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Devaluation and trade balance in Latin American countries*
Huseyin Kalyoncu1, Ilhan Ozturk2, Seyfettin Artan3, Kahraman Kalyoncu4 Abstract The aim of this paper is to examine effectiveness of devaluation on the trade balance in four countries: Argentina, Brazil, Mexico and Peru. We use the Johansen-Juselius cointegration test and impulse response function to estimate the long-run and shortrun effects of devaluation on the trade balance. The estimated results suggest that depreciation improve the trade balance in the long run for the case of Argentina and Peru, and in the short-run there has been J-curve in Argentina and Peru. In addition, the cointegration is found among the four variables (trade balance, domestic income, foreign incomes and real exchange rate) in the case of Argentina and Peru. The results also indicate that there is no cointegration relationship between these variables for Brazil and Mexico. The conclusion of the paper is that the evidence of the J-curve pattern was found for Argentina and Peru only. Key words: trade balance, J-Curve, Marshal-Lerner condition, cointegration, impulse response analysis, Latin America JEL classiﬁcation: F30, F32, F41
Received: 02-09-2008; accepted: 19-06-2009 Associate Professor, Meliksah University, Faculty of Economics and Business Administration, Kaysery, Turkey. Scientiﬁc afﬁliation: international economics. Phone: +90352 2321375. Fax: +90352 2321322. E-mail: email@example.com Senior Lecturer, Cag University, Faculty of Economics and Administrative Sciences, 33800, Yenice, Mersin, Turkey. Scientiﬁc afﬁliation: international economics. Phone: +903246514828. Fax: +903246514811. E-mail: firstname.lastname@example.org (corresponding author). Assistant Professor, Karadeniz Technical University, Faculty of Economics and Administrative Sciences, Department of Economics, Trabzon, Turkey. Scientiﬁc afﬁliation: macroeconomics. E-mail: email@example.com PhD, Aksaray University, Faculty of Economics and Business Administration, Aksaray, Turkey. Scientiﬁc afﬁliation: international economics. E-mail: firstname.lastname@example.org
Huseyin Kalyoncu et al. • Devaluation and trade balance in Latin American countries Zb. rad. Ekon. fak. Rij. • 2009 • vol. 27 • sv. 1 • 115-128
Since the breakdown of Bretton Wood Accord in 1973, and the advent of ﬂoating exchange rates, there has been renewed interest on the effect of devaluation on the trade balance of both developed and developing countries. Currency depreciation is said to worsen the trade balance ﬁrst before resulting in an improvement, yielding a short-run pattern labelled the J-curve phenomenon. In the international economic literature an important question has centred on the reactions of trade balance to currency depreciations or appreciations. The empirical literature supporting the J-curve is mixed5. Some economists argued that a possible way to improve trade balance (TB) would be a devaluation of the real exchange rate. However, real exchange rate devaluations would only improve TB if the well-known Marshall– Lerner (ML) condition holds, then in the long run the TB position would be improved. But in the short-term the TB deﬁcit could worsen if the TB followed the J-curve pattern. Given the implications of the J-curve for the conduct of macroeconomic stabilization policies, its empirical estimation has been a subject of interest. A number of studies have estimated the effect of a change in the real exchange rate on the balance of trade and have conﬁrmed the existence of the J-curve, such as Artus (1975), Spitaller (1980), Krugman and Baldwin (1987), Wilson (1993), Bahmani-Oskooee and Alse (1994), Demirden and Pastine (1995), Marwah and Klein (1996), Lal and Lowinger (2002),...