Marshall lerner condition and j curve effect an in depth look at the marshall lerner condition and j curve effect in determining whether a fall in. The validity of marshalllerner condition in turkey. Abstract growing trade deficit has been one of the major problems of the turkish economy to date. The hypothesis of a j curve arises from the anecdotal evidence that, in response to exchange rate depreciation, the trade balance gauged in local currency worsens in the impact period, and then improves. There is not an agreement about studies in which the validity of marshall lerner. Relationship between zambias exchange rates and the trade. Trade elasticities and the marshal lerner condition for india. Exchange rate and trade balance, j curve, cointegration, autoregressive distributed lag approach. The analysis reveals the fact that for most of the. Pdf estimation of the marshalllerner condition and j.
This is because in the short run, there will be few extra exports sold when prices fall people overseas do not react immediately and. The validity of marshall lerner condition in turkey. J curve, marshall lerner ml condition, trade balance, exchange rate, nigeria, european union jel classification. Based on the estimations, the marshall lerner condition is examined and, by means of impulse response functions, we trace the effect of a onetime shock to the rer on the trade balance checking the j curve pattern. J curve dynamics and the marshall lerner condition. Jcurve and the marshalllerner condition munich personal. A typical finding in the empirical literature is that import and export demand elasticities are rather low, and that the marshall lerner ml condition does not hold. Marshall lerner ml condition postulates foreign exchange market stability if sum of price elasticities of demand for export and demand for imports, in absolute terms, is greater than unity. Simultaneity between export and import flows and the. This video lesson is part two of a lesson on the marshall lerner condition and the j curve. Pdf marshalllerner condition and j curve phenomenon. According to the marshalllerner condition, the sum of trade elasticities. Matesanz and fumorolas 2009, using multivariate cointegration tests and errorcorrecting models to obtain the determinants of the argentinean balance of payments, find no empirical support for maintaining the marshall lerner condition or existence of the j curve. The result also suggests a dissatisfaction of the marshall lerner condition indicating the j curve phenomenon does not exist.
Using the johansen and johansen and juselius cointegration method we test the marshall lerner condition for bangladesh for the period 19852014. Introduction the earlier literature on the relationship between terms of trade and trade balance in international economics concentrated on the investigation of marshall lerner ml condition. In this paper, we reexamine the relationship between trade flows, real effective exchange rates, and incomes by using the bilateral trade flows of 33 countries that form more than twothirds of total world trade. If is equal to zero this means that there is no cointegration. The j curve thus stands as a shortrun departure from marshall lerner condition. In this paper we examine the marshalllerner ml condition for the kenyan. Especially, korean won depreciation improves koreaus trade balance according to the marshall lerner condition while the j curve effect between korea and japan exists with a little improvement of deterioration of trade balance followed by korean won depreciation. Some new insights international journal of economics and empirical research, vol. The main purpose of this study is to investigate the validity of marshall lerner condition and the existence of j curve for the turkish economy. Empirical estimation of the marshalllerner condition in. Assistant professor department of economics providence college sullivan hall 104 providence college 549 river avenue providence, ri 02918, u. Empirical analysis of the determinants of trade balance in.
Many industrial countries face current account problems and the united states is not an. Lecture notes 6 real exchange rates and the trade balance. In order to analyze the j curve, the trade balance export imports is plotted on a line graph for the 31 year period. After conducting unit root and cointegration tests, the estimated vecm results show that marshall lerner condition holds for the turkish case.
Overall, the results of this study suggest a fulfillment of the marshall lerner condition criterion, indicate the existence of the j curve. Although, marshall lerner condition satisfied in the long run, there is not found an evidence supporting j curve for turkey. The marshall lerner condition shows the conditions under which a change in the exchange rate of a countrys currency leads to an improvement or worsening of a countrys balance of payments. Testing for the validity of marshall lerner condition and j curve hypothesis in turkey piskin, sercan lu in lund university nekn01 20141 department of economics. Johansen and juselius approach for estimation of multivariate cointegration. Testing the marshall lerner condition in kenya september 2012. This is the model that is implicit in the boxjenkins method. Estimation of the marshalllerner condition and j curve. In contrast, we find that the marshall lerner conditions are fulfilled in the case of bilateral trade with austria. Bahmanioskooee and niroommand 1998 use stationary data and johansens cointegration analysis to provide new trade elasticities for almost 30 countries. Marshalllerner condition, azerbaijan, jcurve, real.
Pdf estimation of the marshalllerner condition and j curve. Different from other studies, togan and berument 2007 employed annual data covering the period of 19702005. A traditional method of assessing the impact of currency devaluation on the trade balance prior to 1973 and of currency depreciation since 1973 has been one of estimating the wellknown marshall lerner ml condition. Marshalllerner condition and the balance of payments. The j curve phenomenon first appeared in magee 1973. Marshall lerner condition the marshall lerner condition also called the marshall lerner robinson, hereafter, mlr, condition is at the heart of the elasticities approach to the balance of payments. Pdf on may 1, 2018, ilyas siklar and others published estimation of the marshall lerner condition and j curve dynamics for turkey find, read and cite all the research you need on researchgate. The purpose of this paper is to study empirically the dynamics of turkish bilateral trade between turkey and her nine trading partners, in addition to aggregate trade balance data. If plotted over time, the trade response graph yields a j resembling line, thus the j curve terminology. Marshalllerner condition, current account deficit, cointegration, error. Munich personal repec archive j curve dynamics and the marshall lerner condition.
This finding using aggregate data to test the marshall lerner condition is in line with that of bahmanioskooee and alse 1994 who could not establish cointegration between pakistani trade balance and the. Results of the study indicate that marshall lerner condition does hold in the long run for pakistan but not in the short run, thus supporting the phenomenon of j curve. The marshall lerner condition shows that if absolute value of price elasticity of export and import demand is greater than unity, devaluation will improve trade balance. Import and export demand, cointegration, vector error cor rection. The result shows that the rmb exchange rate has a negative significant impact substitution relationship on indonesian export to the us. Furthermore, bahmanioskooee and kantipong 2001 test the j curve phenomenon between thailand and her larger trading partners by employing cointegration analysis and find evidence supporting j curve in the case of us and japan. Because of transition to the floating exchange rate regime in 2001, the analyzing period has been chosen as 20032016 to use monthly data for the related variables. Testing the marshalllerner condition in kenya brunel university. The results obtained indicate that in both long and short runs, marshall lerner condition is not verified for nigeria and that the concept of j curve effect is not identified either.
Johansens cointegration tests, autoregressive distributed lag ardl, error. English economist alfred marshall 18421924 and the romanian born economist abba lerner 1905 1985. Effects of currency depreciation includes marshall lerner condition effects of a currency depreciation youtube. Analysing quarterly data for the 20042015 period, we find the presence of a j curve effect in the cases of germany, austria and croatia. Testing the marshalllerner condition and the jcurve. Error correction modeling and cointegration, eastern economic journal, 20. Devaluation does not improve the balance of trade if the sum is any lower. The j curve hypothesis introduced by magee 1973 was established on this expectation of the ml condition.
Nazeef ishtiaq, hafiz muhammad qasim and adeel ahmad dar additional contact information nazeef ishtiaq. This observation points at the presence of an underlying volume effect which is the key driver of the trade balance growth. However, no studies have been carried out yet to test the marshall lerner condition in kenya, which represents an interesting case since its exports are relatively more diversified than those of the subsaharan african economies. J curve evidence around the world suggests that the marshall lerner condition does not hold in the short run, but does in the medium to long run. Simultaneity between export and import flows and the marshall lerner condition. Marshall lerner ml condition developed by marshall 1923 and lerner 1944 is met.
Alfred marshall 18421924, abba lerner 190382 and joan robinson 190383. Marshall lerner condition in international trade, a theory stating that if the sum of price elasticity of a countrys exports and the price elasticity of its imports is greater than one, a devaluation of that countrys currency will improve its balance of trade. Caporale and chui 1999 present further evidence regarding trade elasticities. Forman christian college a chartered university, 54000, lahore, pakistan. Majority of the studies assessing the impact of currency depreciation on the external account of a country have focused on the well known marshall lerner condition, which is a long run effect and the j curve. It is named after the three economists who discovered it independently. However, no studies have been carried out yet to test the marshall lerner condition in kenya, which represents an interesting case. The basis for jcurve is grounded in the marshalllerner condition. Real exchange rate effects on the balance of trade. An empirical analysis of koreas trade imbalances with the.
They questioned the existence of the j curve1 by analysing the. Specifically, we test the validity of the marshall lerner condition and the j curve effect, and further assess the effect of other macroeconomic variables including household consumption expenditure, government consumption expenditure, foreign income, money supply and domestic prices on trade balance. These results are relevant for policy making both in serbia and in a number of other emerging europe countries as they face major current account adjustments after bop crises of 2009. But it is found that the absolute sum of imports and exports price elasticities of demand barely exceed 1, indicating that a real devaluation of rupee will only. Bilateral j curve, bounds testing, cointegration, sweden. Testing the marshall lerner condition and the j curve phenomenon for pakistan.
However, despite the evidence against the ml condition, the consensus is that real devaluations do improve the balance of trade, though after a lag because of j. This paper evaluates the marshalllerner condition in mexico dur ing the nafta. After conducting unit root and cointegration tests, the estimated vecm. This hypothesis assumes that after the depreciation of the usd, the uss export products should become cheaper for consumers abroad. Marshall lerner condition and j curve effect youtube. It will explain how a depreciation of a nations currency is likely to affect the nations current. Revisiting the marshalllerner condition in the bangladesh. The effects of real exchange rates and income on the trade. Jcurve, developing countries, exchange rate, trade and export. Overall, the results of this study suggest a fulfillment of the marshall lerner condition criteria in all the three countries but the degree of.
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