Relative responsiveness of trade flows to changes in exchange rate and prices in selected ECOWAS countries: Does Orcutt hypothesis hold?

Abstract

This paper examines the elasticities of both export and import models in selected ECOWAS countries employing quarterly series from 1980Q1 to 2007Q4. Specifically, the objective of the paper is grounded in the need to evaluate the relative responsiveness of trade flows to changes in real effective exchange rate and prices among these countries. The empirical evidence from this paper indicates evidence of long run relationships among the variables for the selected countries. Though income, exchange rate and relative prices are found to be significant in explaining the behavior of trade flow among the selected countries, the result rather undermines the validity of the Orcutt hypothesis in the case of exports models in these countries. The general pattern among the selected countries indicates that exports flow responds quicker to relative prices than it does to exchange rate. Results from the estimated imports model, on the contrary, show that imports flow responds to exchange rate quicker than import prices. The results, therefore, make a clear case for mixed country specific evidence with respect to relative responsiveness of trade flows to changes in exchange rate and prices. There is need for further investigation of the validity of Orcutt hypothesis in the developing countries. Key words: Trade flows, exchange rate, relative prices, Orcutt hypothesis, ARDL bound test.