Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach

Arize, Augustine C.; Malindretos, John; Igwe, Emmanuel U.

doi:10.1016/j.iref.2017.02.007

Cited by 235 publications

(156 citation statements)

References 53 publications

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“…For some other application of these methods seeBahmani-Oskooee and Fariditavana (2015, 2016), andArize et al (2017).…”

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confidence: 99%

Do Imports and Exports Adjust Nonlinearly? Evidence from 100 Countries

Arize

Bahmani‐Oskooee

2018

Glob. Econ. J.

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A country is said to live within its international budget constraint if its exports and imports are cointegrated. Previous studies that tried to verify the cointegration between exports and imports used linear models and supported the theory in almost 50% of countries. In this paper, when we use the nonlinear ARDL approach and asymmetry cointegration method, we support the long-run link between imports and exports in 94 out of 100 countries in our sample. This study is not only the most comprehensive study in the literature, but it is also the first to show that, indeed, trade flows adjust in a nonlinear fashion.Example of studies that have failed to support cointegration between imports and exports include Baharumshah et al. (2003), who tested the hypothesis for Asian countries; Narayan and Narayan (2005), for 22 least developed countries; Tang and Alias (2005), for 27 member countries of the Organization of Islamic Conferences, who found support for cointegration in the four countries of Benin, Burkina Faso, Cameroon, and Guyana. Other studies rejecting cointegration between exports and imports include Tang (2006), who used data from Japan; Andreosso-O'Callaghan and Kan (2007), who examined the experiences of crisis-hit Asian countries; Laszlo and Pal (2008), who used Indian data; and Husein (2014), who examined data from nine Middle East and North African (MENA) countries and found evidence of cointegration between the exports and imports of Iran, Israel, Jordan, and Tunisia only.One common feature of all the above-mentioned studies is that they have assumed that the effects of exports (imports) on imports (exports) are symmetric or that the adjustment of trade flows is linear. However, there are reasons to believe that the effects could be asymmetric.Assume an X% increase in exports leads to a Y% increase in imports. The symmetry assumption implies that an X% decrease in exports will lead to a Y% decline in imports. However, if a country is more dependent upon imports than of inputs, that country may chose to borrow and not to allow its imports to decline by Y%, hence the asymmetric response of imports to exports.

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“…For some other application of these methods seeBahmani-Oskooee and Fariditavana (2015, 2016), andArize et al (2017).…”

mentioning

confidence: 99%

Do Imports and Exports Adjust Nonlinearly? Evidence from 100 Countries

Arize

Bahmani‐Oskooee

2018

Glob. Econ. J.

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“…Petrovic and Gligoric (2010) also find that exchange rate depreciation in Serbia improves trade balance in the long run, while giving rise to a J-curve effect in the short run. Arize et al (2017) examines the impact of real effective exchange rate on trade balance in eight Asian countries. His results suggest that, in the long run, a real depreciation in these countries improves the trade balance, but imply that the currency depreciation or devaluation can be successful over the long term only if the authorities are willing and able to accompany the exchange-rate policy with other appropriate policies to halt the process that started the trade imbalance.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Studies which investigate the effect of REER on trade balance found no conclusive results. Bahmani-Oskooee and Kutan (2009) investigated this effect for 11 east European countries individually and find no long-run relationship between real effective exchange rate and the trade balance, while Arize et al (2017) find that a real depreciation in investigated Asian countries improves the trade balance. Bleaney and Tian (2014) also find trade balance improvement after real depreciation in all investigated 87 countries, with slower adjustment for industrial countries.…”

Section: Introductionmentioning

confidence: 99%

The Adverse Effect of Real Effective Exchange Rate Change on Trade Balance in European Transition Countries

Begović¹,

Kreso²

2017

Zb.rad.Ekon.fak.Rij.

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“…However, empirical literature has reported mixed results at best in establishing a relationship between exchange rate changes and trade balance both descriptively and empirically [5]. In a reaction to this, Arize et al [4] opined that various authors modeling nonlinear dynamics with linear or symmetry specification might be the origin of the mixed views from various authors. Symmetry effect suggests that if exchange rate depreciation improves CBT, appreciation worsens it.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric effect of exchange rate changes on cross-border trade in Nigeria

Apanisile

Oloba

2020

Futur Bus J

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This paper investigates the asymmetric effect of exchange rate changes on cross-border trade in Nigeria. The investigation becomes necessary because several studies have reported insignificant results in attempting to establish a link between these two variables using symmetric specification. Whereas, there are strong evidence of nonlinear mean-reverting association because some exchange rate changes of the same magnitude exhibit different effects on other variables of interest. Having separated the real effective exchange rate into both depreciation and appreciation regimes using the partial sum processes based on logistic smooth-transition and exponential smooth-transition, results from the nonlinear autoregressive distributed lags show that exchange rate appreciation had a statistically significant negative relationship with cross-border trade in Nigeria. The study concludes that the relationship between real effective exchange rate and cross-border trade is asymmetric. (Depreciation and appreciation of equal magnitude do not have the same effect on cross-border trade in Nigeria.) The study recommends that policy makers should consider models that allow a nonlinear adjustment of exchange rates which may produce outcomes supporting an effective devaluation or appreciation policy, at least against some trading partners.

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Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach

Cited by 235 publications

References 53 publications

Do Imports and Exports Adjust Nonlinearly? Evidence from 100 Countries

Do Imports and Exports Adjust Nonlinearly? Evidence from 100 Countries

The Adverse Effect of Real Effective Exchange Rate Change on Trade Balance in European Transition Countries

Asymmetric effect of exchange rate changes on cross-border trade in Nigeria

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