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Impact of Exchange Rate Movements on Foreign Trade

Author

Listed:
  • Humberto Arandia

    (Ministerio de Economía y Finanzas Públicas)

  • Luis Laura

    (Ministerio de Economía y Finanzas Públicas)

Abstract

In an external context of declining terms of trade since 2011, which gained momentum mainly in 2014, many economies recorded strong devaluations in order to improve their competitiveness. Within this framework, the present paper uses various statistical techniques to analyze the impact of variations in the real exchange rate on foreign trade, using the approaches of the Marshall-Lerner condition, and the “S” and “J” Curves according to the literature and international empirical experience for the case of Bolivia. The main results show that because a significant percentage of exports do not respond to the real exchange rate (price effect), the Marshall-Lerner condition is not complied with for the Bolivian case. This aspect is corroborated through estimation of the J-Curve and calculation of the S-Curve, which indicate that the trade balance does not show a significant improvement in the face of real depreciation. In the same way, it is found that the income effect is the most important when analyzing the determinants of export and import demands.

Suggested Citation

  • Humberto Arandia & Luis Laura, 2018. "Impact of Exchange Rate Movements on Foreign Trade," Cuadernos de Investigación Económica Boliviana, Ministerio de Economía y Finanzas Públicas de Bolivia, vol. 2(2), pages 1-33, December.
    • Handle: RePEc:efp:journl:v:2:y:2018:i:2:p:1-33
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    More about this item

    Keywords

    Marshall-Lerner; J-Curve; S-Curve; Real Devaluation; Trade Balance;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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