Long-Run Price Elasticities and the Marshall–Lerner Condition: Evidence from Egypt–EU Commodity Trade

Abstract

Currency devaluation or depreciation is said to improve a country's trade balance in the long run if the Marshall–Lerner condition is satisfied. Previous research that has attempted to provide an empirical estimate of the condition has used aggregate trade data between one country and the rest of the world or between two countries at bilateral level, and has provided mixed results. Both groups are said to suffer from aggregation bias. To address this bias, we disaggregate the trade data between two countries, Egypt and the EU, and estimate the condition at commodity level for 59 industries that trade between the two regions. The results provide support for the condition in 39 industries. Included among 39 industries are small and large, comparative advantage and disadvantage industries.