Trade Elasticities, Commodity Prices, and the Global Financial Crisis

Abstract

The effect of the global financial crisis on the international trade patterns of developed countries has been one of the main focuses of recent scholarship. However, world trade depends evermore on emerging markets increases every day. Therefore, it is important to study the level of the negative effect of the crisis on emerging economies and the level of their recovery potential. This paper empirically studies the effects of the financial crisis on trade elasticities of BRIICS (Brazil, Russia, India, Indonesia, China, and South Africa) countries and Turkey. The imperfect substitute model (Goldstein & Khan, 1985) for the export and import demand functions is used. Additionally, the extended model is estimated where commodity price index is employed. The autoregressive distributed lag (ARDL) approach to cointegration is applied to test the cointegration relationships between exports and imports and their determinants, and in order to estimate the export and import elasticities in the countries under examination. The empirical results provide enough evidence to conclude that changes in the exchange rate and in commodity prices did not play significant role in export and import demand functions before and after the global financial crisis. However, foreign and domestic incomes are found highly significant and elastic in export and import demand functions, respectively. It is found as well that the global financial crisis had increasing effect on export and import responsiveness to foreign and domestic incomes respectively, except for Turkey and Brazil in the export demand function and South Africa in the import demand function.