Empirical Economics

, Volume 40, Issue 3, pp 839–854 | Cite as

Bilateral and regional trade elasticities of the EU

  • Natalya KetenciEmail author
  • Idil Uz


The traditional way of assessing the impact of currency depreciation and income on the trade balance has been to estimate the elasticity of trade volume to relative prices and income. The previous studies examine the problems associated with using aggregate data. The recent studies rely on bilateral data, yet another problem is that data for export and import prices are not available. Thus, this study proposes an alternative way of assessing the impact of currency depreciation by using the real exchange rate and the impact of income on bilateral trade. The models are applied between the EU and its major trading partners. Furthermore, the analysis includes the six major trading regions along side the eight major trading countries for 1980–2007, on the quarterly basis. This article uses the autoregressive distributive lag (ARDL) approach advocated by Pesaran and Pesaran (1997). Our results indicate a higher importance of income compared to the real exchange rate in defined bilateral export and import demand functions. In addition, the applied CUSUM and CUSUMSQ stability tests confirm the stability of estimated coefficients in most cases.


Bilateral trade elasticities J-curve Cointegration Stability tests European Union 

JEL classification

F14 F31 F43 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Atkins FJ, Coe PJ (2002) An ARDL bounds test of the long-run Fisher effect in the United States and Canada. J Macroecon 24(2): 255–266CrossRefGoogle Scholar
  2. Bahmani-Oskooee M (1986) Determinants of international trade flows: the case of developing countries. J Dev Econ 20: 107–123CrossRefGoogle Scholar
  3. Bahmani-Oskooee M, Brooks TJ (1999) Bilateral J-curve between US and her trading partners. Weltwirtschaftliches Arch 135: 156–165CrossRefGoogle Scholar
  4. Bahmani-Oskooee M, Goswami GG (2004) Exchange rate sensitivity of Japan’s bilateral trade flows. Jpn World Econ 16: 1–15CrossRefGoogle Scholar
  5. Bahmani-Oskooee M, Kantipong T (2001) Bilateral J-curve between Thailand and her trading partners. J Econ Dev 26: 107–117Google Scholar
  6. Bahmani-Oskooee M, Niroomand F (1998) Long-run price elasticities and the Marshall-Lerner condition revisited. Econ Lett 61: 101–109CrossRefGoogle Scholar
  7. Bahmani-Oskooee M, Ratha A (2004) The J-curve: a literature review. Appl Econ 36(13): 1377–1398CrossRefGoogle Scholar
  8. Bahmani-Oskooee M, Ratha A (2008) Exchange rate sensitivity of US bilateral trade flows. Econ Syst 32: 129–141CrossRefGoogle Scholar
  9. Bahmani-Oskooee M, Goswami GG, Talukdar BK (2005) Exchange rate sensitivity of the Canadian bilateral inpayments and outpayments. Econ Model 22: 745–757CrossRefGoogle Scholar
  10. Banerjee A, Dolado JJ, Mestre R (1998) Error-correction mechanism tests for cointegration in a single equation framework. J Time Ser Anal 19: 267–283CrossRefGoogle Scholar
  11. Brown RL, Durbin J, Evans JM (1975) Techniques for testing the constancy of regression relations over time. J R Stat Soc B 37: 149–192Google Scholar
  12. Cushman DO (1990) US bilateral trade equations: forecasts and structural stability. Appl Econ 22: 1093–1102CrossRefGoogle Scholar
  13. Goldstein M, Khan M (1976) Large versus small price changes and the demand for imports. IMF Staff Papers 23: 200–225Google Scholar
  14. Goldstein M, Khan M (1978) The supply and demand for exports: a simultaneous approach. Rev Econ Stat 60: 275–286CrossRefGoogle Scholar
  15. Halicioglu F (2008) The bilateral J-curve: Turkey versus her 13 trading partners. J Asian Econ 19: 236–243CrossRefGoogle Scholar
  16. Harrigan J, Vanjani R (2003) Is Japan’s trade (still) different?. J Jpn Int Econ 17: 507–519CrossRefGoogle Scholar
  17. Hatemi JA, Irandoust M (2005) Bilateral trade elasticities: Sweden versus her trade partners. Am Rev Polit Econ 3: 38–50Google Scholar
  18. Haynes SE, Stone JA (1983) Secular and cyclical responses of the US trade to income: an evaluation of traditional models. Rev Econ Stat 65: 87–95CrossRefGoogle Scholar
  19. Haynes SE, Hutchison MM, Mikesell RF (1996) US-Japanese bilateral trade and the yen-dollar exchange rate: an empirical analysis. South Econ J 52: 923–932CrossRefGoogle Scholar
  20. Houthakker HS, Magee S (1969) Income and price elasticities in the world trade. Rev Econ Stat 51: 111–125CrossRefGoogle Scholar
  21. Irandoust M, Ekblad K, Parmler J (2006) Bilateral trade flows and exchange rate sensitivity: evidence from likelihood based panel cointegration. Econ Syst 30: 170–183CrossRefGoogle Scholar
  22. Khan MS (1974) Import and export demand in developing countries. IMF Staff Papers 21: 678–693Google Scholar
  23. Khan MS (1975) The structure and behaviour of imports of Venezuela. Rev Econ Stat 57: 221–224CrossRefGoogle Scholar
  24. Kreinin ME (1967) Spurious regression and residual-based tests for cointegration in panel data. J Econom 90: 510–516Google Scholar
  25. Kremers JJM, Ericsson NR, Dolado JJ (1992) The power of cointegration tests. Oxford Bull Econ Stat 54: 325–348CrossRefGoogle Scholar
  26. Krugman P (1987) Pricing to market when the exchange rate changes. In: Arndt S, Richardson J (eds) Real financial linkages among open economies. MIT Press, CambridgeGoogle Scholar
  27. Lal AK, Lowinger TC (2002) Nominal effective exchange rate and trade balance adjustment in South Asia countries. J Asian Econ 13: 371–383CrossRefGoogle Scholar
  28. Liu L, Fan K, Shek J (2007) Hong Kong’s trade patterns and trade elasticities. Hong Kong Monetary Authority working paper, March 21–31Google Scholar
  29. Marquez J (1990) Bilateral trade elasticities. Rev Econ Stat 72: 70–77CrossRefGoogle Scholar
  30. Marwah K, Klein LR (1996) Estimation of J-curve: United States and Canada. Can J Econ 29: 523–539CrossRefGoogle Scholar
  31. Menon J (1995) Exchange rate pass-through. J Econ Surv 9(2): 197–231CrossRefGoogle Scholar
  32. Nadenichek J (2000) The Japan-US trade imbalance: a real business cycle perspective. Jpn World Econ 12: 255–271CrossRefGoogle Scholar
  33. Narayan PK, Narayan S (2006) Savings behaviour in Fiji: an empirical assessment using the ARDL approach to cointegration. Int J Soc Econ 33(7): 468–480CrossRefGoogle Scholar
  34. Nielsen HB (2004) Cointegration analysis in the presence of outliers. Econom J 7: 249–271CrossRefGoogle Scholar
  35. Pesaran MH, Pesaran B (1997) Working with Microfit 4.0: interactive econometric analysis. Oxford University Press, OxfordGoogle Scholar
  36. Pesaran MH, Shin Y (1999) An autoregressive distributed lag modeling approach to co-integration analysis. In: Strom S (eds) Econometrics and economic theory in the 20th century: the Ragnar Frisch centennial symposium. Cambridge University Press, CambridgeGoogle Scholar
  37. Pesaran MH, Shin Y, Smith RC (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econ 16: 289–326CrossRefGoogle Scholar
  38. Rose AK, Yellen JL (1989) Is there a J-curve?. J Monet Econ 24: 53–68CrossRefGoogle Scholar
  39. Wang J, Ji AG (2006) Exchange rate sensitivity of China’s bilateral trade flows. BOFIT Discussion Papers 19Google Scholar
  40. Warner D, Kreinin ME (1983) Determinants of international trade flows. Rev Econ Stat 65: 96–104CrossRefGoogle Scholar
  41. Wilson JF, Takacs WE (1979) Differential responses to price and exchange rate influences in the foreign trade of selected industrial countries. Rev Econ stat 61: 267–279CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Department of EconomicsYeditepe UniversityIstanbulTurkey

Personalised recommendations