Faridul, Islam and Mohammad, Iqbal Tahir and Muhammad, Shahbaz (2012): Income terms of trade and trade balance: the long run evidence from Bangladesh.
Download (116Kb) | Preview
The paper implements the Autoregressive Distributed Lag (ARDL) approach to cointegration to test the Harberger-Laursen-Metzler (HLM) effect in the context of Bangladesh. The HLM effect predicts that a rise in terms of trade from an exogenous shock to a small open economy will lead to an improvement in that country’s trade balance. Our findings confirm a long run relationship. The Granger causality test reports unidirectional causality from income terms of trade to trade balance. Results are consistent with the theoretical predictions.
|Item Type:||MPRA Paper|
|Original Title:||Income terms of trade and trade balance: the long run evidence from Bangladesh|
|English Title:||Income Terms of Trade and Trade Balance: The Long Run Evidence from Bangladesh|
|Keywords:||Income terms of trade, cointegration, ARDL|
|Subjects:||F - International Economics > F1 - Trade|
|Depositing User:||Muhammad Shahbaz|
|Date Deposited:||26. Apr 2012 13:10|
|Last Modified:||14. Feb 2013 09:16|
Appleyard, D. and Field Jr, A. J. (2001). International Economics, 4th edn, McGraw-Hill, Singapore.
Bahmani-Oskooee, M. and Janardhanan, A. (1995). Is there any long-run relation between the terms of trade and trade balance? Journal of Policy Modeling, 17, 199-205.
Bahmani-Oskooee, M., (1986). The Determinants of International Trade Flows. Journal of Development Economics, 20(1), 107-123.
Bhargava, A., (1986). On the Theory of Testing for Unit Roots in Observed Time Series. The Review of Economic Studies, 53( 3), 369-384.
Dibooglu, S. (2000). Aggregation supply, domestic absorption, and terms of trade: a structural decomposition of the US trade balance, The International Trade Journal, 14, 147-168.
Elliot, G., Rothenberg, T.J., Stock, J.H. (1996). Efficient Tests for an Autoregressive Unit Root, Econometrica, 64, 813-36.
Engle R.F., Granger C.W.J. (1987). Cointegration and error correction representation: estimation and testing, Econometrica, 55, 251-276.
Gylfason, T and Risager, O., (1984). Does Devaluation Improve the Current Account? European Economic Review, 25(1), 37-64.
Hamori, S., (2008). Trade Balances and the Terms of Trade in G-7 Countries: Panel Cointegration Approach. Applied Econometrics and International Development, 8(2), 13-22.
Harberger, A. C. (1950). Currency depreciation, income and the balance of trade, Journal of Political Economy, 8, 47-60.
Haynes, S.E. and Stone, J.A. (1982). Impact of the terms of trade on the U.S. trade
Hoque, A. (1995). Co-integration relationship between terms of trade and current account deficit: the Australian evidence, Applied Economics Letters, 2, 130-133.
Kouassi, E., Decaluwe, B., Kapombe, C. M. and Colyer, D. (1998). Is it real? The long-run relation between terms of trade and current account deficits: the Ivory evidence, Applied Economics Letters, 5, 437-440.
Laursen, S. and Metzler, L. A. (1950). Flexible exchange rates and the theory of employment, Review of Economics and Statistics, 32, 281-199.
Marquez, J., (1990). Bilateral Trade Elasticities. The Review of Economics and Statistics. 72(1), 70-77.
Mendoza, E. G. (1995). The terms of trade, the real exchange rate and economic fluctuations, International Economic Review, 36, 101-137.
Narayan, P.K. (2005). The saving and investment nexus for China: evidence from cointegration tests, Applied Economics, 37, 1979-1990.
Ng, S., Perron, P. (2001). Lag Length Selection and the Construction of Unit Root Test with Good Size and Power, Econometrica, 69, 1519-1554.
Nusrat, A., (2008). Unpublished Ph.D thesis, Department of Economics, Birmingham University, U.K.
Obsfeld, M. (1982). Aggregate Spending and Terms of Trade: is there a Laursen-Metzler effect. Quarterly Journal of Economics, 97, 251-270.
Otto, G. (2003). Terms of trade shocks and the balance, Journal of International Money and Finance, 22, 155-184.
Ouattara, B., (2004). “Foreign Aid and Fiscal Policy in Senegal”. Mimeo University of Manchester.
Pesaran, M. H., Shin, Y. and Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326.
Phillips, P.C.B and Perron, P., (1988). Testing for a Unit Root in Time Series Regression. Biometrica, 75(3), 35-446.
Sachs, J.D., 1981. The current account and macroeconomic adjustment in the 1970s. Brookings Papers on Economic Activity 1, 201–268.
Shahbaz, M. (2009). On Nominal and Real Devaluations Relation: An Econometric Evidence for Pakistan. International Journal of Applied Econometrics and Quantitative Studies, 9, 85-108.
Sheffrin, S.M., Woo, W.T., 1990. Present value tests of an intertemporal model of the current account. Journal of International Economics 29, 237–253.
Wahid, ANM., Shahbaz, M. (2009). Does Nominal Devaluation Precede Real Devaluation? The Case of the Philippines, Transition Studies Review, 16, 47-61.
Warner, D. and Kreinin, M. (1983). Determinants of international trade flow. Review of Economics and Statistics, 65 (1), 96-104.
Wong, H. T. (2009a). Terms-of-Trade and Trade Balance: Some Empirical Evidence of Asian Economies. The International Trade Journal, 23, 422-457.
Wong, H. T. (2009b). Terms of Trade and Trade Balance in Korea, Hong Kong and Singapore. Labuan Bulletin of International Business & Finance, 7, 53-76.
Wong, T. K, (2006). Is there a long-run relationship between trade balance and terms of trade? The case of Malaysia, Applied Economics Letters, 13, 307-311.
Zortuk, M. (2008). Testing the relationship between trade balance and terms of trade: the case of Turkey. Problems and Perspectives in Management, 6(2), 39-43.