Does Currency Devaluation Improve the Trade Balance in the Long Run? Evidence from Malawi (original) (raw)
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Of Devaluation, Imports, Exports, Balance of Payments and the IMF in Malawi: A Case Study
1993
In International Economics, conventional wisdom suggests that devaluation improves the trade balance for a country. This is possible because, by worsening the terms of trade for a country, devaluation leads to import substitution and enhanced competitiveness in the export sector. The trade balance is expected to improve via the J-curve, where the trade balance worsens first, until a country is able to adjust to the contractual problem. This project sought to identify the presence of the J-curve or a lack thereof in Malawi, a country in South Central Africa, within the contextual frame work of the IMF's structural adjustment programs. More precisely, it was hypothesized that a series of devaluations between 1982 and 1992 led to a wave-like pattern in the current account and the balance of payments. It was hypothesized that the trade balance was not enhanced because the J-curves never matured. The project also analyzed some key variables that form the foci of structural adjustment...
Cognizance Journal of Multidisciplinary Studies (CJMS), 2024
This paper examines the effects of currency depreciation on Malawi’s trade balance. It is an attempt to test the conjectures of the Marshal Lerner Condition on Malawi. To achieve this objective, data on exchange rates, exports, imports, GDP, and foreign income was collected from the World Bank Database. The econometric method of Error Correction Mechanism was employed for analysis. The short-run results revealed an insignificant effect of Malawi’s actual efficient currency valuation of imports and exports. This suggests that the depreciation of the Malawi Kwacha has little effect on the Trade Balance. However, Foreign and Domestic Income elasticities were found to be significant. Agriculture Value Addition was additionally discovered to be noteworthy and positively affecting exports. The coefficient of the error correction term in both export and import models appeared with a negative sign and was statistically significant, meaning that the short-run dynamics converge back to the long-run equilibrium relationship. In light of the results, the study suggests that Governments should endeavor to create an enabling environment for industries and enterprises to engage in value addition of agricultural products in a bid to jumpstart industrialization that is anchored on agriculture. This would be an effective way to achieve growth in exports, wealth creation, and sustainable economic growth rather than focusing on exchange rate regulations such as currency depreciation.
The short-run and long-run trade balance response to exchange rate changes in Malawi
Journal of Development and Agricultural Economics, 2012
The objective of this paper has been to examine the short-run and long-run effects of real exchange rate changes on the trade balance in Malawi. The model was estimated using the multivariate cointegration framework proposed by Johansen (1988). The results from the study show that the impact of a real depreciation on the trade balance is not significant enough to change the trade pattern in the long-run. Further, while a J-curve pattern is observed in the short to medium term, the improvement that follows a deterioration is not significantly different from the old equilibrium levels. On the other hand, the trade balance seems to respond more positively to shocks in domestic income. These findings have important policy implications for policy-makers. The long-run insignificance of the real exchange rate movements on the trade balance and the importance of domestic income in determining trade patterns suggest that policies aimed at improving the country's trade competitiveness should first focus on internal supply-side policies that give a conducive environment for the production of exportables and import-substitutes. Focusing on the external approach (that is, currency devaluation) may not bring effective results as Malawi is mostly a price-taker on the international market, and would thus not be able to influence external demand for her exports through price incentives that arise from exchange rate changes.
Assessment of impact devaluation on trade balance and marketing in Zimbabwe (1990-2005)
2015
The cost of Marketing in a company is so critical that, marketing become costly in International Business, especially when devaluation hits local currency. The primary purpose of this study is to find the impact of devaluation on trade balance in Zimbabwe using the Johansen-Juselius Cointegration and Vector Error Correction Model (VECM), unit root tests, and impulse response analysis. Quarterly data for the period 1990 to 2005 is used. The result shows that devaluation is effective in improving trade balance in the long run and there is a cointegrated relationship between the real effective exchange rate and trade balance in the long run. The findings initially revealed that there is a long run relationship between trade balance and exchange rate. Secondarily the real exchange rate is an important variable to the trade balance, and that devaluation will improve trade balance in the long run, thus consistent with the Marshall-Lerner condition and finally, the results indicate no J-cu...
Effectiveness of Devaluation in Achieving Internal and External Balance: The Case of Ethiopia
2015
Currency devaluation is a policy instrument that is most accepted and recommended by the World Bank and the International Monetary Fund because it is believed to bring the devaluating country to be able to compute in the international market and achieve trade balance. This study analyzes the effectiveness of devaluation in achieving Internal and External balance in Ethiopia using annual time series data for theexternal balance from 1974-2014and for the internal balance from 2006/7-2015. The main focus of the internal balance analysis will be the recent devaluation especially the 2009/10 and 2010/11 devaluations and forboth internal andexternalbalance analysis this paper is going tosee the effects of devaluation since 1992 up until 2014. This study usedVARand tested the short andlong run effects of exchange rate depreciation and devaluation, real GDP and Real Effective Exchange Rate on trade balance. With the second model, impacts of real effective exchange rate on inflation was also...
The Effect of Devaluation On Trade Balance In Ethiopian
The primary objective of the study was investigating the impact of devaluation on trade balance in Ethiopia by using annual time series data from 1992 to 2020. To address these objectives Vector Error Correction Model was appalled. The explanatory variables in this study were Nominal effective exchange rate, Import and Export. Vector Error Correction Model used to analyze the impacts of the independent variables Augmented Dickey-Fuller Unit-root test is used. Import and Exchange rate have negative effects of trade balance whereas export is appositive effects. Analyze the trends of independent variables and the trade balances in Ethiopia. The trade balance of Ethiopia is negative and the gaps are increase time to time.
Effects of a Devaluation on Trade Balance in Uganda: An ARDL Cointegration Approach
International Journal of Economics and Finance, 2020
Obtaining a trade surplus, an increase in exports over imports, is a major economic indicator and one that developing economies strive to obtain. The devaluation of a country"s currency is expected to be one way to obtain the trade surplus, by making imports expensive and exports cheap in the domestic country. This paper investigates the effects of a devaluation on the trade balance in Uganda in both the short run and long run. We consider two major approaches to trade balance improvement: the absorption approach and the elasticity approach. We employed an autoregressive distributed lag model (ARDL) approach to predict the long-term and short-term outcomes of a possible devaluation of Uganda"s currency using gross domestic product as a proxy to income, real exchange rates and trade balances, which are the ratio of exports to imports. Our results suggest that incomes significantly affect trade balances in the long run and short run, while real exchange rates were found to only affect trade balances in the short run.
The effect of real exchange rate changes on output: Jamaica's devaluation experience
Journal of International Development, 1993
Developing economies have relied upon devaluation to assist in the correction of fundamental disequilibrium in the balance of payment. As posited by conventional economic theory and proven by empirical research, a devaluation improves the balance of payments by reducing the demand for imports and increasing the supply of exports. However, recent research on devaluation insists that correction of the trade deficit occurs concurrently with income reduction. Using a three-market Keynesian model, the conclusion reached in this research on the Jamaican economy is that a devaluation is contractionary in the short run and expansionary in the long run.
2015
Abstract. This paper discusses the effects of devaluation on output growth in Less Developed Countries (LDCs). The issue has played an important role in the economic and political agendas of developing countries for several decades during which devaluation has been one of the most frequently used policy tools under both IMF-regulated and independent stabilization programs in these countries. Whether devaluation of the currency affects national income positively or negatively has also received considerable attention among academic researchers. In this paper, in order to analyze empirically whether or not devaluation results in output contraction in LDCs, data from 18 sample countries are used in a fixed-effect procedure. LDCs are divided into two categories and two different regression analyses are conducted. First, data from a group of 10 countries, including both manufacturing product exporters as well as agricultural and primary product exporters, are used to estimate a model of r...