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

Abstract

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.

The South Africa‐U.S. Trade and the Real Exchange Rate: Asymmetric Evidence from 25 Industries

“…Indeed, when Chiloane et al . () concentrated on the trade balance of only South African manufacturing sector with the rest of the world, they found support for the J‐curve effect in that sector. The approach was expanded recently by Amusa and Fadiran () who concentrated on South African trade with its major trading partner, the U.S. and disaggregate their trade flows by industry.…”

The effect of exchange rate movements on trade balance performance in Egypt: Is there a J-curve phenomenon?

“…According to the standard theory of international trade, changes in the exchange rate affects the trade balance (TB) through affecting both of trade value and volume (Andersson and Styf, 2010;Choi, 2017;Lal and Lowinger, 2002). The real depreciation (appreciation) of the country's currency value, other things remain constant, increases (decreases) the competitiveness position of the country's' products (Chiloane, Pretorius, and Botha, 2014). The real depreciation (appreciation) of the country's currency value increases (decreases) the price of imported goods in terms of domestic goods (Ali, Johari, and Alias, 2014).…”

“…Studying this relationship conditional to the sum of the price elasticities of demand for exports and imports is called Marshall-Lerner Condition (Baek, Koo, and Mulik, 2009;Bahmani-Oskooee et al, 2016;Drama, 2010;Masih, Liu and Pervaiz, 2018;Tutuianu, 2015). This approach studies this relationship as a net effect of real exchange rates changes on both prices and volume of traded goods 5 (Ali et al, 2014;Andersson and Styf, 2010;Chiloane et al, 2014;Choi, 2017;Hussain and Bashir, 2012;Lencho, 2013). Figure 1 illustrates the effect of the depreciation of the currency on its TB assuming perfectly elastic supply.…”

“…The J-curve phenomenon started as a dynamic representation of Marshall-Lerner Condition. It studied how the effects of devaluation on TB can vary over time as elasticities changes (Andersson and Styf, 2010;Chiloane et al, 2014;Drama, 2010;Masih et al, 2018;Musawa, 2014). In the short-term, demand for exports and imports are less-elastic.…”

“…The study strengthened having J-curve phenomenon as the permanent depreciation of the domestic currency improves the TB of the country after a deterioration of it in the short-term. Chiloane et al (2014) examined the relationship between exchange rate changes and manufacturing trade balance in South Africa. Even though the estimation results concluded that the depreciation of the currency worsens the manufacturing trade balance in the short-term, it improves it in the long-term.…”