Journal of Economics and Financial Analysis, 5 (2), pp. 1-22, [2021]
URI: https://ojs.tripaledu.com/index.php/jefa/article/view/65/76

Real Exchange Rate Dynamics and Trade Balance in WAEMU Countries: Evidence from Panel Nonlinear ARDL Approach



DOI: http://dx.doi.org/10.1991/jefa.v5i2.a43

Abstract

This study estimates the impact of real exchange rate on the trade balance of seven countries of the West African Economic and Monetary Union (WAEMU). In examining this issue, most previous studies assume the relationship to be symmetric. In this paper, we relax this assumption by extending the nonlinear ARDL approach to panel data framework. We filter appreciations from depreciations in the real exchange rate and estimate their respective effects on the trade balance using the Pooled Mean Group (PMG) estimator. The results for the panel show that the long-run relationship between real exchange rate and trade balance is asymmetric. More precisely, the trade balance was found to respond stronger to depreciations in the real exchange rate than to appreciations in the long-run. In the short-run, however, the trade balance is not sensitive to the real exchange rate regardless of whether it appreciates or depreciates. The results for individual country estimation reveal cross-country heterogeneity in the short-run relationship between the real exchange rate and the trade balance.

Keywords

Nonlinear ARDL; Asymmetry; Trade Balance; Real Exchange Rate; WAEMU.

JEL Classification

C23, F10, F31, O55.

Full Text:


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