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Non Linear Adjustment in the MLR Condition: Evidence from Threshold Cointegration

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  • Ghassan, Hassan B.

Abstract

This paper investigates the long-run equilibrium relationship between the real net exports and the exchange rate in Moroccan economy by the threshold cointegration test. This approach, introduced by Enders and Siklos (2001), provides clair evidence of the cointegration relationship characterized by an asymmetric adjustment. By allowing for this asymmetry, we obtain the results showing the stability of the Marshall-Lerner-Robinson (MLR) condition. In particular, the estimated results indicate the the adjustment process is persistent toward equilibrium above an appropriately threshold parameter, whereas the adjustment process toward equilibrium quickly converges below the estimated threshold. This finding indicates that the deviations from equilibrium resulting from increases in real effective exchange rate (i.e. devaluation) are highly persistent, but the deviations from equilibrium resulting from decreases in real effective exchange rate (i.e. reevaluation) converge quickly toward equilibrium.

Suggested Citation

  • Ghassan, Hassan B., 2009. "Non Linear Adjustment in the MLR Condition: Evidence from Threshold Cointegration," MPRA Paper 54393, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:54393
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    References listed on IDEAS

    as
    1. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-645, August.
    2. Pierre Perron & Gabriel Rodríguez, "undated". "Residuals-based Tests for Cointegration with GLS Detrended Data," Boston University - Department of Economics - Working Papers Series wp2015-017, Boston University - Department of Economics, revised 19 Oct 2015.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    4. Boyd, Derick & Caporale, Gugielmo Maria & Smith, Ron, 2001. "Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 187-200, July.
    5. Mohsen Bahmani-Oskooee, 2001. "Nominal and real effective exchange rates of middle eastern countries and their trade performance," Applied Economics, Taylor & Francis Journals, vol. 33(1), pages 103-111.
    6. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
    7. Kamal Upadhyaya & Dharmendra Dhakal, 1997. "Devaluation and the trade balance: estimating the long run effect," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 343-345.
    8. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-176, April.
    9. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
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    More about this item

    Keywords

    MLR condition; Effective exchange rate; Threshold cointegration; Morocco.;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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