Abstract
This study assesses the response of the trade balance to exchange rate fluctuations across a large number of countries. Fixed-effects regressions are estimated for three country groups (industrial, developing and emerging markets) on annual data for 87 countries from 1994 to 2010. The trade balance improves significantly after a real depreciation, and to a similar degree, in the long run for all countries, but the adjustment is significantly slower for industrial countries. Emerging markets and developing countries display relatively fast adjustment. Disaggregation into exports and imports shows that the delayed adjustment in industrial countries is almost entirely on the export side. The rate of adjustment in emerging markets is slowing over time, consistent with their eventual graduation to high-income status. The ratio of trade to GDP is also highly sensitive to the real effective exchange rate, with a real depreciation of 10 % raising the trade/GDP ratio across the sample by approximately 4 %. This result, which presumably reflects movements in the prices of tradables relative to non-tradables, raises questions about the widespread use of the trade/GDP ratio as a trade policy indicator, without adjustment for real exchange rate effects.
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Notes
The choice of 1994 as the start date is somewhat arbitrary. For a reduced sample of countries, data from before 1994 could be used, extending the time dimension, but at the risk of introducing more structural breaks if any have occurred. Note also that, because of time-lags in the regression, real exchange rate data back to 1992 are used.
For example they are equal to −0.088/0.518 = −0.170 for the whole sample. The similarity also suggests that extra lags of the real exchange rate are not required in Table 2.
The data are in US dollars, but the fixed country and time effects imply that the results would be the same for any currency.
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The authors wish to thank John Gathergood, George Tavlas and an anonymous referee for helpful comments on an earlier draft.
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Appendices
Appendices
1.1 Appendix 1
1.2 Appendix 2
1.3 Appendix 3
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Bleaney, M., Tian, M. Exchange Rates and Trade Balance Adjustment: A Multi-Country Empirical Analysis. Open Econ Rev 25, 655–675 (2014). https://doi.org/10.1007/s11079-014-9310-3
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DOI: https://doi.org/10.1007/s11079-014-9310-3