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

Kedir Bekeru Genemo

doi:doi:10.11648/j.ebm.20170306.11

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

Kedir Bekeru Genemo

Published in European Business & Management (Volume 3, Issue 6)

Received: 25 September 2017 Accepted: 26 October 2017 Published: 20 November 2017

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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 long-run 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.

Published in	European Business & Management (Volume 3, Issue 6)
DOI	10.11648/j.ebm.20170306.11
Page(s)	95-104
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2017. Published by Science Publishing Group

Keywords

Devaluation, Panel Co-Integration, FMOLS

References

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APA Style

Kedir Bekeru Genemo. (2017). Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. European Business & Management, 3(6), 95-104. https://doi.org/10.11648/j.ebm.20170306.11

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Kedir Bekeru Genemo. Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. Eur. Bus. Manag. 2017, 3(6), 95-104. doi: 10.11648/j.ebm.20170306.11

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AMA Style

Kedir Bekeru Genemo. Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. Eur Bus Manag. 2017;3(6):95-104. doi: 10.11648/j.ebm.20170306.11

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@article{10.11648/j.ebm.20170306.11,
  author = {Kedir Bekeru Genemo},
  title = {Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration},
  journal = {European Business & Management},
  volume = {3},
  number = {6},
  pages = {95-104},
  doi = {10.11648/j.ebm.20170306.11},
  url = {https://doi.org/10.11648/j.ebm.20170306.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ebm.20170306.11},
  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 long-run 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.},
 year = {2017}
}

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TY  - JOUR
T1  - Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration
AU  - Kedir Bekeru Genemo
Y1  - 2017/11/20
PY  - 2017
N1  - https://doi.org/10.11648/j.ebm.20170306.11
DO  - 10.11648/j.ebm.20170306.11
T2  - European Business & Management
JF  - European Business & Management
JO  - European Business & Management
SP  - 95
EP  - 104
PB  - Science Publishing Group
SN  - 2575-5811
UR  - https://doi.org/10.11648/j.ebm.20170306.11
AB  - 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 long-run 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.
VL  - 3
IS  - 6
ER  -

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Author Information

Kedir Bekeru Genemo

Department of Statistics, Jimma University, Jimma, Ethiopia

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Plain Text BibTeX RIS

APA Style

Kedir Bekeru Genemo. (2017). Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. European Business & Management, 3(6), 95-104. https://doi.org/10.11648/j.ebm.20170306.11

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ACS Style

Kedir Bekeru Genemo. Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. Eur. Bus. Manag. 2017, 3(6), 95-104. doi: 10.11648/j.ebm.20170306.11

Copy | Download

AMA Style

Kedir Bekeru Genemo. Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration. Eur Bus Manag. 2017;3(6):95-104. doi: 10.11648/j.ebm.20170306.11

Copy | Download

@article{10.11648/j.ebm.20170306.11,
  author = {Kedir Bekeru Genemo},
  title = {Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration},
  journal = {European Business & Management},
  volume = {3},
  number = {6},
  pages = {95-104},
  doi = {10.11648/j.ebm.20170306.11},
  url = {https://doi.org/10.11648/j.ebm.20170306.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ebm.20170306.11},
  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 long-run 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.},
 year = {2017}
}

Copy | Download

TY  - JOUR
T1  - Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration
AU  - Kedir Bekeru Genemo
Y1  - 2017/11/20
PY  - 2017
N1  - https://doi.org/10.11648/j.ebm.20170306.11
DO  - 10.11648/j.ebm.20170306.11
T2  - European Business & Management
JF  - European Business & Management
JO  - European Business & Management
SP  - 95
EP  - 104
PB  - Science Publishing Group
SN  - 2575-5811
UR  - https://doi.org/10.11648/j.ebm.20170306.11
AB  - 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 long-run 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.
VL  - 3
IS  - 6
ER  -

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