Marshall-Lerner Condition Research Articles

The non-linear impact of monetary policy on international reserves: macroeconomic variables nexus

This paper employs panel smooth transition regression models to investigate the nonlinear effects of two monetary policy proxies (i.e., real exchange rate return and real interest rate differential) on the international reserves—macroeconomic variables nexus. The panel data set includes the fourteen G-20 countries during the period 1991–2012. Empirical results show that the marginal effects of the macroeconomic variables (savings, terms of trade, public debt, capital account liberalization, economic growth, and trade openness) on international reserves are non-linear and vary with time, the proxies and countries, not linear and constant derived from traditional linear model. Currency devaluation policy (against the US dollar) can non-linearly enlarge the positive contribution of trade openness and public debt on international reserves, and non-linearly reduce the negative impact of terms of trade on international reserves, as the Marshall–Lerner condition holds. Expansionary monetary policy (through the decrease in domestic interest rates) can strengthen the positive effects of public debt, trade openness, and economic growth on international reserves. The precautionary and mercantilist views of reserves holdings are partially supported.

Testing for Marshall-Lerner Condition: Bilateral Trade between Pakistan and its Major Trading Partners”

Testing for Marshall-Lerner Condition: Bilateral Trade between Pakistan and its Major Trading Partners”

THE IMPACT OF REAL EXCHANGE RATE ON TRADE BALANCE

The purpose of this study is to investigate the relationship between the trade balance and the real exchange rate for bilateral trade in merchandise goods between Indonesia and the US, Japan and Singapore as its major trading partner. This article employs the elasticity approach to analyze such a relationship. Johansen multivariate cointegration is proposed to examine the impact of depreciation of real exchange rate on trade balance. To tests for J-curve, a generalize impulse response function generated from a vector error- correction model is applied. Quarterly data over the period 1988:1-2003:4 are used for the analysis. Our findings demonstrate that the real exchange rate has a positive impact on the bilateral trade balance between Indonesia and Japan and Singapore. The generalized Marshall-Lerner condition, however, seems to hold only for the bilateral trade balance between Indonesia and Japan. This study also finds that there is an evidence for J-curve for Indonesia’s bilateral trade balance with the Japan. Keyword: real exchange rate, trade balance, Marshal-Lerner Condition and J-curve

Exchange rate sensitivity of the USA-Singapore trade flows: evidence from industry data

The Marshall-Lerner condition is a condition that is judged to assess the long-run effects of currency depreciation on the trade balance. It is obtained by estimating price elasticities of a country's demand for imports and rest of the world demand for its exports. When the analysis is extended to bilateral level between two countries using aggregate bilateral trade data or bilateral commodity data, due to lack of prices researchers directly relate inpayments and outpayments to the exchange rate in addition to scale variables. In this paper we try to determine the short-run and long-run effects of real depreciation of the dollar on inpayments of 141 US industries that export to Singapore and 59 US industries that import from Singapore. While we find that most industries are affected in the short-run. However, the short-run effects last into the long-run only in 45 exporting industries and 15 importing industries. Most of the affected industries are small.

Koreas Inpayments and Outpayments with the Rest of the World: Is There Room for Currency Manipulation?

In estimating the well-known Marshall-Lerner condition, researchers have used trade volume data between one country and rest of the world. To reduce aggregation bias in these studies, it is proposed to use trade data at commodity level. However, due to lack of import and export prices to obtain trade volume at commodity level, researchers have used trade values instead. These value models are used to assess the direct impact of currency depreciation on inpayments and outpayments of an industry. In this paper we assess the sensitivity of inpayments and outayments of 148 Korean industries that trade with the rest of the world. We were able to identify 20 Korean exporting industries and 38 importing industries that will benefit from won depreciation in the long run.

Demand and distribution in integrated economies

Aggregate demand is influenced by the functional income distribution of an economy and that of its trading partners. This relationship between income distribution and output is analyzed in a short-run two-country Neo-Kaleckian model. The effects of devaluation and redistribution are discussed in detail. Trade and redistribution within one country interact and output increases or decreases with changes in either depending on the specific distributional and exchange rate movements. The Marshall-Lerner condition is shown to be equivalent to the assumption of expansionary devaluation. If devaluation increases output, national redistribution policy toward wage earners is also more likely to be expansionary. (author's abstract)

Welfare Reversals in a Monetary Union

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices, and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent. (JEL E31, E52, E62, F33, F41)

Commodity and Non-Commodity Trade Dynamics in Colombia

This paper studies the dynamics between the Colombian external trade sector and real exchange rate variations of the Colombian currency within the theoretical framework of the Marshall-Lerner condition. To comprehensively study these dynamics, the analysis is disaggregated for commodity trade, i.e. goods with prices set in the international market, and trade of non-commodities, for which prices are formed at an exporter-importer level. In addition, Colombian bilateral trade with the U.S. and Venezuela, its two main trading partners, is provided distinct attention alas to consider two distinct trade scenarios, one where a country transacts internationally in its local currency versus another where the country does not. The M-L condition holds for the cases of Colombian non-commodity trade between with the U.S., and with Venezuela. Colombian commodity trade showed being unresponsive to changes in the Colombian terms of trade.

Competitive devaluations and the trade balance in less developed countries: An empirical study of Latin American countries

Policymakers in less developed countries (LDCs) usually support competitive devaluations to improve the trade balance (TB). In this paper, we estimate the effects of appreciated and depreciated real exchange rates (RER) in the TB of Argentina and Brazil during the period, 1990–2010 using co-integration tests for non-stationary data and vector error correction models (VECM). The estimations confirmed the existence of a long-term relationship among the TB and the RER and foreign and domestic incomes for the countries during opposite RER policies. Based on our estimations, the Marshall–Lerner condition held during periods of more flexible and depreciated RER, and the estimation of the general impulse response functions demonstrated that devaluations in both countries did not follow a J-curve pattern in the short-term.

The relationship between the exchange rate and the trade balance in South Africa

The purpose of this paper is to test the existence of the J-curve effect and to show whether the Marshall–Lerner condition holds in the South African manufacturing sector. Using quarterly data from 1995 to 2010, the study uses the vector error correction modelling technique as well as impulse response functions to attain the research objectives. The results show that a long-run equilibrium relationship exists between the manufacturing trade balance and the three explanatory variables: real effective exchange rate, real domestic and foreign income levels. Overall, the results show that a depreciation in the domestic currency results in a deterioration in the manufacturing trade balance in the short run, and that this is followed by an improvement in the long run. The study finds evidence of the existence of the J-curve in the South African manufacturing sector. The long-run dynamics suggest that the Marshall–Lerner condition holds.

Testing the Marshall-Lerner Condition in Kenya

In this paper we examine the Marshall-Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export-import ratio and relative (US) income for the time period 1996q1 - 2011q4, and employ techniques based on the concept of long memory or long-range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well-defined cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilizing influence on the balance of payments through the current account without the need for high interest rates.

Impact of Real Exchange Rate on Trade Balance in Nigeria

AbstractThe study investigated whether the depreciation of exchange rate has a favourable impact on trade balance in Nigeria, based on the Marshall–Lerner (ML) condition. The Johansen method of cointegration and vector error correction methodology (VECM) was employed to investigate the existence of a long‐run relationship between trade balance and the specified set of independent variables. The results confirm the satisfaction of the Marshall–Lerner condition in Nigeria, implying that depreciation of the exchange rate has a positive effect on trade balance in the long run. The study also established that a one per cent depreciation in the exchange rate would improve trade balance by 1.16 per cent. In the light of these findings, the study recommends a gradual depreciation of the exchange rate, which should be accompanied with export policy that encourages domestic production of non‐oil products for exports.

The Effects of Tajikistan’s Accession to the Common Economic Space of Belarus, Kazakhstan, and Russia on Its Agricultural Sector Under Official and Depreciated Exchange Rates

Tajikistan is planning to join the Common Economic Space (CES) of Belarus, Kazakhstan, and Russia in order to benefit from free movement of capital, goods, especially the labour force. Labour migrants abroad are equivalent to 15 percent of country’s population, 28 percent of the labour force, and 50 percent economically active population. Migrant remittances in Tajikistan are the main drivers of economic growth that induces currency appreciation. This paper, using a Partial Equilibrium Model, assesses the effects of Tajikistan’s accession to the CES on the country’s agricultural sector at official and depreciated (experimental) exchange rates. The latter enables testing the Marshall-Lerner Condition (MLC) and are calling to emphasize the cost of remittances-induced currency appreciation to producer, consumer, state budget, agricultural value added and balance of trade. The overall welfare effects of CES accession on the agricultural sector are positive under both exchange rates. Producer and overall gain at depreciated exchange rate exceeds the gain at official exchange rate by 34 percent, while consumers gain almost 2.9 times less under depreciated exchange rate. Budget losses are 15 percent less at depreciated exchange rate rather than the official one. Producer and consumer gains, under both exchange rates, prevail over budget losses, therefore an overall gain will be ensured. The value of agricultural production in scenario, ceteris paribus, almost two times less at official exchange rate (14 percent) than under the depreciated one (27 percent). Furthermore, the deterioration balance of trade is smaller at depreciated exchange rate, thus, the MLC is met.

Price and income elasticities: evidence from commodity trade between the U.S. and Egypt

Elasticity approach to balance of payments postulates that a country can enjoy an improvement in its trade balance in the long run if sum of import and export demand price elasticities exceed unity, a condition known as the Marshall-Lerner condition. Previous research tested this condition either using aggregate trade data between one country and rest of the world or between two countries and provided mixed results. They are all said to suffer from aggregation bias. To remove the bias, in this paper we concentrate on trade flows of two countries, i.e., the U.S. and Egypt and disaggregate their trade flows by commodity. The estimates reveal that the ML condition is met in 28 out of 36 industries that trade between the two countries.

Welfare Reversals in a Monetary Union

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.

Testing for Marshall-Lerner Condition: Bilateral Trades between Malaysia and Trading Partners

In this paper, empirical approaches are applied to test the validity of Marshall-Lerner condition, i.e. if devaluation in real exchange rate helps to improve the trade balance of domestic country. The analyses are focused on five pairs of bilateral trades between Malaysia and its main trading partners of China, EU, Japan, Singapore and U.S. respectively. Applying the Least Square and Fully Modified Least Square approaches, our results fail to show the validity of Marshall-Lerner condition in all five pairs of bilateral trades. However, our results show that higher income level of trading partners may lead to improvement in the trade balance of domestic country.  period of 1980-2012. We fail to prove the validity of Marshall-Lerner condition in all five pairs of bilateral trades. Our results reveal that higher income of foreign trade partner may improve the trade balance of domestic country.

Real Exchange Rate Volatility on the Short- and Long-Run Trade Dynamics in Colombia

The short- and long-run implications of real exchange rate volatility on Colombian bilateral trade commodities and non-commodities with its major trade partners are analyzed from the perspectives of the Marshall-Lerner condition, a cointegration relation with other aggregate variables, and the J-curve hypothesis. Long-run equilibrium on the Colombian bilateral balance of trade with a country is more common when the trade volume is denominated in terms of one of the world's main currencies—as is the case of commodity trade and trade with a country whose national currency is one of these currencies. No evidence of the J-curve was found in any of the analyzed Colombian bilateral balances of trade. Opposite to the predictions of the J-curve hypothesis, more common are the scenarios of short-run improvements in the bilateral trade balances following a devaluation than are those with instantaneous declines. Improvements in the terms of trade are found to have a long-run deteriorating impact on the Colombian balance of trade, especially in the case of non-commodity trade. Policy makers should consider that continuous improvements in the Colombian terms of trade, as the ones recently observed, will ultimately be a detriment to the country's current balance of trade surplus.

Bilateral J-Curve between India and Her Trading Partners: A Quantitative Perspective

This study examines the short-run and long-run effects of real exchange rate changes on India’s trade balance vis-à-vis four of her major trading partners, viz., the US, the UK, Japan and Germany within a cointegrating vector error correction model. Cointegration estimates suggest a long-run equilibrium relationship among trade balance, real exchange rate, domestic and foreign income in each country. This study also applied generalized impulse response functions to trace the effect of a one-time shock to the real exchange rate on trade balance. Although considerable variations exists in the results, overall, the generalized impulse response functions suggest that J-curve effect is visible in India’s bilateral trade with both Japan and Germany, but the Marshall-Lerner condition appears to hold in the context of India-Germany trade. On the contrary, we did not get J-curve in India’s trade with the US, and the UK, rather we got S-curve effect in India-UK trade.

Welker's Negative-Inelastic Marshall-Lerner Condition

Welker provides a simple proof of the Marshall-Lerner Condition, this paper points out some flaws in his derivation. His definition of excess demand is wrong. Excess demand and excess supply are equivalent. A correct trade model does not contain excess demand or excess supply.

Is there a J-curve for Azerbaijan? New evidence from industry-level analysis

This paper estimates the J-curve for Azerbaijan using quarterly industry-level data over the 2000–2009 period. Empirical results show that in 3 of the 10 strategic industries there is strong evidence for the fulfilment of the Marshall–Lerner condition, as the trade balance improves in the long run in reaction to a currency devaluation. In most industries the J-curve pattern is observed in the short run. All 10 cases exhibit long-run cointegration and are stable according to the CUSUM and CUSUMSQ stability tests. These findings are largely consistent with the existing literature on the Azerbaijani J-curve and carry important policy implications.