The Effect of Real Exchange Rate Changes on External Trade Balance in Sudan: Testing J-Curve Hypothesis

Abstract

The current research article analyzes the impact of changes in real exchange rate upon external trade balance of Sudan during the period 1978-2017. It employs Autoregressive Distributed Lag (ARDL) approach, impulse response functions and Granger causality test. The empirical findings indicate that exchange rate devaluations have no impact on the merchandize trade balance, thus evidence in favor of the J-curve pattern was not found. Granger causality test runs one-way from trade ratio to real exchange rate and not the other way. Thus, the results can be considered as an additional contribution to evidence stated in literature that focused a vibrant range of economies. These findings are appropriate for policy making in Sudan as well as in various developing countries since the focal point is major trade balance deficit.

The Effects of Currency Devaluation on the Bilateral Trade Balance of Sudan: Cointegration and Error-Correction Modeling

“…As shown in Table (7), we cannot reject the hypothesis that neither variable Granger-causes the other. These results are in line with Ibrahim & Bashir, [36].…”

“…Both tables show that in all cases, the unit root hypothesis cannot be rejected. Therefore, It can be concluded that most variables are I (1), except for trade balance, which was stationary at level, a result confirmed by numerous other studies such as Ibrahim and Bashir [36]; Bashir and Ibrahim, [50]; Ibrahim and Bashir, [53]; Wu [54].…”

“…This analysis involves cointegration analysis, an error correction model (ECM), impulse response functions (IRFs), and variance decompositions (VDs). The VAR is useful in forecasting systems of interrelated time series and analyzing the dynamic impact of random disturbances on the system of variables [36].…”

“…Ibrahim and Bashir [36] investigated the effect of changes in the real exchange rate on the trade balance in Sudan for the period 1978-2017. They found that exchange rate devaluations do not affect the trade balance, hence the J-curve hypothesis is not valid.…”

“…The first stage involves testing the existence of a long-run equilibrium relationship between observed variables, i.e., cointegration among variables such as trade balance (TB), domestic national income (DY), foreign national income (FY), domestic money supply (DM2), foreign money supply (FM2), and exchange rate (ER), if the coefficients β , β β β β β are different from zero. The second stage involves defining the error-correction term, particularly the cointegration vector [36].…”