications of real exchange rate volatility on colombian bilateral trade commodities and noncommodities with its major trade partners are analyzed from the perspectives of the marshall lerner condition, a cointegration relation with other aggregate ariablves and the j curve hypothesis. Aug 28, 2018 this longrun effect manifests itself in the short run for a small number of countries, indicating the fact that satisfying the marshall lerner condition in the short run is more difficult. Because of transition to the floating exchange rate regime in 2001, the analyzing period has been chosen as 20032016 to use monthly data for the related variables. Testing the marshalllerner condition and the jcurve. Testing the marshalllerner condition and the jcurve phenomenon for pakistan.
J curve, trade balance, marshall lerner condition, cointegration, ardl model, sierra leone. Bahmanioskooee and niroomand 1999 have tested the marshall lerner. The main purpose of this study is to investigate the validity of marshall lerner condition and the existence of j curve for the turkish economy. A related issue is whether there exist j curve effects, i. Trade balance, j curve, marshall lerner, exchange rate, panel cointegration.
Specifically, we test the validity of the marshall lerner condition and the j curve effect, and further assess the effect of other macroeconomic variables including household consumption expenditure, government consumption expenditure, foreign income, money. Trade balance, marshalllerner condition, jcurve effect, cointegration, ghana. Hsing 9 examined the j curve for the bilateral trade between croatia, the czech republic, hungary. There is not an agreement about studies in which the validity of marshall lerner. According to the former, currency devaluation improves the trade balance only if the sum of the absolute values of import and export demand price. The evidence of j curve is found and longrun effect. Bilateral export and import demand functions of bangladesh.
In this paper, the results didnt confirm j curve and marshall lerner condition. However, our results show that higher income level of trading partners may lead to improvement in the trade balance of domestic country. Testing the validity of the jcurve hypothesis between. Philippines and korea by using cointegration and ecm techniques. Brooks the university of wisconsinmilwaukee, 1999 under the supervision of mohsen bahmanioskooee the united states has experienced a large and growing trade deficit for the. G7 member countries using j ohansen cointegration method. In recent years, it is discussed that the currency adjustments devaluations may frequently have impact on current account deficit associated with the increase in current account deficit. These results are relevant for policy making both in serbia and in a number of other emerging europe countries as they face major current account adjustments after bop crises of 2009. Based on the estimations, the marshall lerner condition is examined and, by means of impulse response functions, we trace the effect of a onetime shock to the rer on the trade balance checking the j curve pattern. Pdf estimation of the marshalllerner condition and j.
Testing the marshalllerner condition in kenya brunel university. Pdf exchange rate and trade balance the case for jcurve. Sep 26, 2012 this observation points at the presence of an underlying volume effect which is the key driver of the trade balance growth. Asymmetric jcurve in the commodity trade between pakistan and. Pdf this study was commissioned to investigate for the presence of marshall lerner condition and j curve phenomenon in nigerias foreign. This corroborates the absence of j curve findings of the cointegration technique that real. However, despite the evidence against the ml condition, the consensus is that real devaluations do improve the balance of trade, though after a lag because of j curve effects. This paper seeks empirical evidence for the jcurve and the marshallerner condition for azerbaijan. Findings the empirical results suggest nonexistence of the jcurve effect at disaggregate and aggregate levels. Argentina, marshall lerner, j curve, cointegration and impulse response analysis.
Introduction despite voluminous literature, the effects of exchange rate changes on the balance of payments, particularly those related to the trade balance, are still to be understood clearly. This study was commissioned to investigate for the presence of marshall lerner condition and j curve phenomenon in nigerias foreign trade bustles. Error correction modeling and cointegration, eastern economic. The j curve hypothesis introduced by magee 1973 was established on this expectation of the ml condition. In this paper we examine the marshall lerner ml condition for the kenyan. If plotted over time, the trade response graph yields a j resembling line, thus the j curve terminology.
Empirical analysis of the determinants of trade balance in. Caporale and chui 1999 present further evidence regarding trade elasticities. Jul 12, 2001 a typical finding in the empirical literature is that import and export demand elasticities are rather low, and that the marshall lerner ml condition does not hold. The bounds testing approach to cointegration and error. Real exchange rate effects on the balance of trade. Over the last decade, china and malaysia have committed to exportled growth policy based on maintenance of their undervalued currencies. When the sum of export and import elasticities are greater than unity, the ml condition states that a deficit in the. The result shows that the rmb exchange rate has a negative significant impact substitution relationship on indonesian export to the us. Bilateral jcurve between slovakia and its major trading. Pdf the validity of marshalllerner condition in turkey.
The theoretical basis of the j curve comes from marshall and lerner. The validity of marshalllerner condition in turkey. A cointegration approach, authorhakan t\urkay, journaltheoretical and applied. J curve, marshall lerner, vector auto regression, trade balance, cointegration, impulse response function ms l chiloane is a masters student at the department of economics and econometrics, university of johannesburg, south. Estimation of the marshalllerner condition and j curve. Q4 period data for fourteen transition economy and turkey by means of panel cointegration analysis with multiple structural breaks under cross. J curve, marshall lerner ml condition, trade balance, exchange rate, nigeria, european union jel classification. The result also suggests a dissatisfaction of the marshall lerner condition indicating the j curve phenomenon does not exist. It revolves around the idea of how current account balance affects the price elasticity of net exports. Estimation of the marshalllerner condition and j curve dynamics. Marshall lerner ml condition is a phenomenon that describes increase in net exports through depreciation of domestic currency. However, there is no evidence for the j curve phenomenon, which suggests an initial deterioration in the trade balance in the short run following a. Qasim and adeel ahmad dar, journalcultural anthropology ejournal, year2016. Bilateral j curve, bounds testing, cointegration, sweden.
Conclusion we find evidence that marshall lerner condition holds true for brazilian trade balance, and no evidence of a shortrun j curve. Introduction the earlier literature on the relationship between terms of trade and trade balance in international economics concentrated on the investigation of marshall lerner ml condition. First, it provides an indirect test of the marshall lerner condition and second, it provides information about the length and depth of deterioration in the trade balance following devaluation. This hypothesis assumes that after the depreciation of the usd, the uss export products should become cheaper for consumers abroad. Table 6 from the validity of marshalllerner condition in. Mackinnon, j 1996 numerical distribution functions for the unit root and cointegration tests, journal of applied econometrics, 11, 601618. Jcurve dynamics and the marshalllerner condition core. The marshall lerner condition states that the sum of export and import demand elasticity has to be at least one and that the currency devaluation will have. In this condition, the ml condition would be manifested as j curve. Singapore commodity trade and the jcurve mohsen bahmani. Bahmanioskooee and niroomand 1999 have tested the marshall lerner condition for 30 developed and developing countries for the period 19601992. We show that a nonlinear model outperforms a linear model of our data set, and select a markovswitching, vector errorcorrection model i. Exchange rate and trade balance, jcurve, cointegration, autore.
Regarding the ml condition and the j curve effect in egypt, there are few studies that may. Marshall lerner condition and j curve effect an in depth look at the marshall lerner condition and j curve effect in determining whether a fall in the exch. Keywords egypt, depreciation, marshalllerner, elasticities, trade balance. Key words balance of trade devaluation the marshall lerner condition turkey exchange rate cointegration analysis. Revisiting the marshalllerner condition under processing. However, no studies have been carried out yet to test the marshall lerner condition in kenya, which represents an interesting case since its exports are relatively more diversified than those of the subsaharan african economies. Jcurve hypothesis, vecm with cointegration, narx, anfis, brazil, the. J curve dynamics and the marshall lerner condition. The determinants of pakistans trade balance lahore school of. Marshall lerner condition and j curve effect youtube. Utilizing j curve phenomenon has two advantages over using marshall lerner condition directly. Employing panel cointegraion techniques, it is found that effect of a devaluation of turkish currency on trade balance is country specific and there is j curve effect only in trade with japan. Although, marshall lerner condition satisfied in the long run, there is not found an evidence supporting j curve for turkey.
The impacts of currency depreciation on a countrys trade balance have been extensively examined in the empirical literature in the context of the marshall lerner condition and the j curve theory. Trade elasticities and the marshal lerner condition for india. The hypothesis of a j curve arises from the anecdotal evidence that, in response to exchange rate depreciation, the trade balance gauged in local currency worsens in the impact period, and then improves. Specifically, we use fractional integration and cointegration methods.
Bahmanioskooee and niroommand 1998 use stationary data and johansens cointegration analysis to provide new trade elasticities for almost 30 countries. J curve effect and the results show that there are significant differences in the. There have been many empirical studies on the existence of the j curve for many countries. In addition, marshall lerner condition is a further extension of bickerdike robinson metzler condition. The marshall lerner condition is at the heart of the elasticities approach to the balance of payments. Jcurve and the marshalllerner condition munich personal. The theories of marshall lerner and the j curve hypothesis acts as a foundation behind the analysis of the study. A modified marshall lerner condition under processing trade.
International trade has, for years, remained a key driver of economic. In this study, the validity of marshall lerner condition in turkey was investigated. As shown by marshall lenner condition, which was developed by marshall 1923, lerner 1944 and the theory of j curve curve effects of therelationship between exchange rate and trade balance, further developed and extended this argument. The theory of marshall lerner condition is a longterm aspect.
Pdf marshalllerner condition and j curve phenomenon. Both nations had succumbed to pressure of revaluation to depeg their currency against the usd, the same day in july 2005. The results of this study suggest that marshall lerner condition is verified but j curve. Pdf estimating the marshalllerner condition of china. However, despite the evidence against the ml condition, the consensus is that real devaluations do improve the balance of trade, though after a lag because of j. A typical finding in the empirical literature is that import and export demand elasticities are rather low, and that the marshall lerner ml condition does not hold. Recently, numerous papers have tested the marshall lerner condition and j curve. Based on the estimations, the marshall lerner condition is checked and, by means of impulse response functions, we trace the effect of a onetime shock to the real exchange rate on the trade balance not finding support for a j curve pattern in the shortrun. A cointegration approach, authorhakan t\urkay, journaltheoretical and applied economics, year2014, pages22. Different from other studies, togan and berument 2007 employed annual data covering the period of 19702005. This unique scenario motivated us to examine the dynamic nexus of exchange rate impact on bilateral export and import flows between. Testing the marshall lerner condition and the j curve phenomenon for pakistan. Overall, the results of this study suggest a fulfillment of the marshall lerner condition criterion, indicate the existence of the jcurve, and of the price and volume effects. Keywords rmb, marshall lerner condition, j curve, johansen cointegration, vecm.
Real effective exchange rate, broad money supply and trade. Exchange rate and trade balance, j curve, cointegration, autoregressive distributed lag approach. A traditional method of assessing the impact of currency devaluation on the trade balance prior to 1973 and of currency depreciation since 1973 has been one of estimating the wellknown marshall lerner ml condition. Pdf on apr 1, 2020, guo getao published estimating the marshall lerner condition of china find, read and cite all the research you need on researchgate. Marshall lerner ml condition developed by marshall 1923 and lerner 1944 is met. Results o f the study suggest that marshall lerner condition. Pdf estimation of the marshalllerner condition and j curve.
However it was verified that there is j curve for balance of trade of new zealand. After conducting unit root and cointegration tests, the estimated vecm. Bilateral jcurve between slovakia and its major trading partners. An elasticity approach and test of the marshall lerner condition for bilateral trade between the us and the g7 by taggert j. In this paper we examine the marshall lerner ml condition for the kenyan economy. Estimation of the marshall lerner condition and j curve dynamics for turkey, international journal of economics and financial research, academic research publishing group, vol. Dynamics of indias exchange rate and trade balance the.
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