The impactof real exchange rate devaluation on bilateral trade balance: Evidence from Namibia against its major trading partners
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Date
2020
Authors
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Journal ISSN
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Publisher
University of Namibia
Abstract
The main objective of the study was to investigate whether devaluation of real exchange rate has any impact on Namibia’s bilateral trade balances against its main trading partners namely; Angola, Botswana, China, Spain, Germany, Italy, UK, USA, South Africa and Switzerland. The few studies that has focused on the relationship between real exchange rate and trade balance in the context of Namibia have employed aggregate trade data in the analysis. The use of aggregate trade data is known to have implications such as aggregation bias and spurious regression. In order to overcome these problems, the present study employed disaggregated trade data to investigate the impact of real exchange rate devaluation on Namibia’s bilateral trade balance against its major trading partners. The study employed Autoregressive Distributive Lag Model (ARDL) and Error Correction Model (ECM) technique over quarterly data spanning from 1998:Q1 to 2018:Q4. Consequently, the study failed to find any evidence in support of the J-Curve effect (short run) and that the Marshall-Lerner condition does not hold for Namibia. These findings have implications that real exchange rate cannot be adopted as a policy to improve Namibia’s bilateral trade balance against its main trading partners. Additionally, it was found that real domestic income and foreign incomes are significant in influencing Namibia’s bilateral trade balances in some cases while insignificant in other cases. Hence, it is important for Namibia to embark on advanced production of import substitute goods in those cases were domestic and foreign incomes have an impact on trade balance in an effort to lower imports and encourage exports.
Description
A research submitted in partial fulfillment of the requirements for the Degree of Master of Science in Economics
Keywords
Real exchange, Bilateral trade