Marshall-Lerner Condition Research Articles

Investigating The Validity of The Marshall-Lerner Principle and J-Curve Theory in Relation to Real Exchange Rates and Trade Imbalances: An Empirical Study of China's Economic Dynamics

According to traditional macroeconomic theory, meeting the Marshall-Lerner condition suggests that currency devaluation could positively impact the long-term trade balance. This implies that despite initial import cost increases, enhanced export competitiveness from a weaker currency eventually leads to trade balance improvements. However, short-term negative effects, known as the J-curve effect, may occur due to trade volume adjustments lagging currency devaluations. This study aims to assess the validity of the Marshall-Lerner condition in China's economy from 1995: Q1 to 2023: Q4 and evaluate the short-term J-curve effect's magnitude. Analyzing economic indicators and exchange rate fluctuations, the research confirms the validity of the Marshall-Lerner condition and supports the existence of the J-curve effect. These findings highlight the importance of nuanced currency policymaking for sustainable economic growth and stability, considering both short-term adjustments and long-term objectives. Key Words: Marshall-Lerner Condition, J Hypothesis, Foreign Trade.

Empirical analysis of the J-Curve and Marshall-Lerner condition: impacts of macroeconomic shocks on the Brazilian trade balance using a Bayesian SVAR Identified via heteroskedasticity

ABSTRACT This study examines the impacts of macroeconomic shocks on the Brazilian trade balance, disaggregated into five sectors, using a Bayesian SVAR model identified via heteroskedasticity. We find significant evidence supporting the Marshall-Lerner condition across all sectors analysed. Although we have not observed significant evidence supporting the J-curve, there is a higher probability of the phenomenon occurring than not occurring. Additionally, our findings indicate that a world GDP shock influences the domestic trade balance with the expected sign. A ‘pessimism’ shock regarding domestic economic activity leads to an improvement in the trade balance. Moreover, it is observed that an increase in GDP, even when caused by a supply shock, leads to a deterioration of the trade balance in the medium term.

Testing the J-Curve, Marshall-Lerner Condition and Thirlwall Hypothesis - An Empirical Evidence from Nigeria

Testing the J-Curve, Marshall-Lerner Condition and Thirlwall Hypothesis - An Empirical Evidence from Nigeria

Testing the J-curve, Marshall-Lerner condition and Thirlwall hypothesis - empirical evidence from Nigeria

Testing the J-curve, Marshall-Lerner condition and Thirlwall hypothesis - empirical evidence from Nigeria

The Marshall-Lerner Condition Deconstructed: Exploring Trade Impacts of Strategic PHP Depreciation

The Marshall-Lerner Condition Deconstructed: Exploring Trade Impacts of Strategic PHP Depreciation

Can national productions replace imports in West African countries? Estimation of the Marshall–Lerner–Robinson condition (MLRC)

PurposeThis article examines if the national productions of West African Economic and Monetary Union (WAEMU) countries can be substituted for the imports by testing MLRC in these countries.Design/methodology/approachThe Mundell–Fleming model (MMF) is the analytical framework adopted in this paper with import demand and export supply functions estimation borrowed to Thirlwall (1979). This study covers four countries in West Africa from 1990 to 2021. The estimation procedure used is an Autoregressive Distributed Lag (ARDL) approach to cointegration.FindingsThe findings reveal that there is a strong marginal propensity to import in the WAEMU countries. The hypothesis of a non-significant price effect on imports in the short-term is confirmed for several countries while only Togo satisfies the MLRC in the short and long run.Originality/valueThis study presents several originalities: (1) it evaluates MLRC with a clear analytical framework; (2) unlike other studies, this article quantifies the MLRC from a theoretical, econometric and empirical point of view; (3) this article presents the results country by country in order to reveal heterogeneity between countries; (4) this study adds to the Marshall–Lerner condition for the derivation of Robinson by considering a situation where initially the trade balance is not in equilibrium.

OIL PRICES, EXCHANGE RATES, AND THE TRADE BALANCE: EVIDENCE FROM KAZAKHSTAN AND RUSSIA

The original objective of this paper is to study the impact of the exchange rate on the trade balance for Kazakhstan and Russia. Baseline empirical results indicate that an exchange rate depreciation actually decreases exports and deteriorates the trade balance for these countries; this is the opposite of the traditional theory of the J-curve and Marshall–Lerner condition. The paper then explores why these major oil exporters do not conform to the theory. It argues that it is the oil price that affects both the exchange rate and the trade balance, thereby masking the true impact of the exchange rate on the trade balance. More formally, the paper augments the traditional theory to take into account the behavior of oil prices in the export and trade balance equations. The augmented theory posits that a decrease in the oil price leads to a real exchange rate depreciation and a decline in exports, thereby creating the positive correlation seen in the baseline results. In accordance with the augmented theory, the regression results suffer from omitted variable bias; when the oil price is taken into account, the results again support the theory.

Exchange Rate and Trade Balance in Nigeria: Testing for the Validity of J-Curve Phenomenon and Marshall-Lerner Condition

This study examined the validity of the J-Curve Phenomenon and Marshall-Lerner Condition in the Nigerian context using data from 1982-2020. The Autoregressive Distributed Lag Bounds test method of cointegration was employed for the analysis of short-run and long-run effects of exchange rate uncertainty on the trade balance. The long-run result endorsed the validity of the Marshall-Lerner Condition in Nigeria. Thus, a depreciation of the Naira improves the trade balance in the long run. However, the results of the short-run dynamics revealed that there is no J-Curve phenomenon in Nigeria. The study recommends diversification of exports to improve the performance of Nigeria’s non-oil exports. In addition, fiscal, monetary and exchange rate policies should be properly harmonized to tackle trade deficits. Furthermore, there should be more investment in Research and Development in Nigeria to improve the value of goods exported and the competitiveness of its exports in the arena of international trade.

Asymmetric Effects of Trade Openness on Malaysian Fish Trade Balance

Although Malaysia is a small open economy surrounded by the ocean, it still experiences a critical fish trade deficit. This study examines the nonlinear effects of trade openness on Malaysian fish trade balance from 1976 to 2016, using the Nonlinear Autoregressive Distributed Lag (NARDL) approach. The other independent variables applied in the model are the exchange rate and domestic income. Findings show that the variables are cointegrated. In the long-run, positive change in trade openness has a significant negative effect on the trade balance. The emphasis of the study is also placed on shreds of evidence of the long-run and short-run asymmetric effects of trade openness. Domestic income and depreciation of the exchange rate offer significant positive impacts on the trade balance. In the short-run, all the variables yield an opposite effect. The outcome of the exchange rate supports the J-curve effect and the Marshall-Lerner condition. This research may help the policymakers and traders to have a better understanding of the sector and thus develop suitable long-term strategies to improve the fish trade balance.

Improving Australia's trade balance: A case study of agro‐forest and fish products

AbstractThe impact of the exchange rate (ER) on the trade balance (TB) has been discussed for many years. However, the issue has not been discussed in sufficient depth, especially in relation to the TB of agricultural products. This paper will gauge this impact on Australia, which has much potential for agro‐based trade in the world market. We have applied the Bahmani‐Oskooee and Hosny's approach of the linear autoregressive distributed lag model to estimate the Marshall–Lerner condition (MLC) regarding the trade of Australian agro‐forest and fish (AFF) products with its five major partner countries. Quarterly data will be used for the period 1988Q1–2020Q4. Our findings support the MLC in case of the major share of Australian AFF trade. The implication is that if the market force depreciates Australian ER, the country's AFF TB will improve in the long‐run.

Stimulating Non-Energy Exports in Trinidad and Tobago: Evidence from a Small Petroleum-Exporting Economy Experiencing the Dutch Disease

The motivation for this study hinges around the fact that Trinidad and Tobago (T&T) is suffering from the Dutch disease which inadvertently hinders the growth of non-energy exports. This paper examines measures that can be adopted for a small petroleum-exporting economy to dampen the effect of Dutch disease by promoting non-energy trade. This paper is novel and contributes to the literature in using panel data for the T&T case, as it investigates the effect of a devaluation of the TT dollar in order to stimulate non-energy exports (a combination of agriculture and manufacturing trade). Note that previous studies would have examined the Marshall–Lerner condition on the aggregate trade balance which is heavily influenced by energy revenues. The panel autoregressive distributed lag (ARDL) method is used for ten of T&T’s main trading partners for the period 1991 to 2019 to establish findings. The results show that the Marshall–Lerner condition does not hold for aggregate trade in the long run, as expected. However, when non-energy trade is isolated, it is found that a devaluation of the TT dollar does have a positive impact on non-energy trade and the Marshall–Lerner condition holds. Other measures are also recommended to stimulate non-energy exports in the long run.

Exchange rate and Export of Bangladesh: Does Marshall-Lerner condition holds?

Export is expected to have a favorable impact on GDP growth, and the exchange rate is expected to have a major impact on export and thus export earnings. The relationship between exchange rate and export is a hotly debated topic in macroeconomics, and the goal of this research is to see if the Marshall-Lerner condition holds incase of Bangladesh that is if devaluation of domestic currency increase export earnings. Explanatory variables of the model in the study are the exchange rate, foreign income (WGDP), and domestic income (DGDP). Cointegration approaches; Error Correction model, Granger Causality test are used in this study to estimate the long and short-run impacts. With time series data from 1973Q3 to 2018Q2, we used the Error Correction Model and the Granger Causality Test. The findings of VECM support short-run exchange rate and export adjustments. The bidirectional causality between exchange rate and export is established using the Granger causality test.

Exchange rate and Export of Bangladesh: Does Marshall-Lerner condition holds?

Export is expected to have a favorable impact on GDP growth, and the exchange rate is expected to have a major impact on export and thus export earnings. The relationship between exchange rate and export is a hotly debated topic in macroeconomics, and the goal of this research is to see if the Marshall-Lerner condition holds incase of Bangladesh that is if devaluation of domestic currency increase export earnings. Explanatory variables of the model in the study are the exchange rate, foreign income (WGDP), and domestic income (DGDP). Cointegration approaches; Error Correction model, Granger Causality test are used in this study to estimate the long and short-run impacts. With time series data from 1973Q3 to 2018Q2, we used the Error Correction Model and the Granger Causality Test. The findings of VECM support short-run exchange rate and export adjustments. The bidirectional causality between exchange rate and export is established using the Granger causality test.

Investigating how exchange rates affected the Japanese economy after the advent of Abenomics

News of aggressive monetary easing by the Bank of Japan in late 2012 contributed to a 45 percent depreciation of the Japanese yen relative to the U.S. dollar. This paper investigates how the depreciation affected the Japanese economy. Exports responded much less than predicted, especially for sectors related to transportation equipment. Imports also responded less than predicted, and the sum of export and import elasticities are too small to meet the Marshall-Lerner condition. A depreciation raises returns for many Japanese stocks, with the response being largest for automobile stocks. A depreciation also raises aggregate Japanese stock returns by twice as much after 2013 as before. This indicates that responses that corporate Japan made to swings in the yen such as transferring production abroad have been good for profitability.

Aggregation, asymmetry, and common factors for Bangladesh’s exchange rate–trade balance relation

We present an application of the recent CS-ARDL methodology in the context of a country’s trade balance–exchange rate relationship. The trade balance is expected to deteriorate first before improving in response to currency depreciation and vice versa, widely known as the J-curve effect satisfying the Marshall–Lerner condition in the long run. Combining bilateral and aggregate analysis in one setting by constructing specific panel data with one reference country, we find that aggregate analysis is sensitive to our allowance for heterogeneity. Estimates using the aggregate time series data show evidence favoring the J-curve relation, whereas the aggregate analysis resulting from the panel time series data shows that currency appreciation improves trade balance in Bangladesh in the long run, which goes against the Marshall–Lerner condition. With the reference of the existing commodity-level literature, we argue that this atypical scenario lines with the realities of a ‘small’ economy like Bangladesh, where her exporters attempt to maintain their market share with some government support. The study provides essential policy suggestions by identifying the significant contributors to Bangladesh’s trade balance–exchange rate relationship: China, Japan, and Singapore.

Are exports and imports of India’s trading partners cointegrated? Evidence from Fourier bootstrap ARDL procedure

The paper assesses the long-run relationship between India’s exports and imports with its 21 major trading partners using bootstrap autoregressive distributed lag bounds test procedure with a Fourier function. The study uses monthly data for the period 2014 (Month 01) to 2020 (Month 02). The empirical results show cointegration for 6 countries if imports are used as the dependent variable but not when exports are used as a dependent variable. However, for the remaining countries, no cointegration between exports and imports was found. This indicates that India’s efforts to reduce its bilateral imbalances through trade policies with these countries may not be appropriately targeted. Having established a long-run relationship, the study estimates a disaggregated bilateral import demand function by employing a linear and nonlinear autoregressive distributed lag model to investigate the asymmetric impact of the relative price changes on the import demand of India with her trading partners. Marshall–Lerner condition is satisfied for India’s trade with Kuwait and Germany in case of linear autoregressive distributed lag model and with Qatar, Kuwait and Germany in case of nonlinear autoregressive distributed lag model. Cumulative asymmetries are established for Indo-Kuwait trade.

Policy Responses to COVID-19 and the Marshall-Lerner Condition: Lessons from the Crisis in Argentina

The current crisis dominates everything from commerce to day-to-day life. But it will pass over within a relatively short space of time and the recession seems likely to reverse the long-standing pattern. Given the gravity of the circumstance, nations have been constrained to undertake unusual approach arrangements. This article proposes a framework of the COVID-19 effect following analysis and comparison of the most prominent concepts of the economic crisis and devaluation. Our paper helps to identify the positions of each of these concepts with regard to the balance trade and Argentina prosperity. This study enriches the literature on the Marshall-Lerner condition and J-curve effect by providing analysis of the devaluation scenario. Finally, areas of application and policy implications of the COVID-19 effect are explored in order to guide future research on the developing countries.

Policy Responses to COVID-19 and the Marshall-Lerner Condition: Lessons from the Crisis in Argentina

Policy Responses to COVID-19 and the Marshall-Lerner Condition: Lessons from the Crisis in Argentina

Is There a J-Curve Effect in Sierra Leone? An Empirical Analysis with VECM

This paper examines the relationship between exchange rate and trade balance in determining whether the J-Curve phenomenon holds in the short and long-run for Sierra Leone during the period 2002Q2-2019Q4. The econometric technique commenced with an assessment of unit root to ascertain the order of Unit Root and followed by an Unrestricted Vector Autoregressive (VAR) estimation. The procedure leading to using Vector Error Correction Model (VECM) was confirmed through Johansen Cointegration test. The result suggests long-run relationship running between exchange rate and trade balance for all three model equations, but weakly for the Trade Balance Model, which is also attested in the impulse response shock for trade balance and real effective exchange rate. The Marshall-Lerner (ML) condition was also satisfied, with the joint elasticity for Export and Import summing up to more than one. The short-run dynamic situation for Sierra Leone was not satisfied with the Wald Tests for all three models—this could be due to internal macroeconomic bottlenecks associated with weaknesses in the real sector. The findings for this study are relevant for Central Bank policy formulation and fiscal consolidation efforts. It is highly recommended that domestic production is boosted to ascertain macroeconomic stability in the economy.

Real exchange rate and trade balance in Turkey: Evidence from heterogeneous panel data

In this study, the effect of real exchange rate on bilateral trade balance between Turkey and its 25 main trade partners is investigated for the period of 1996-2015 with heterogeneous panel data techniques. Trade balance model is estimated by using Mean Group (MG) estimator, which allows parameter heterogeneity, Common Correlated Effects Mean Group (CCEMG), and Augmented Mean Group (AMG) estimators, which both allow cross-section dependency and heterogeneity. Results indicate that the real exchange rate elasticity of the trade balance ranges between -0.40 and -0.45 and Marshall-Lerner (ML) condition is valid for Turkey. According to the results, the foreign income elasticity of trade balance ranges between 1.54 and 2.84, while for domestic income elasticity, it is found between -0.75 and -1.38. Country-specific results show that ML condition is valid for the USA, Belgium, Spain, Switzerland, Romania, and Russia at the bilateral level according to both CCEMG and AMG estimators.