Bilateral Trade Elasticity: B&H versus its seven trade partners

Kurtovic, Safet and Halili, Blerim and Maxhuni, Nehat (2016): Bilateral Trade Elasticity: B&H versus its seven trade partners.

Abstract

Bilateral trade elasticity is important in the analysis of the international trade flows and their anticipation in the process of establishing macroeconomic policy. Our research is based on bilateral data and the assessment of the influence of currency depreciation on the bilateral trade elasticity of B&H and its seven leading trade partners from Central and Southeast Europe. We applied the ARDL econometric technique in the research. In the short term we investigated the presence of the Marshall-Lerner condition (M-L condition) for Croatia and FYR Macedonia, while in the long term we investigated the presence of the M-L condition for Slovenia. In addition, we investigated, in certain cases, the presence of the J-curve, i.e. long-term impact of currency depreciation on the elasticity of export and import demand function. Finally, based on the application of diagnostic statistics and stability tests, the stability of the coefficient was confirmed in the majority of cases.

• Item Type: MPRA Paper
• Language: English
• Keywords: M-L condition, J-curve, elasticity, exchange rate, trade
• Subjects: F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

Aftab, Z., and S. Khan 2008. “Bilateral J-Curves between Pakistan and Her Trading Partners.” PIDE Working Papers 45, Pakistan Institute of Development Economics. http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-45.pdf

Altintaş, H., and O. Türker. 2014. “The Dynamics of Export and Import Functions in Turkey: Cointegration and Multivariate Granger Causation Analysis.” International Journal of Asian Social Science, 4(5): 676-689. http://www.aessweb.com/pdf-files/ijass-2014-4(5)-676-689.pdf

Andrew, K.R., and L.J. Yellen. 1989. “Is there a J-curve?” Journal of Monetary Economics, No. 24: 53-58.

Aziz, J., and X. Li. 2007) “China’s Changing Trade Elasticities.” IMF Working Paper 266, International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2007/wp07266.pdf

Bahmani-Oskooee, M. 1986. “Determinants of international trade flows: The case of developing countries.” Journal of Development Economics, 20(1): 107-123.

Bahmani-Oskooee, M., and T.J. Brooks. 1999a. “Cointegration Approach to Estimating Bilateral Trade Elasticities Between U.S. and her Trading Partners.” International Economic Journal, Vol. 13, No. 4: 119-128.

Bahmani-Oskooee, M., and T.J. Brooks. 1999b. “Bilateral J-curve between US and her trading partners.” Weltwirtschaftliches Arch 135: 156–165.

Bahmani-Oskooee, M., and T. Kantipong. 2001. “Bilateral J-Curve Between Thailand and Her Trading Partners.” Journal of Economic Development, Vol. 26, No. 2. 107-117. http://www.jed.or.kr/full-text/26-2/oskooee.pdf

Bahmani-Oskooee, M., and G.G. Goswami. 2003. “A Disaggregated Approach to Test the J-Curve Phenomenon: Japan versus Her Major Trading Partners.” Journal of Economics and Finance, Vol. 27, No. 1: 102-113. http://taskin.bilkent.edu.tr/teach/302_11/Bahmani_oskooee_2003.pdf

Bahmani-Oskooee, M., and A. Ratha. 2007. “The Bilateral J-Curve: Sweden versus her 17 Major Trading Partners.” International Journal of Applied Economics, 4(1): 1-13. http://www2.southeastern.edu/orgs/ijae/index_files/IJAE%20MARCH%202007%201-13%20Bahmani.pdf

Banerjee, A., Dolado, J.J., Galbraith, J.W., and D.F. Hendry. 1993. “Co-Integration, Error Correction and the Econometric Analysis of Non Stationary Data.” Oxford University Press.

Bernstein, R., and R. Madlener. 2011. “Residential Natural Gas Demand Elasticities in OECD Countries: An ARDL Bounds Testing Approach.” FCN Working Paper No. 15, Institute for Future Energy Consumer Needs and Behavior (FCN). https://www.rwth-aachen.de/global/show_document.asp?id=aaaaaaaaaagvvqk

Bhatta, R.S. 2011. “Stability of demand for money function in Nepal: A cointegration and error correction modeling approach.” MPRA Paper No. 41404. https://mpra.ub.uni-muenchen.de/41404/

Bobic, V. 2009. “Income and Price Elasticities of Croatian Trade - A Panel Data Approach.” Paper presented at the Young Economists' Seminar to 15th Dubrovnik Economic Conference, Narodna Banka Hrvatske, Dubrovnik, Croatia, June 1-26. http://old.hnb.hr/dub-konf/15-konferencija/young/paper-bobic-1.pdf

Buzaushina, A. 2015. “Trade elasticities in transition countries.” International Economics and Economic Policy, 12: 309–335.

Caporale, G.M., and M.K.F. Chui. 1999. “Estimating income and price elasticities of trade in a cointegration framework.” Review of International Economics, 7(2): 254-264.

Caporale, G. M., G. Gil-Alana, A. L., and R. Mudida. 2012. “Testing the Marshall-lerner Condition in Kenya.” Working Paper No. 12-22, Brunel University. https://www.brunel.ac.uk/__data/assets/pdf_file/0009/234279/1222.pdf

CBB&H. 2015. Bilten 4, Centralna banka BiH, Sarajevo. http://www.cbbh.ba/files/bilteni/2015/Bilten_4_2015.pdf

Chaitip, P., and C. Chaiboonsri. 2009. “Thailand’s International Tourism Demand: The ARDL approach to Cointegration.” Annals of the University of Petroşani, Economics, 9(3): 163-184. http://upet.ro/annals/economics/pdf/2009/20090316.pdf

Chinn, D.M. 2005. “Doomed to deficits? Aggregate U.S. trade flows Re-Examined.” Review of World Economics 141: 460-485. http://www.ssc.wisc.edu/~mchinn/doomed_RWE.pdf

Duarte, A., Nicolini-Llosa, L. J., and I. Paya. 2007. “Estimating Argentina's imports elasticities.” Working Paper 009, Lancaster University Management School. http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/ArgentinaElasticities.pdf

European Commission. 2015. “European Union, Trade in goods with Bosnia-Herzegovina, Directorate -General for Trade.” 20-10-2015 1 Units A4/G2 http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113358.pd, 1-10.

Goldstein, M., and M.S. Khan. 1978. “The supply and demand for exports: A simultaneous approach.” The Review of Economics and Statistics, Vol. 60: 275-286.

Goldstein, M., and M. Khan. (1976). “Large versus small price changes and the demand for imports.” IMF Staff Papers 23: 200–225.

Goldstein, M. and M.S. Khan. 1982. “Effects of slow-down in industrial countries on growth in non-oil developing countries.” IMF Ocassional paper, No. 12.

Gylfason, T., and O. Risager. 1984. “Does devaluation improve the current account?” European Economic Review, 25(1): 37-64.

Hacker, S.R., and A. Hatemi-j. 2003. “Is the J-Curve Effect Observable for Small North European Economies?” Open economies review 14: 119–134. http://mail.tku.edu.tw/niehcc/paper/HH(03-oer)J-curve.pdf

Halicioglu, F. 2004. “An ARDL Model of International Tourist Flows to Turkey.” Global Business and Economics Review Anthology, In: D. Kantarelis. (Ed.), B&ESI, Worcester: 614-624. http://econwpa.repec.org/eps/it/papers/0503/0503005.pdf

Halicioglu, F. 2005. “The Demand for New Housing in Turkey: An Application of ARDL model.” Paper prepared for “2005 Business and Economics Society International Conference”. Grand Canyon, Arizona, July 22-25. 1-10.http://econwpa.repec.org/eps/urb/papers/0508/0508002.pdf

Halicioglu, F. 2007. “The Bilateral J-curve: Turkey versus her 13 Trading Partners.” MPRA Paper No. 3564. http://mpra.ub.uni-muenchen.de/3564/

Hasan, A., and M.Z. Nasir. 2008. “Macroeconomic Factors and Equity Prices: An Empirical Investigation by Using ARDL Approach.” The Pakistan Development Review 47: 4 Part II: 501–513. http://www.pide.org.pk/pdf/PDR/2008/Volume4/501-513.pdf

Hatemi-J, H. and M. Irandoust. 2005. “Bilateral Trade Elasticities: Sweden Versus Her Major Trading Partners.” American Review of Political Economy, Vol. 3, No. 2: 51-71. https://sites.bemidjistate.edu/arpejournal/wp-content/uploads/sites/2/2015/12/v3n2-hatemi-j-irandoust.pdf

Haynes, S.E., and J.A. Stone. 1983. “Secular and cyclical responses of the US trade to income: an evaluation of traditional models.” The Review of Economics and Statistics Vol. 65, No. 1: 87–95.

Hooper, P., Johnson, K., and J. Marquez. 2000. “Trade Elasticities for the G-7 Countries.” Princeton Studies in International Economics, No.87: 1-47. https://www.princeton.edu/~ies/IES_Studies/S87.pdf

Houthakker, H.S., and S.P. Magee. 1969. “Income and price elasticities in world.Trade.” Review of Economics and Statistics, 51(2): 111-125.

Imbs, J., and I. Mejean. 2010. “Trade Elasticities, A Final Report for the European Commission,” Economic Papers 432: 1-41. http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp432_en.pdf

Jovanovic, B. 2012. “Estimating Trade Elasticities for Ex-socialist Countries: The Case of Macedonia.” National Bank of the Republic of Macedonia. http://www.eiit.org/WorkingPapers/Papers/TradePatterns/FREIT444.pdf

Ketenci, N., and U. Uz. 2011. “Bilateral and regional trade elasticities of the EU.” Empirical Economics, No. 40: 839–854.

Ketenci, N. 2013. “The effect of global financial crisis on trade elasticities: Evidence from BRIICS countries and Turkey.” MPRA Paper No. 5465. http://mpra.ub.uni-muenchen.de/54659/

Khan, M.S. 1974. “Import and export demand in developing countries.” IMF Staff Papers, 21(3): 678-693. Kreinin, M.E. 1967. “Price Elasticities in the International Trade.” Review of Economics and Statistics, no. 49: 510-516.

Krugman, P. 1989. “Income elasticities and the Real Exchange Rates.” European Economic Review, Vol. 33: 1031-1054.

Kun Sek, S., and W. MunHar. 2014. “Testing for Marshall-Lerner Condition: Bilateral Trades Between Malaysia and Trading Partners.” Journal of Advanced Management Science, Vol. 2, No. 1: 23-28. http://www.joams.com/uploadfile/2013/1225/20131225040245555.pdf

Lanati, M. 2013. “Estimating the elasticity of trade: the trade share approach.” Discussion Paper No. 159. http://www.ec.unipi.it/documents/Ricerca/papers/2013-159.pdf

LooiKee, N. A., and M. Olarreaga. 2004. “Estimating Import Demand and Export Supply Elasticities.” http://repec.org/esNASM04/up.16133.1075482028.pdf

Magee, P.S. 1973. “Currency Contracts, Pass-through, and Devaluation.” Brookings Papers on Economic Activity, Vol. 4, Issue 1: 303-325. http://www.brookings.edu/~/media/Projects/BPEA/1973-1/1973a_bpea_magee.pdf

Mann, L. C., and K. Plück. 2005. “The U.S. trade deficit: A disaggregated perspective. National Bureau of Economic Research.” In: Clarida, H.R. (ed.), G7 Current Account Imbalances: Sustainability and Adjustment: 247-281. University of Chicago Press: http://www.nber.org/chapters/c0129.pdf.

Mwito, M.M., Muhia, N.R., Kiprop, S., and L. Kibet. 2015. “Does the Marshall-Lerner Condition Hold for Kenya’s Bilateral Trade? A Dynamic Panel Data Approach.” European Journal of Business and Social Sciences, Vol. 4, No. 06: 40 – 58.

Murad, S.M.W. 2012. “Bilateral Export and Import Demand Functions of Bangladesh: A Cointegration Approach.” MPRA Paper No. 36919. https://mpra.ub.uni-muenchen.de/36919, 43-60.

OğusBinatli, A., and N. Sohrabji. 2009. “Elasticities of Turkish Exports and Imports.” Working Papers No 906. http://eco.ieu.edu.tr/wp-content/wp0906.pdf.

Pahlavani, M., Wilson, E., and A.C. Worthington. 2005. “Trade-GDP Nexus in Iran: An Application of the Autoregressive Distributed Lag (ARDL) Model.” American Journal of Applied Sciences, 2(7): 1158-1165. http://thescipub.com/PDF/ajassp.2005.1158.1165.pdf

Pandey, R. 2013. “Trade Elasticities and the Marshal Lerner Condition for India.” Global Journal of Management and Business Studies, Vol. 3, No. 4, 423-428. http://www.ripublication.com/gjmbs_spl/gjmbsv3n4_13.pdf

Petrovic, P., and M. Gligoric. 2010. “Exchange Rate and Trade Balance: J-curve Effect.” Panoeconomicus, 1: 23-41. http://www.panoeconomicus.rs/casopis/2010_1/02.pdf

Pesaran, M. H., Shin, Y., and R.J. Smith. 1997. “Testing for the Existence of a Long-Run Relationship. DAE Working Paper No. 9622, University of Cambridge.

Pesaran, H.M., Shin, Y., and R.J. Smith. 1999. “Bounds Testing Approaches to the Analysis of Long-Run Relationships.” Discussion Paper Series No. 46. http://www.econ.ed.ac.uk/papers/id46_esedps.pdf

Pesaran, M.H., Shin, Y., and R.J. Smith. 2001. “Bounds Testing Approaches to the Analysis of Long-Run Relationships.” Journal of Applied Econometrics, Vol. 16, No. 3: 289-326. https://www.researchgate.net/publication/5139626_'Bounds_Testing_Approaches_to_the_Analysis_of_Long_Run_Relationships'

Santos-Paulino, U.A. 2001. “The Effects of Trade Liberalisation on Imports in Selected Developing Countries.” ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0110.pdf

Siddiqui, S., Zehra, S., Majeed, S., and S.M. Butt. 2008. “Export-Led Growth Hypothesis in Pakistan: A Reinvestigation Using the Bounds Test.” The Lahore Journal of Economics 13, 2: 59-80. http://www.lahoreschoolofeconomics.edu.pk/JOURNAL/vol13-no2/4%20Saima_Sameena_ed_TTC_March_16.pdf

Simonovska, I., and E.M. Waugh. 2011. “The Elasticity of Trade: Estimates and Evidence.” NBER Working Paper 16796, National Bureau of Economic Research, Cambridge, MA. http://www.nber.org/papers/w16796.pdf

Šimáková, J. 2014. “The Effects of Exchange Rate Change on the Trade Balance of Slovakia.” European Financial and Accounting Journal, Vol. 9, No. 3: 50-66. http://www.vse.cz/efaj/124

Thorbecke, W. 2006. “How would an appreciation of the renminbi affect the U.S. trade deficit with China? Topics in Macroeconomics.” Berkeley Electronic Press 6(3): 1454-1468.

Türkay, H. 2014. “The validity of Marshall-Lerner condition in Turkey: A cointegration approach.” Theoretical and Applied Economics, Vol. XXI (2014), No. 10(599): 21-32. http://store.ectap.ro/articole/1025.pdf

Uz, I. 2010a. “Testing for structural change in the bilateral trade elasticities of Turkey.” METU studies in Development, 37: 53-72. http://www.acarindex.com/dosyalar/makale/acarindex-1423909969.pdf

Uz, I. 2010b. “Bilateral Trade Elasticities of Turkey.” International Journal of Applied Economics, 7(1): 28-46. http://www2.southeastern.edu/orgs/ijae/index_files/IJAE%20MARCH%202010%203-13-2010%20Idil_Uz%20ijae%20RV1.pdf

Wilson, J. F., and W.E. Takacs. 1979. “Differential responses to price and exchange rate influences in the foreign trade of selected industrial countries.” http://www.federalreserve.gov/pubs/ifdp/1977/104/ifdp104.pdf

Warner, D., and M.E. Kreinin. 1983. “Determinants of international trade flows.” Review of Economic and Statistics, 65(1): 96-104.