Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration

Abstract

This paper attempts an empirical investigation of the impact of exchange rate devaluation on major east African countries trade balance using the panel co-integration and panel group fully modified least square estimation technique from 1990-2014. Whether exchange rate devaluation improves or worsens trade balance has been at the centre of literature debate over time with varying empirical evidences for developed and developing nation. The results indicate that there exist a longrun stationary relationship between trade balance and its determinant-foreign and domestic income, nominal exchange rate as employed in the study. The research major findings include; nominal exchange rate induces inelastic and significant relation on trade balance in the long run. From this, the paper concludes that the trade balance deteriorate with increasing depreciation of exchange rate (as a value effect in east African countries). Again, it found that the coefficient of domestic income is negative and significant implying that the booming of real domestic income increases the purchasing power of their household to import more resulting trade deficit in the long run. Moreover the paper found that inelastic coefficient of nominal exchange rate in line with the theoretical Marshall-Lerner condition i.e. "the demand for import and export is inelastic then devaluation would further increase the trade deficit" [21]. Therefore based on the empirical findings the researcher recommends that the policy maker of these countries should take emphasis not to devaluate exchange rate more and selecting countries with higher income to make import and export elastic and improve trade balance in the long run.

Asymmetric Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from Nonlinear ARDL Approach

“…This finding is consistent with Adeniyi et al (2011) who found a negative relationship between domestic income and trade balance in Ghana. It also endorses Genemo (2017) and Keho (2020) who found a negative relationship between domestic income and trade balance in selected African countries, and Cote d'Ivoire, respectively.…”

“…He found that exchange rate depreciation has a long-run positive impact on the trade balance, but the J-curve effect does not hold in the short-run. Genemo (2017) investigated the effect of the exchange rate on the trade balance in selected African countries for the period from 1990 to 2014. Using panel cointegration techniques, he found that a depreciation of the real exchange rate deteriorates trade balance in the long-run.…”

Determinants of Trade Balance in West African Economic and Monetary Union (WAEMU): Evidence from heterogeneous panel analysis

“…Ogbonna (2016) showed that exchange rate depreciation has a long-run positive impact on the trade balance in Benin. Genemo (2017) studied the case of selected African countries using panel cointegration techniques. He found that depreciation of the real exchange rate deteriorates the trade balance in the long-run.…”

Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from Threshold Nonlinear ARDL Model

“…The evidence from this literature is mixed and conflicting. Some studies found that depreciation of real exchange rate has a significant improving effect on trade balance (Baharumshah, 2001;Bahmani-Oskooee, 2001;Boyd et al, 2001;Kale, 2001;Lal & Lowinger, 2002;Musila & Newark, 2003;Yol & Baharumshah, 2007;Igue & Ogunleye, 2014;Anning et al, 2015;Caporale et al, 2015;Ogbonna, 2016;Hunegnaw & Kim, 2017;Ousseini et al, 2017;Sokeng Dongfack & Ouyang, 2019;Yazgan & Ozturk, 2019;Keho, 2021a), while others reported that depreciation worsens trade balance (Onafowora, 2003;Adeniyi et al, 2011;Genemo, 2017). Still, others failed to establish any significant relationship between the two variables (Hatemi-J & Irandoust, 2015;Duasa, 2007;Loto, 2011;Akpansung & Babalola 2013;Shawa & Shen, 2013;Meniago & Eita, 2017;Kamugisha & Assoua, 2020).…”