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Abstract:
Thefollowing work analyzes the impact of fluctuating exchange rates on Romanian trade balance, having as a theoretical background the MarshalTLerner condition. The autoregressive distributed lag model was employed to estimate a bilateral trade model for Romania with its major commercial partners from Euro Area. The resulting data confirm that, between 1999 and 2016, the MarshalTLerner condition is fulfilled and a real currency depreciation has an important positive impact on trade balance together with both national and foreign income.
Key words: balance of trade; MarshalTLerner condition; external imbalances; ARDL; cointegration
JEL Classification: F40; F14; C32
1. Introduction
The issue of "competitive devaluation", i.e. real exchange rate devaluation, and its effects on the trading position of a country, has been a major topic of study in the field of international economics for a long period of time. The hypothesis is that the purposeful depreciation of currency might stimulate export industries by causing domestic goods to become cheaper relative to international goods.
Over the past 70 years, many studies have analyzed the impact of currency devaluation over both short and long periods of time. The respective studies included various countries from industrialized and emerging economies as well as developing and third-world countries. The empirical findings were inconclusive: while trade expansion is accelerated by real depreciation in some countries, the opposite effect is encountered in others. In other words, at present stage, neither the theoretical nor the empirical works can concretely confirm whether currency devaluation, be it nominal or real, causes trade expansion or trade deterioration (Jäggi & Parnisari, 2006; Bahmani et al, 2013; Wooi Hooy & Chan, 2008). Despite the failure of said studies to provide conclusive evidence, the general consensus among economists and trade specialists remains that exchange rate movements have direct impacts on the balance of trade and its components (Bahmani et al, 2013; Shahbaz et al, 2010).
In fact, the economic theory states that currency depreciation leads in the short-term to trade balance deterioration followed by long-term improvement. This phenomenon is present due to a time lag between the adjustment of producers and consumers to relative price changes and the adjustment of the exchange rates to relative price change. In the short run, this results in the export and import elasticities having...