China, marshall lerner condition, trade balance, ardl model. Using the johansen and johansen and juselius cointegration method we test the marshall lerner condition for bangladesh for the period 19852014. Marshall lerner condition and j curve effect an in depth look at the marshall lerner condition and j curve effect in determining whether a fall in the exch. A modified marshall lerner condition under processing trade. Section 3 briefly describes the theoretical framework, whilst section 4 presents the econometric analysis.
The socalled elasticities approach to the balance of payments relies on the. Testing the marshalllernerrobinson condition in ghana. The marshall lerner condition is satisfied for india as. In this paper we examine the marshall lerner ml condition for the kenyan. Despite being studied numerous times, there is still no conclusive evidence to proof a general validity of marshall lerner theorem. Previous research that has attempted to provide an empirical estimate of the condition has used aggregate trade data between one country and the rest of the world or between two countries at bilateral level, and has provided mixed results. Since it is preferable to explore the theoretical premises before analyzing whether. L condition, which stipulates that a devaluation or depreciation of its currency will improve a countrys trade balance only if the sum of the absolute values of a countrys import and export price elasticities are greater than one, is a fundamental tenet of international economics.
The paper evaluates marshall lerner conditions in time when policy experts are facing severe structural unbalance in the economy of pakistan. When the sum of export and import elasticities are greater than unity, the ml condition states that a deficit in the. Generalized marshal lerner condition, that the variation of rmbs exchange rate will not succeed in adjusting the trade balance in the chinese economy, maybe more persuasive than the traditional one. Alfred marshall 18421924, abba lerner 190382 and joan robinson 190383. Stability and comparative static in the basic trade model at this stage it is necessary to take a closer look at the theoretical foundations of the international stability and the marshall lerner conditions. In this paper we examine the marshall lerner ml condition for the kenyan economy. Evidence on the marshall lerner condition from a vecgarch approach rodolfo cermeno. The aim of the paper is to test the marshall lerner robinson condition by using the unitroot test of ngperron 2001 and cointegration test of perronrodriguez. The result shows that devaluation improved trade balance and satisfy marshall lerner condition in pakistan. Testing the marshalllerner condition in kenya brunel university.
Introduction since china joined the wto in 2001, china. The intuition lies in the larger price e ect, which in this setting falls on import prices. Firstly, beginning with the summary, this paper put forward new angles of the real effective exchange rate of rmb and of sam to make positive research to the applicability of the marshall lerner condition to china. The above discussion is preserved as an archive of a requested move. Marshalllerner condition devaluation economics online. In particular, we use quarterly data on the log of real exchange rates, exportimport ratio and relative us income for the time period 1996q1 2011q4, and employ techniques based on the concept of long memory or longrange dependence. The marshall lerner condition shows that if absolute value of price elasticity of export and import demand is greater than unity, devaluation will improve trade balance. Hepaktan 2009 investigated marshall lerner condition in turkey through cointegration method by using data of 19802008 period and concluded that this condition does not work accurately.
Bop problems and marshall lerner condition and jcurve. Pdf estimation of the marshalllerner condition for namibia. The time period of interest in this study is 19601983. Revisiting the marshalllerner condition under processing. The condition states that the current account will improve, after a depreciation, if the sum of the price elasticities of demand for imports and exports is greater than 1. This video explains the marshalllerner condition for determining whether a depreciation of a nations currency will improve or worsen its current account ba. This states that if the sum of the elasticity of exports with respect to the real exchange rate and the. This states that if the sum of the elasticity of exports with respect to the real exchange rate and the elasticity of imports is bigger. The marshalllerner condition after alfred marshall and abba p. According to this approach the effect of a devaluation.
Marshall lerner robinson condition, estimated by the imperfect substitutes model to forecast the effect of a currency depreciation in 1983 on the trade balance in ghana. Marshall lerner condition marshall lerner condition just a spelling correction. Estimation of marshall lerner condition in the economy of. Longrun price elasticities and the marshalllerner condition. Marshall lerner condition and j curve effect youtube. Subsequent comments should be made in a new section on this talk page. Marshalllerner condition financial definition of marshall. Get pdf 961 kb abstract the aim of the paper is to test the marshall lerner robinson condition by using the unitroot test of ngperron 2001 and cointegration test of perronrodriguez 2001. Further a 1% increase in domestic income increases indias imports by 0. It is named after the three economists who discovered it independently. Its origins lie in the elasticities approach to the balance of payments. For marshall lerner condition to be hold, we should fulfill the following condition.
We normally assume that when a currency depreciates imports fall and exports increase and therefore balance of trade improves. Marshalllerner condition the marshalllerner condition unibg. The validity of marshalllerner condition in turkey. The ordinary least square ols method was used to estimate the import and export demand functions. I traditionally, and in a static context, the relation between the real exchange rate and the trade balance is described by the marshall lerner condition8.
The marshalllerner condition states that a devaluation will improve the balance of trade if the sum of the price elasticities of demand for exports and imports in absolute value is greater than 1. Trade elasticities and the marshal lerner condition for india. Lerner is satisfied if the absolute sum of a countrys export and import demand elasticities demand responsiveness to price is greater than one. Marshalllerner condition and economic globalization core. Thus, the trade balance deteriorates rst and then improves gradually. Study is based upon secondary data for quantitative analysis which spans over 30 years 1980 to 2010. Marshall lerner condition the marshall lerner condition also called the marshall lerner robinson, hereafter, mlr, condition is at the heart of the elasticities approach to the balance of payments. The marshalllerner condition, which states that a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one, is named after english economist alfred marshall 18421924 and the romanian born economist abba lerner 1905 1985. Devaluation does not improve the balance of trade if the sum is any lower. Testing the marshalllernerrobinson condition in ghana prior. The marshalllerner condition is satisfied if the absolute sum of a countrys export and import demand elasticities demand responsiveness to price is greater.
Tochitskaya 2007 also examined that ml condition is fulfilled and depreciation can pick up the balance of trade in the long run. Jcurve and the marshalllerner condition the case of. En change flexible et parfaite mobilite des capitaux. Nov 22, 2012 currency devaluation or depreciation is said to improve a countrys trade balance in the long run if the marshalllerner condition is satisfied. This paper focuses on estimating a condition that is generally thought necessary for a depreciation to be successful. Pdf the aim of the paper is to test the marshall lerner robinson condition by using the unitroot test of ngperron 2001 and cointegration test of. In the sr, this will not be the case and the current account can actually become worse before it becomes betterthis is known as the jcurve effect. A modified marshalllerner condition under processing trade define the nominal exchange rate as the units of foreign currency per unit of the domestic currency. In theory, if the marshall lerner condition does not hold, a real depreciation can lead to a decrease in net exports. A condition that ensures devaluation improves a countrys balance of trade. Jcurve is a phenomena which has been derived partially from the studies of alfred marshall and abba lerner, which gives it its name marshalllerner condition in the situation where the balance of trade of a country is zero then elasticity in supply are never ending then an exchange rate decrease in value can initiate a surplus surge in the. According to the marshall lerner condition, the sum of trade elasticities should be greater than one for a change in exchange rate to have an impact on the countrys balance of payments.
Define the nominal exchange rate as the units of foreign currency per unit of the domestic currency. The marshall lerner condition refers to the impact of a depreciation, or devaluation, of a currency on the current account of the balance of payments. Lerner condition of the power of exchange rate devaluation as a stabilization policy of a particular country. Does devaluation improve the trade balance of nigeria. Khan and aftab1995 estimated exportimport demand function by using quarterly data and applied conventional method in the case of pakistan. Johansen cointegration approach was applied to examine marshall lerner condition. Marshalllerner condition, namely, if the sum in absolute value of elasticity of import and export is bigger than one, the depreciation of the home currency will. It is widely known as the marshall lerner condition, herein referred to as the ml condition. Revisiting the marshalllerner condition in the bangladesh. The wellknown marshall lerner condition states that a real devaluation a rise of the real exchange rate q. Pdf according to the marshalllerner condition, the sum of trade elasticities should be greater than one for a change in exchange rate to have.
China, marshalllerner condition, trade balance, ardl model. The marshall lerner condition shows the conditions under which a change in the exchange rate of a countrys currency leads to an improvement or worsening of a countrys balance of payments. Jcurve and the marshalllerner condition munich personal. Nonetheless, there are relatively more literatures that supported the existence. The marshalllerner condition is an important condition that determines whether or not a exchange rate depreciation will cause the balance of trade to improve or to deteriorate. In its simplest version, the mlr condition states that a real devaluation or a real depreciation of the currency will improve the trade balance if the sum of the. The condition was proposed by alfred marshall and abba lerner. The theory that a devaluation of a domestic currency will improve current account balance is founded on a number of elasticity approach models, the most popular of which is the marshall lerner condition. Section 2 discusses the importance of the marshall lerner condition in the kenyan case. This is the period prior to the first of a series of currency devaluations and structural. Specifically, we use fractional integration and cointegration methods. Marshalllerner condition in international trade, a theory stating that if the sum of price elasticity of a countrys exports and the price elasticity of its imports is greater than one, a devaluation of that countrys currency will improve its balance of trade. The marshall lerner condition, named after british economist alfred marshall 18421924 and american economist abba lerner 190382, is an often asserted economic statement that specifies the circumstances under which a downward movement of the exchange rate, arising from either marketdetermined depreciation or monetary authority devaluation, will exert a favorable influence on a nation. The wellknown marshall lerner condition states that a real exchange rate appreciation termsoftrade improvement, i.
In this paper we examine the marshalllerner ml condition for the kenyan. The study adapted the elasticity approach of the marshall lerner condition to the balance of payment adjustment mechanism. Effects of currency depreciation includes marshall lerner condition. Using the johansen and johansen and juselius cointegration method we test the marshall lerner condition for. Lecture notes 6 real exchange rates and the trade balance. Pdf estimating the marshalllerner condition of china. A 1% depreciation in the real exchange rate causes a 1. Apr 27, 2012 the marshalllerner condition when evaluating the impact of a currency fluctuation on the balance of trade we should consider the marshalllerner condition. Marshall lerner ml condition is a phenomenon that describes increase in net exports through depreciation of domestic currency. They tested empirical model to satisfy marshall lerner condition.
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