Abstract
This paper analyses the effects of real exchange rate on the trade balance in Cote d’Ivoire using times series from 1975 to 2017. Although many studies have investigated this issue, most of them assume that this relationship is symmetric. This paper relaxes this assumption employing the nonlinear autoregressive distributed lag (ARDL) model by Shin, Yu and Greenwood-Nimmo (2014). The results show that trade balance responds stronger to negative shocks in real exchange rate than to positive ones in the long-run, while the short-run response of trade balance is symmetric.
Highlights
Since the adoption of floating exchange rates in the 1970s, the effectiveness of exchange rate depreciation in improving the trade balance is a subject of intense debate among economists
To depict the presence of a long-run relationship between the variables, we rely on the nonlinear autoregressive distributed lag (ARDL) (NARDL) approach introduced by Shin et al (2014) as an extension of the ARDL bounds testing approach developed by Pesaran, Shin and Smith (2001)
The results reveal a negative and significant coefficient on the real effective exchange rate, indicating that real exchange rate depreciation causes an improvement in the trade balance in the short-run
Summary
Since the adoption of floating exchange rates in the 1970s, the effectiveness of exchange rate depreciation in improving the trade balance is a subject of intense debate among economists. While some studies supported the view that real exchange rate depreciation improves the trade balance (e.g., Kale, 2001; Baharumshah, 2001; Bahmani-Oskooee, 2001; Boyd, Caporale, & Smith, 2001; Lal & Lowinger, 2002; Musila & Newark, 2003; Ogbonna, 2011; Igue & Ogunleye, 2014), many others found a negative or insignificant relationship between the two variables (e.g., Rose & Yellen, 1989; Rose, 1990; Bahmani-Oskooee, 1991; Upadhyaya & Dhakal, 1997; Shahbaz, Awan, & Ahmad, 2011; Akpansung & Babalola, 2013; Oyinlola, Omisakin, & Adeniyi, 2013; Eke, Eke, & Obafemi, 2015)
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