Exchange Rates and Trade Balance Adjustment: A Multi-Country Empirical Analysis

Abstract

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Does trade openness influence the real effective exchange rate? New evidence from panel time-series

“…The question posed in this regard is whether a nominal devaluation with actual effects on the REER improves the trade balance. In general, the answer to this question has been positive (Bleaney and Tian 2014;Brada et al 1997;Himarios 1989;Narayan 2006;Shirvani and Wilbratte 1997). 2 For the purpose of our study, though, it seems relevant to ask the inverse question: does the trade balance have an effect on the REER?…”

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

“…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. Falk (2008) investigates cross-country differences between industrialized countries and finds that depreciation of REER index leads to an improvement in trade balance, though in countries with trade balance deficit it is much less sensitive to movements in the REER index.…”

“…Fixed effect model is usually applied for trade balance equation in multi-country empirical analysis (Falk, 2008;Bleaney and Tian, 2014). Falk (2008) derives the trade balance equation from theoretical model introduced by Goldstein and Khan (1985).…”

“…Bahmani-Oskooe and Kutan (2009) control for the same variables as Falk (2008) except fiscal balance. Bleaney and Tian (2014) control for log-changes of REER, terms of trade, GDP growth, country and time fixed effects. Additionally, the control for the foreign direct investment (as a percentage of GDP), labour productivity and EU and EMU membership has been conducted.…”

“…Regarding the exchange rate misalignments, the empirical results analysed in Auboin and Ruta (2011) mostly confirm that short-run effects can exist, but their size and persistence over time are not consistent across different studies and the impact again depends on number of features. Bleaney and Tian (2014) use a large dataset of 87 countries to investigate differences between three country groups: industrial, developing and emerging. Their findings suggest trade balance improvement after real depreciation in all countries, with slower adjustment for industrial countries.…”