Abstract
African countries have over the years experienced persistent current account deficits. The role of asymmetries in explaining the response of trade balance to exchange rate movement has not received adequate attention as linear models dominate extant empirical literature. In this paper, we examined the impact of exchange rate on the trade balance in five African countries using both linear and nonlinear autoregressive distributed lag models to analyze data for the period 1980–2018. The linear model revealed that the J-curve holds in Uganda in the short run, whereas evidence of long-run J-curve effect was found only in Algeria. However, the nonlinear analysis showed that the short-run J-curve holds for South Africa and Uganda whereas a long-run J-curve effect was found in Algeria and Uganda. The results make a case for modeling asymmetries as the nonlinear model performed relatively better. An important policy implication is the need to address structural imbalances in the economy to leverage on the exchange rate and trade policies to improve trade outcomes.
Article PDF
Avoid common mistakes on your manuscript.
References
African Development Bank, 2020. African Economic Outlook, Abidjan, Cote d’Ivoire.
Adeniyi O., Omisakin O., Oyinlola A., 2011. Exchange rate and trade balance in West African monetary zone: is there a J-curve? Int. J. Appl. Econ. Fin. 5, 167–176.
Akonji D.R., Wakili A.M., Sakiru O.K., 2013. Dynamics of the trade balance: an empirical investigation of Nigerian J-curve hypothesis, IOSR J. Hum. Soc. Sci. 7, 51–57.
Arize A.C., Malindretos J., Igwe E.U., 2017. Do exchange rate changes improve the trade balance: an asymmetric nonlinear cointegration approach, Int. Rev. Econ. Fin. 49, 313–326.
Babatunde M.A., 2014. The estimation of the J-curve in Nigeria, Empirical Econ. Lett. 13, 414–422.
Bahmani-Oskooee M., 1985. Devaluation and the J-curve: some evidence from LDCs, Rev. Econ. Stat. 67, 500–504.
Bahmani-Oskooee M., Baek J., 2019. Asymmetry cointegration and the J-curve: new evidence from Korean bilateral trade balance models with her 14 partners, J. Asia Pac. Econ. 24, 66–81.
Bahmani-Oskooee M., Gelan A., 2012. Is there J-curve in effect Africa? Int. Rev. Appl. Econ. 26, 73–81.
Bahmani-Oskooee M., Harvey H., 2018. The U.S. trade balance with partners from developing world: an asymmetry analysis of the J-curve effect, J. Econ. Dev. 43, 29–43.
Bahmani-Oskooee M., Mitra R., 2009. The J-curve at the industry level: evidence from U.S.-India trade, Econ. Bull. 29, 1520–1529.
Bahmani-Oskooee M., Rahman M.O., Kashem M., 2017. Bangladesh’s trade partners and the J-curve: an asymmetry analysis, Macroecon. Fin. Emerg. Market Econ. 12, 174–189.
Bahmani-Oskooee M., Ratha A., 2004. The J-curve: a literature review, Appl. Econ. 36, 1377–1398.
Bahmani-Oskooee M., Fariditavana H., 2016. Nonlinear ARDL approach and the J-curve phenomenon, Open Econ. Rev. 27, 51–70.
Bawa S., Abdul R.M., Sani Z., Dauda M., 2018. Testing the J-curve phenomenon in Nigeria: an ARDL bounds testing approach, West Afr. J. Money Econ. Integr. 18, 47–71.
Cergibozan R., Ari A., 2017. The exchange regime and trade balance in Turkey, Int. Trade J. 32, 363–387.
Hsing Y., 2008. A study of the J-curve for seven selected Latin American countries, Glob. Econ. J. 8, 1850150.
Hussain M.E., Haque M., 2014. Is the J-curve a reality in developing countries? J. Econ. Polit. Econ. 1, 231–240.
Igue N.N., Ogunleye T.S., 2014. Impact of real exchange rate on trade balance in Nigeria, Afr. Dev. Rev. 26, 347–358.
Krugman P.R., Obstfeld M., Melitz M.J., 2018. International trade: Theory and Policy, Pearson, London, UK.
Magee S.P., 1973. Currency contracts, pass-through, and devaluation, Brookings Pap. Econ. Act. 1973, 303–325.
Moussa N., 2016. Trade and current account balances in Sub-Saharan Africa: stylized facts and implications for poverty, UNCTAD Working Paper Series No. 1.
Nusair S.A., 2016. The J-curve phenomenon in European transition economies: a nonlinear ARDL approach, Int. Rev. Appl. Econ. 31, 1–27.
Pesaran M.H., Shin Y., Smith R.J., 2001. Bounds testing approaches to the analysis of level relationships, J. Appl. Econ. 16, 289–326.
Pilbeam K., 2006. International Finance, third ed., Palgrave Macmillan, New York.
Rose A.K., Yellen J.L., 1989. Is there a J-curve? J. Monet. Econ. 24, 53–68.
Shin Y., Yu B., Greenwood-Nimmo M., 2014. Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. in: Sickles R., Horrace W. (Eds.), Festschrift in Honor of Peter Schmidt, Springer, New York, NY, pp. 281–314.
Soleymani A., Saboori B., 2012. The J-curve: evidence from commodity trade between Malaysia and Japan, Int. J. Appl. Econ. Fin. 6, 64–73.
United Nations Economic Commission for Africa, 2020. Drivers to boost intra-African investment flows towards Africa’s transformation, Addis Ababa, Ethiopia.
World Bank, 2020a. African Pulse: An Analysis of Issues Shaping Africa’s Economic Future, World Bank, Washington, DC.
World Bank, 2020b. World Development Indicators, World Bank, Washington, DC.
Ziramba E., Chifamba R.T., 2014. The J-curve dynamics of South African trade: evidence from the ARDL approach, Eur. Sci. J. 10, 346–358.
Author information
Authors and Affiliations
Corresponding author
Additional information
Peer review under responsibility of the African Export-Import Bank
Data availability statement: The data that support the findings of this study are available from the corresponding author, [MS], upon reasonable request.
Rights and permissions
This is an open access article distributed under the CC BY-NC 4.0 license (http://creativecommons.org/licenses/by-nc/4.0/).
About this article
Cite this article
Shuaibu, M., Isah, A. Exchange Rate Dynamics and Trade Balance in Selected African Countries. J Afr Trade 7, 69–83 (2020). https://doi.org/10.2991/jat.k.201218.001
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.2991/jat.k.201218.001