Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration
European Business & Management
Volume 3, Issue 6, November 2017, Pages: 95-104
Received: Sep. 25, 2017; Accepted: Oct. 26, 2017; Published: Nov. 20, 2017
Views 1430      Downloads 108
Kedir Bekeru Genemo, Department of Statistics, Jimma University, Jimma, Ethiopia
Article Tools
Follow on us
This paper attempts an empirical investigation of the impact of exchange rate devaluation on major east African countries trade balance using the panel co-integration and panel group fully modified least square estimation technique from 1990-2014. Whether exchange rate devaluation improves or worsens trade balance has been at the centre of literature debate over time with varying empirical evidences for developed and developing nation. The results indicate that there exist a long-run stationary relationship between trade balance and its determinant- foreign and domestic income, nominal exchange rate as employed in the study. The research major findings include; nominal exchange rate induces inelastic and significant relation on trade balance in the long run. From this, the paper concludes that the trade balance deteriorate with increasing depreciation of exchange rate (as a value effect in east African countries). Again, it found that the coefficient of domestic income is negative and significant implying that the booming of real domestic income increases the purchasing power of their household to import more resulting trade deficit in the long run. Moreover the paper found that inelastic coefficient of nominal exchange rate in line with the theoretical Marshall-Lerner condition i.e. “the demand for import and export is inelastic then devaluation would further increase the trade deficit” [21]. Therefore based on the empirical findings the researcher recommends that the policy maker of these countries should take emphasis not to devaluate exchange rate more and selecting countries with higher income to make import and export elastic and improve trade balance in the long run.
Devaluation, Panel Co-Integration, FMOLS
To cite this article
Kedir Bekeru Genemo, Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration, European Business & Management. Vol. 3, No. 6, 2017, pp. 95-104. doi: 10.11648/j.ebm.20170306.11
Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abebe Belay (2014): Journal of Economics and Sustainable Development; Exchange Rate and Trade Balance; J Curve Effect in Ethiopia.
Adeyemi. A, Ogundipe Paul Ojeaga Oluwatomsin M. Ogundipe (2013): European scientific journal: Estimating the long run effects of exchange rate devaluation on the trade balance of Nigeria.
Alege, Philip O (2011): Exchange rate policy and Africa’s foreign trade: a panel Cointegration analysis.
Anette Andersson (2010): How Does Depreciation in the Exchange Rate Affect Trade over Time.
Bahmani-Oskooee, M. and Brooks, T. J. (1999): Bilateral J-Curve between U. S. and her Trading Partners.
Brown, W. B., & Hogendorn, J. S. (2000): International Economics – In the Age of globalization Peterborough: Broadview Press.
Chee-Wooi, H., & Tze-Haw, C. (2008): Examining Exchange rates exposure, J-curve and the Marshall-Lerner Condition for high frequency trade series between China and Malaysia.
Demirden & Pastine, I. (1995): Flexible Exchange rates and the J-curve: An alternative approach.
Daniels, J. P, & VanHoose, D. (2004): International Monetary and Financial.
Dornbusch, R., Fischer, S., & Startz, R. (2004): Macroeconomics (ninth edition.). New York: McGraw-Hill.
Economics (third edition): N. Thompson South-Western College Publishing.
Eric Kamoto (2010): the j-curve effect on the trade balance in Malawi and South Africa.
Elif Guneren (2014): European scientific journal: The effect of exchange rates on Exports and imports of emerging Countries.
Guptar-Kapoor, Anju and Ramakrishnan, Uma (1999): Is There a J-Curve? A New Estimation for Japan, International Economic Journal.
Grephas O. Ogutu (2014): International institute of social study: Effects of the real exchange rate on the trade balance in Kenya.
Glenville Rawlins (2008): Journal of Applied Business and Economics Montclair State University. Using Currency Devaluations as a Tool to Improve the Trade Balance: The Experience of Central America and the Caribbean.
Gartner, M. (1993): Macroeconomics under flexible exchange rate. Manchester.
Hacker, R. S., & Hatemi-J, A. (2003): Is the J-curve effect observable for small North European economies?
Isard, P. (1995): Exchange rate economics. Cambridge: Cambridge University Press?
Khan, M. and M. Knight (1988): Import Compression and Export Performance in Developing Countries. Review of Economics and Statistics.
Lerner A. P. (1944): The Economics of Control – Principles of Welfare Economics. New York: The MacMillian Company.
Lal, Anil K. and Lowinger, Thomas C. (2001): “J-Curve: Evidence from East Asia,” manuscript presented at the 40th Annual Meeting of the Western Regional Science Association February 2001 in Palm Springs.
Marshall, A. (1923): Money Credit and Commerce. London: MacMillian & Co. Ltd.
Marshall, A. (1997): Money Credit and Commerce. Bristol/Tokyo.
Moses Joseph (2013): International Journal of Business and Economics Research: Analysis the determinants of trade balance: Case study of Tanzania.
Onafowora, O. (2003): Exchange rate and trade balance in East Asia: Is there a J-curve, Economic Bulletin.
Pedroni, P. (1999): Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,” Oxford Bull.
Pedroni, P. (2000): Fully Modified OLS for Heterogeneous Cointegration Panel in Nonstationary Panels, Panel Cointegration and Dynamic Panels, Advances in Ec.
Rawlins and Praven (1993): Devaluation and the Trade Balance: The Recent Experience of Selected African Countries.
Vivek K. and Vishal M (2012): Reserve Bank of India Occasional Papers Is India’s Trade Balance Sensitive to Real Exchange Rates? A Bilateral Trade Data Analysis.
Zhang, W-B (2008): International trade theory- Capital, knowledge, economic, structure, money and prices over time, Berlin Heidelberg, Springer.
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
Tel: (001)347-983-5186