Testing the Short- and Long-Run Exchange-Rate Effects on the Trade Balance: The Case of Colombia

Abstract

This paper examines the role of exchange rates in determining the short-and-long-run trade balance behavior for Colombia. Conventional wisdom says that a nominal devaluation improves the trade balance. This conjecture is rooted in the Bickerdike-Robinson-Metzler (BRM) and MarshallLerner (ML) conditions. Empirically, the evidence for both developed and developing countries has been inconsistent in either rejecting or supporting the BRM or ML conditions. This paper tests these two conditions. It uses a regression model formulation which includes income and money so that the monetary and absorption approaches to the balance of payments are also examined. The econometric procedure used is the Johansen and Juselius' approach to estimation of multivariate cointegration systems. The main result is that exchange rates do play a role in determining the short-and-long-run behavior of the Colombian trade balance. Moreover, devaluation improves the trade balance, which is consistent with the BRM or ML conditions. The results show also that the long-run effect of an exchange rate devaluation on the trade balance is enhanced if accompanied by reduction in the money stock and/or an increase in income. The findings with respect to income and money variables did not uniformly reject or accept hypotheses from the absorption or monetary approaches either for the short run or the long run.JEL classification: C32; C52; E1; F31; F41

Effect of Depreciation of the Exchange Rate on the Trade Balance of Albania

“…The results showed that the GDP of Albania has a positive effect on the trade balance in the long term. Namely, research studies Gupta-Kapoor and Ramakrishnan (1999), Rincón (1999), Petrović and Gligorić (2010), Vika (2006) have confirmed our results that the real depreciation and income growth have a positive effect on trade balance. In addition, using vector error-correction model, or ECM, we explored the positive effect of real depreciation on the trade balance in the short-run, i.e.…”

“…the growth of foreign demand. Namely, research studies Rincón (1999), Petrović and Gligorić (2010), Vika (2006) have confirmed our results that the real depreciation and income growth have a positive effect on trade balance. The GDP growth of Albania from 1997 to 1999 experienced the largest decline as a result of political unrest that occurred then, to grow in the coming years, or more precisely to 2008.…”

The Impact of Exchange Rate on Tomato Trade: Evidence from Malaysia

“…Research by Humpage (1998) showed that all the exchange rate systems and managements are associated with balance of payments. Rincon (1998) also found that exchange rate has a significant relationship on both the short run as well as the long-run behavior of Columbia's trade balance. In another notable study, Baharumshah (2001) stated that a positive long-run relationship between exchange rate and trade balance has been found in the bilateral trade between Thailand and Malaysia with one of their major trading partner -Japan.…”

The Relationship between Exchange Rates and International Trade: A Review of Economic Literature

“…8 Several papers submitted by WTO members point to the impact of exchange rate shifts on bilateral trade or on the aggregate the trade balance. For example, Rincon (1999) finds that, over the period 1979 to 1995, more affected than trade in commodities; and participation in a currency union had rather strong positive effects on trade flows. Of particular interest is the work of Dell'Ariccia (1998), which looks at the impact of exchange rate volatility on the bilateral trade of EU 15 Members and Switzerland over twenty years, from the mid-1970s to the mid-1990s.…”