Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration

Gebe Yemataw Gzaw

doi:doi:10.11648/j.jwer.20150404.11

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Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration

Gebe Yemataw Gzaw

Published in Journal of World Economic Research (Volume 4, Issue 4)

Received: 3 July 2015 Accepted: 14 July 2015 Published: 25 July 2015

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Abstract

This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.

Published in	Journal of World Economic Research (Volume 4, Issue 4)
DOI	10.11648/j.jwer.20150404.11
Page(s)	92-98
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2015. Published by Science Publishing Group

Keywords

Trade Balance, Marshall Lerner Condition, Bound Test, Co-Integration

References

[1]	Bahmani-Oskooee, M. (2001). Nominal and Real Effective Exchange Rates of Middle Eastern Countries and Their Trade Performance. Applied Economics, 33, 103-111.
[2]	Duasa, J. (2007). Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach. Journal of Economic Cooperation, 28(3), 21-40.
[3]	Greenwood, J. (1984). Non-Traded Goods, the Trade Balance and the Balance of Payments. Canadian Journal of Economics, 17, 806-823.
[4]	Hernan, R.C. (1998). Testing the Short and Long run Exchange Rate Effect on Trade Balance the case of Colombia. Ph.D Dissertation at University of Illinois.
[5]	Jenkins, H.P and Katircioglu, S.T. (2008). The Bound Test Approach for Co integration and the causality between Financial Development, International Trade and Economic Growth the Case of Cyprus. Working Paper.
[6]	Johansen, S. (1988), “Statistical Analysis of Cointegration vectors”, Journal of Economic Dynamics and Control, 12, pp.231-54.
[7]	Kennedy, O. (2013). Kenya’s Foreign Trade Balance: An Empirical Investigation. European Scientific Journal. 9(19): 1857-78-81.
[8]	Liew, K.S., Lim, K.P., and Hussain, H. (2003). Exchange Rates and Trade Balance Relationship: The Experience of ASEAN Countries. International Trade. 0307003, Econ WPA.
[9]	Mohammad, S.D. (2010). Determinant of Trade Balance Case Study of Pakistan. European Journal of Scientific Research. 4(1), 13-20
[10]	Pesaran, M.H., Shin, Y. and Smith, R.J. 2001. “Bounds testing approaches to the analysis of level relationship.” Journal of Applied Economics 16: 289-326.

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Gebe Yemataw Gzaw. (2015). Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. Journal of World Economic Research, 4(4), 92-98. https://doi.org/10.11648/j.jwer.20150404.11

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Gebe Yemataw Gzaw. Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. J. World Econ. Res. 2015, 4(4), 92-98. doi: 10.11648/j.jwer.20150404.11

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AMA Style

Gebe Yemataw Gzaw. Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. J World Econ Res. 2015;4(4):92-98. doi: 10.11648/j.jwer.20150404.11

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@article{10.11648/j.jwer.20150404.11,
  author = {Gebe Yemataw Gzaw},
  title = {Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration},
  journal = {Journal of World Economic Research},
  volume = {4},
  number = {4},
  pages = {92-98},
  doi = {10.11648/j.jwer.20150404.11},
  url = {https://doi.org/10.11648/j.jwer.20150404.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20150404.11},
  abstract = {This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.},
 year = {2015}
}

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TY  - JOUR
T1  - Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration
AU  - Gebe Yemataw Gzaw
Y1  - 2015/07/25
PY  - 2015
N1  - https://doi.org/10.11648/j.jwer.20150404.11
DO  - 10.11648/j.jwer.20150404.11
T2  - Journal of World Economic Research
JF  - Journal of World Economic Research
JO  - Journal of World Economic Research
SP  - 92
EP  - 98
PB  - Science Publishing Group
SN  - 2328-7748
UR  - https://doi.org/10.11648/j.jwer.20150404.11
AB  - This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.
VL  - 4
IS  - 4
ER  -

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Author Information

Gebe Yemataw Gzaw

Department Economic Research, National Bank of Ethiopia, Addis Ababa, Ethiopia

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Plain Text BibTeX RIS

APA Style

Gebe Yemataw Gzaw. (2015). Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. Journal of World Economic Research, 4(4), 92-98. https://doi.org/10.11648/j.jwer.20150404.11

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ACS Style

Gebe Yemataw Gzaw. Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. J. World Econ. Res. 2015, 4(4), 92-98. doi: 10.11648/j.jwer.20150404.11

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AMA Style

Gebe Yemataw Gzaw. Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration. J World Econ Res. 2015;4(4):92-98. doi: 10.11648/j.jwer.20150404.11

Copy | Download

@article{10.11648/j.jwer.20150404.11,
  author = {Gebe Yemataw Gzaw},
  title = {Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration},
  journal = {Journal of World Economic Research},
  volume = {4},
  number = {4},
  pages = {92-98},
  doi = {10.11648/j.jwer.20150404.11},
  url = {https://doi.org/10.11648/j.jwer.20150404.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20150404.11},
  abstract = {This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.},
 year = {2015}
}

Copy | Download

TY  - JOUR
T1  - Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration
AU  - Gebe Yemataw Gzaw
Y1  - 2015/07/25
PY  - 2015
N1  - https://doi.org/10.11648/j.jwer.20150404.11
DO  - 10.11648/j.jwer.20150404.11
T2  - Journal of World Economic Research
JF  - Journal of World Economic Research
JO  - Journal of World Economic Research
SP  - 92
EP  - 98
PB  - Science Publishing Group
SN  - 2328-7748
UR  - https://doi.org/10.11648/j.jwer.20150404.11
AB  - This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.
VL  - 4
IS  - 4
ER  -

Copy | Download