Testing the Marshall-Lerner condition between the U.S. and other G7 member countries

Abstract

This paper examines the Marshall-Lerner condition for the six bilateral trade balances between the U.S. and Canada, France, Germany, Italy, Japan, and the U.K. from 1985 to 2016. The main contribution of this paper is that it tests for and incorporates nonlinearity into the balance of trade equation of Boyd, Caporale, and Smith (2001). My results indicate that price elasticities for exports and imports hardly satisfy the Marshall-Lerner condition in either of the two regimes. This means that higher real exchange rate depreciation may not necessarily improve the U.S. bilateral trade balance with all of the other G7 member countries.