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J-Curve Dynamics and the Marshall–Lerner Condition: Evidence from Azerbaijan

  • World Transition Economy Research
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Transition Studies Review

Abstract

Is there a J-curve for Azerbaijan? In answering this question, we are estimating a conventional trade model for Azerbaijan vis-à-vis its major trading partner—Europe. We are employing a Johansen approach to cointegration and error correction modeling. Our results suggest that a real depreciation of the Azerbaijani Manat will cause a decline in the balance of trade in the short run, and an increase in the long run. When we include the prices of exports and imports into the analysis, the new model shows that the terms of trade ratio diminishes following the devaluation but does not return to its pre-depreciation level in the long run. The balance of trade, however, continues to improve. This observation points at the presence of an underlying volume effect which is the key driver of the trade balance growth. Overall, the results of this study suggest a fulfillment of the Marshall–Lerner condition criterion, indicate the existence of the J-curve, and of the price and volume effects.

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Notes

  1. Consult Phillips and Perron (1988), and Kwiatkowski, Phillips, Schmidt, and Shin (Kwiatkowski et al. 1992) for the proper demonstration of ADF, PP, and KPSS unit root testing.

  2. The autocorrelation and normality test results are omitted for brevity but are available upon request.

  3. Based on the internal database of the Central Bank of the Republic of Azerbaijan.

  4. Data was taken from the International Trade Center.

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Correspondence to Rustam Jamilov.

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The opinions expressed in this paper do not necessarily reflect the viewpoint of the Central Bank of Azerbaijan, and belong solely to the author.

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Jamilov, R. J-Curve Dynamics and the Marshall–Lerner Condition: Evidence from Azerbaijan. Transit Stud Rev 19, 313–323 (2013). https://doi.org/10.1007/s11300-012-0240-8

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