Journal of Development and Agricultural Economics
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Article Number - EF47FED1205


Vol.4(8), pp. 221 - 232 , May 2012

ISSN: 2006-9774



Review

The short-run and long-run trade balance response to exchange rate changes in Malawi


Samson Kwalingana, Kisu Simwaka, Thomas Munthali and Austin Chiumia*




Reserve Bank of Malawi, P. O. Box 30063, Lilongwe 3, Malawi.


Email: achiumia@rbm.mw






 Accepted: 27 March 2012  Published: 12 May 2012

Copyright © 2012 Author(s) retain the copyright of this article.
This article is published under the terms of the Creative Commons Attribution License 4.0


 

The objective of this paper has been to examine the short-run and long-run effects of real exchange rate changes on the trade balance in Malawi. The model was estimated using the multivariate cointegration framework proposed by Johansen (1988). The results from the study show that the impact of a real depreciation on the trade balance is not significant enough to change the trade pattern in the long-run. Further, while a J-curve pattern is observed in the short to medium term, the improvement that follows a deterioration is not significantly different from the old equilibrium levels. On the other hand, the trade balance seems to respond more positively to shocks in domestic income. These findings have important policy implications for policy-makers. The long-run insignificance of the real exchange rate movements on the trade balance and the importance of domestic income in determining trade patterns suggest that policies aimed at improving the country’s trade competitiveness should first focus on internal supply-side policies that give a conducive environment for the production of exportables and import-substitutes. Focusing on the external approach (that is, currency devaluation) may not bring effective results as Malawi is mostly a price-taker on the international market, and would thus not be able to influence external demand for her exports through price incentives that arise from exchange rate changes.

 

Key words: J-curve, trade balance, exchange rate.


APA (2012). The short-run and long-run trade balance response to exchange rate changes in Malawi. Journal of Development and Agricultural Economics, 4(8), 221 - 232.
Chicago Samson Kwalingana, Kisu Simwaka, Thomas Munthali and Austin Chiumia. "The short-run and long-run trade balance response to exchange rate changes in Malawi." Journal of Development and Agricultural Economics 4, no. 8 (2012): 221 - 232.
MLA Samson Kwalingana, et al. "The short-run and long-run trade balance response to exchange rate changes in Malawi." Journal of Development and Agricultural Economics 4.8 (2012): 221 - 232.
   
DOI
URL http://academicjournals.org/journal/JDAE/article-abstract/EF47FED1205

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