The Effects of Currency Devaluation on the Bilateral Trade Balance of Sudan: Cointegration and Error-Correction Modeling
Journal of Economics, Management and Trade,
Page 16-33
DOI:
10.9734/jemt/2023/v29i21076
Abstract
The purpose of this research paper is to investigate the effects of exchange rate, income and money supply on the trade balance of Sudan over a fifty-year period from 1970 to 2020. The empirical model for this investigation is developed using a cointegration approach and error-correction technique to specifically examine the effects of currency devaluation on the trade balance of Sudan with its major partners. The bounds test shows that the variables of interest are bound together in the long-run. The associated equilibrium correction is significant, thus confirming the existence of a long-run relationship. Moreover, to analyze the dynamic interactions of the variables included in the estimated model, variance decomposition is employed. The study results from the variance decomposition show that innovations in foreign income contribute highly to the forecast error variance of the trade balance compared with other explanatory variables in the short-run. In contrast, the domestic money supply contributes highly to the trade balance compared with other variables in the long-run. A key finding of the study suggests that the devaluation of Sudan’s currency is not an appropriate step toward improving the country's trade balance position.
Keywords:
- ARDL
- currency devaluation
- error-correction model
- exchange rate
- trade balance
- Sudan
How to Cite
Ibrahim, A. A. A., & Bashir, M. S. (2023). The Effects of Currency Devaluation on the Bilateral Trade Balance of Sudan: Cointegration and Error-Correction Modeling. Journal of Economics, Management and Trade, 29(2), 16-33. https://doi.org/10.9734/jemt/2023/v29i21076
References
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Dongfack LPC, Ouyang H. The impact of real exchange rate depreciation on Cameroon's trade balance: Is devaluation a remedy for persistent trade deficits? Journal of Economic Integration. 2019;34 (1): 189-213. Available:http://dx.doi.org/10.11130/jei.2019.34.1.189
Alexander SS. The effects of a devaluation on a trade balance. IMF Staff Papers. International Monetary Fund. 1952;2(2): 263-278..
Johnson HG. Elasticity, absorption, Keynesian multiplier Keynesian policy and monetary approaches to devaluation theory: A simple geometric exposition. American Economic Review. 1971;11:448-452.
Appleyard DR, Field AJ. International economics. 8th ed. New York, NY, USA: McGraw-Hill Irwin; 2014.
Miles MA. The effects of devaluation on the trade balance and the balance of payments: some new results. Journal of Political Economy. 1979;87(3):100-120.
Bahmani-Oskooee M. Devaluation and the J-curve: Some evidence from LDCs. The Review of Economics and Statistics. 1985;67(3):500-504.
Nicholas K. Devaluation and adjustment in developing countries. Finance and Development. 1983;20(2):35-37.
Karim, N. Devaluation in developing countries: The difficult choice. Finance and Development. 1983;20(1):14-17.
Asheghian P. Currency devaluation: A comparative analysis of advanced countries and less developed countries. Quarterly Review of Economics and Business. 1988;2(2):11-70.
International Monetary Fund (IMF). Direction of trade statistics [Internet]. Available:https://data.imf.org/?sk=9d6028d4-f14a-464c-a2f2-59b2cd424b85. Washington D. C.
Mundell RA. Monetary theory: Inflation, interest and growth in the world economy. Pacific Palisades. Calif: Goodyear; 1971.
Frenkel JA, Rodriguez C. Portfolio equilibrium and the balance of payments: A monetary approach. American Economic Review. 1975;15(4):174-188.
Bahmani-Oskooee M. What are the long-run determinants of the U.S. trade balance? Journal of Post Keynesian Economics. 1992;15(1):85-97.
Available:https://doi.org/10.1080/016034771992.11489927
Ali DA, Johari F, Alias MH. The effect of exchange rate movements on trade balance: A chronological theoretical review. Economic Research International. 2014;1-7.
Available:http://dx.doi.org/10.1155/2014/893170
Dornbusch R. Exchange rates and fiscal policy in a popular model of international trade. American Economic Review. 1975; 15:859-871.
Johnson HG. The monetary approach to the balance of payments theory. Journal of Financial and Quantitative Analysis. 1972; 7(2):1555-1571.
Frenkel JA, Gylfason T, Helliwell JF. A Synthesis of monetary and Keynesian approaches to short-run balance of payments theory. Economic Journal. 1980; 90:582-592.
Murli DB, Henry T, Upadhyaya KP. Devaluation and the trade balance in India: Stationarity and cointegration. Applied Economics. 1996;28(4):429-432.
Available:https://doi.org/10.1080/000368496328551
Nachane DM, Prasad PR. India’s trade balance in the 1980s – An econometric analysis. Applied Economics.1998;30(6):761-774. Availabe:https://doi.org/10.1080/000368498325462
Upadhyaya KP, Mixon FG, Dhakal D. Do devaluations improve trade balances? evidence from four South Asian Countries. The Indian Economic Journal. 1999; 41(3):91-97.
Mahmoud NR. On the impact of exchange rate depreciation on bilateral trade of Egypt and China: An ARDL approach. Journal of Economics, Management and Trade. 2022;28(2):49-63.
Available:https://doi.org/10.9734/jemt/2022/v28i230394
Amaliawiati L, Nursjanti F, Puspitasari DM, Roespinoedji D. The effect of the exchange rate on the Indonesian trade balance in the managed floating exchange rate system and flexible exchange rate system-period 1980 to 2020. Central Asia and the Caucasus. 2022;23(1): 1479-1491. Available:https://doi.org/10.37178/ca-c.23. 1.152
Keho Y. Determinants of trade balance in West African Economic and Monetary Union (WAEMU): Evidence from heterogeneous panel analysis. Cogent Economics and Finance. 2021;9: 1970870. Available:https://doi.org/10.1080/23322039.2021.1970870
Eshetu F, Eshetu N. Impact of exchange rate on Ethiopian trade balance: evidence from ARDL model. Annals of Data Science. Published online: 2021-10-27. Available: https://doi.org/10.1007/s40745-021-00360-x
Iqbal J, Nosheen M, Panezai GR, Salahhuddin. Asymmetric cointegration, non-linear ARDL, and the J-curve: A bilateral analysis of Pakistan and its trading partners. International Journal of Financial Economics. 2021;26: 2263–2278.
Available: https://doi.org/10.1002/ijfe.1905
Bao HHG, Le HP. Asymmetric impact of exchange rate on trade between Vietnam and each of EU-27 countries and the UK: Evidence from nonlinear ARDL and the role of vehicle currency. Heliyon. 2021; 7:e07344.
Available:https://doi.org/10.1016/j.heliyon.2021.e07344
Befikadu AT. Determinant of trade balance in Ethiopia: Approaches from autoregressive distributed lag (ARDL) model. Journal of World Economics Research. 2021;10(2):62-73.
Available:https://doi.org/10.11648/j.jwer.20211002.14
Ceyhan T, Gürsoy S. The J-Curve hypothesis: An analysis for Turkey. Gümüşhane Üniversitesi Sosyal Bilimler Enstitüsü Elektronik Dergisi, 2021;12 (3):1169-1181.
Available:https://dergipark.org.tr/tr/pub/gumus/issue/65088/948428
Kamugisha G, Assoua JE. Effects of a devaluation on trade balance in Uganda: An ARDL cointegration approach. International Journal of Economics and Finance. 2020;12(7):42-53.
Available:https://doi.org/10.5539/ijef.v12n7p42
Bahmani-Oskooee M, Arize AC. Asymmetry cointegration and the J-curve: New evidence from Africa trade balance and the J-curve, an asymmetry analysis. Journal of Economic Studies. 2020;47(5): 969-984.
Available: https://doi.org/10.1108/JES-09-2018-0333
Ibrahim AA, Bashir MS. The effect of real exchange rate changes on external trade balance in Sudan: Testing J-Curve hypothesis. Nile Journal of Business and Economics.2020;6(16):2–23. Available:http://dx.doi.org/10.20321/%25nilejbe.616
Ambe ME. Determinants of trade balance in Ethiopia. Journal of Economics and Sustainable Development. 2019;10(3):111-119.
Available: https://doi.org/10.7176/JESD/10-3-10
Tasseven O, Saracel N, Yılmaz, ÜÖN. Determinants of trade balance for Turkey: ARDL based bounds testing approach. Social Sciences Research Journal. 2019;1 (8):194-208.
Akoto L, Sakyi D. Empirical analysis of the determinants of trade balance in post-liberalization Ghana. Foreign Trade Review. 2019;54(3):177–205.
Available:https://doi.org/10.1177/0015732519851632
Nusair SA, The J-Curve phenomenon in European transition economies: A nonlinear ARDL approach. International Review of Applied Economics, 2016;31(1): 1-27.
Arize AC, Malindretos J, Igwe EU. Do exchange rate changes improve the trade balance: an asymmetric nonlinear cointegration approach. International Review of Economics and Finance. 2017; 49:313-326.
Available: https://doi.org/10.1016/j.iref.2017.02.007
Bahmani-Oskooee M, Kanitpong T. Do exchange rate changes have symmetric or asymmetric effects on the trade balances of Asian countries?. Applied Economics. 2017;49:4668-4678.
Himarios D. The effect of devaluation on the trade balance: A critical view and re-examination of Miles new results. Journal of International Money and Finance. 1985;4(4): 553-563.
Available:https://doi.org/10.1016/0261-5606(85)90029-4
Himarios D. Do devaluations improve the trade balance? The evidence revisited. Economic Inquiry. 1989;27(1): 143-168. Available:https://doi.org/10.1111/j.1465-7295.1989.tb01169.x
Bahmani-Oskooee M, Pourheydarian M. The Australian J-curve: A reexamination. International Economic Journal. 1991;5(3): 49-58.
Yang J-H, Yang GGL. The analysis of automatic adjustment mechanism of balance of payments-evidence from manufactured goods exporters. Business Prospects. 2022;2(2):51-59.
Available:https://doi.org/10.52288/bp.27089851.2021.12.09
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Bashir MS, Ibrahim AA. Effects of macroeconomic variables on bank credit in Saudi Arabia: An ARDL bounds testing approach to cointegration. Asian Journal of Economics, Business and Accounting. 2020;19(2):1–12.
Available:https://doi.org/10.9734/ajeba/2020/v19i230298
Pesaran MH, Shin Y, Smith RJ. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 2001;16(3): 289-326.
Bashir MS, Ibrahim AA. Examining the export-led growth hypothesis: Empirical evidence from Sudan. Journal of Economics, Business, & Accountancy Ventura. 2022;25(1):77–92.
Available:http://dx.doi.org/10.14414/jebav.v25i1.2978
Ibrahim AA, Bashir MS. Does the incomplete exchange rate pass-through exist in Sudan? East African Journal of Business and Economics. 2021;3(1):147–63.
Available:https://doi.org/10.37284/eajbe.3.1.394
Wu M-L. An empirical time series econometric study of the J-curve effect of exchange rate in trade balance between China and the US. Journal of Economics, Management and Trade. 2020;26(6):35-46.
Available:https://doi.org/10.9734/jemt/2020/v26i630264
Sudan Central Bureau of Statistics, Annual statistical yearbook. Various issues. Khartoum. Sudan.
Haansende CM, Nyambe JM. Analyzing the exchange volatility relative to trade balance: The case of SACU countries. Journal of Economics, Management and Trade. 2020;26(6):60-74.
Available:https://doi.org/10.9734/jemt/2020/v26i630266
Nguyen CDT, Dang HTT, Nguyen CDT, Dang HTT. The impact of foreign exchange rate on a balance of payments: Issues from Vietnam. International Journal of Advanced and Applied Sciences. 2022;9(6):1-8.
Available:https://doi.org/10.21833/ijaas.2022.06.001
Filardo A, Gelos G, McGregor T. Exchange-rate swings and foreign currency intervention. International Monetary Fund. Working Paper WP/22/158, 2022; Accessed 22 December 2022.
Available:https://www.imf.org/-/media/Files/ Publications/WP/2022/English/wpiea2022158-print-pdf.ashx
Robinson J. The foreign exchanges. In: Robinson J. Essays in the theory of employment. 2nd ed. Oxford: Blackwell. 1947:134-155.
Metzler LA. The theory of international trade. In: Howard SE, editor. A survey of contemporary economics. Philadelphia: Blakiston; 1948.
Dongfack LPC, Ouyang H. The impact of real exchange rate depreciation on Cameroon's trade balance: Is devaluation a remedy for persistent trade deficits? Journal of Economic Integration. 2019;34 (1): 189-213. Available:http://dx.doi.org/10.11130/jei.2019.34.1.189
Alexander SS. The effects of a devaluation on a trade balance. IMF Staff Papers. International Monetary Fund. 1952;2(2): 263-278..
Johnson HG. Elasticity, absorption, Keynesian multiplier Keynesian policy and monetary approaches to devaluation theory: A simple geometric exposition. American Economic Review. 1971;11:448-452.
Appleyard DR, Field AJ. International economics. 8th ed. New York, NY, USA: McGraw-Hill Irwin; 2014.
Miles MA. The effects of devaluation on the trade balance and the balance of payments: some new results. Journal of Political Economy. 1979;87(3):100-120.
Bahmani-Oskooee M. Devaluation and the J-curve: Some evidence from LDCs. The Review of Economics and Statistics. 1985;67(3):500-504.
Nicholas K. Devaluation and adjustment in developing countries. Finance and Development. 1983;20(2):35-37.
Karim, N. Devaluation in developing countries: The difficult choice. Finance and Development. 1983;20(1):14-17.
Asheghian P. Currency devaluation: A comparative analysis of advanced countries and less developed countries. Quarterly Review of Economics and Business. 1988;2(2):11-70.
International Monetary Fund (IMF). Direction of trade statistics [Internet]. Available:https://data.imf.org/?sk=9d6028d4-f14a-464c-a2f2-59b2cd424b85. Washington D. C.
Mundell RA. Monetary theory: Inflation, interest and growth in the world economy. Pacific Palisades. Calif: Goodyear; 1971.
Frenkel JA, Rodriguez C. Portfolio equilibrium and the balance of payments: A monetary approach. American Economic Review. 1975;15(4):174-188.
Bahmani-Oskooee M. What are the long-run determinants of the U.S. trade balance? Journal of Post Keynesian Economics. 1992;15(1):85-97.
Available:https://doi.org/10.1080/016034771992.11489927
Ali DA, Johari F, Alias MH. The effect of exchange rate movements on trade balance: A chronological theoretical review. Economic Research International. 2014;1-7.
Available:http://dx.doi.org/10.1155/2014/893170
Dornbusch R. Exchange rates and fiscal policy in a popular model of international trade. American Economic Review. 1975; 15:859-871.
Johnson HG. The monetary approach to the balance of payments theory. Journal of Financial and Quantitative Analysis. 1972; 7(2):1555-1571.
Frenkel JA, Gylfason T, Helliwell JF. A Synthesis of monetary and Keynesian approaches to short-run balance of payments theory. Economic Journal. 1980; 90:582-592.
Murli DB, Henry T, Upadhyaya KP. Devaluation and the trade balance in India: Stationarity and cointegration. Applied Economics. 1996;28(4):429-432.
Available:https://doi.org/10.1080/000368496328551
Nachane DM, Prasad PR. India’s trade balance in the 1980s – An econometric analysis. Applied Economics.1998;30(6):761-774. Availabe:https://doi.org/10.1080/000368498325462
Upadhyaya KP, Mixon FG, Dhakal D. Do devaluations improve trade balances? evidence from four South Asian Countries. The Indian Economic Journal. 1999; 41(3):91-97.
Mahmoud NR. On the impact of exchange rate depreciation on bilateral trade of Egypt and China: An ARDL approach. Journal of Economics, Management and Trade. 2022;28(2):49-63.
Available:https://doi.org/10.9734/jemt/2022/v28i230394
Amaliawiati L, Nursjanti F, Puspitasari DM, Roespinoedji D. The effect of the exchange rate on the Indonesian trade balance in the managed floating exchange rate system and flexible exchange rate system-period 1980 to 2020. Central Asia and the Caucasus. 2022;23(1): 1479-1491. Available:https://doi.org/10.37178/ca-c.23. 1.152
Keho Y. Determinants of trade balance in West African Economic and Monetary Union (WAEMU): Evidence from heterogeneous panel analysis. Cogent Economics and Finance. 2021;9: 1970870. Available:https://doi.org/10.1080/23322039.2021.1970870
Eshetu F, Eshetu N. Impact of exchange rate on Ethiopian trade balance: evidence from ARDL model. Annals of Data Science. Published online: 2021-10-27. Available: https://doi.org/10.1007/s40745-021-00360-x
Iqbal J, Nosheen M, Panezai GR, Salahhuddin. Asymmetric cointegration, non-linear ARDL, and the J-curve: A bilateral analysis of Pakistan and its trading partners. International Journal of Financial Economics. 2021;26: 2263–2278.
Available: https://doi.org/10.1002/ijfe.1905
Bao HHG, Le HP. Asymmetric impact of exchange rate on trade between Vietnam and each of EU-27 countries and the UK: Evidence from nonlinear ARDL and the role of vehicle currency. Heliyon. 2021; 7:e07344.
Available:https://doi.org/10.1016/j.heliyon.2021.e07344
Befikadu AT. Determinant of trade balance in Ethiopia: Approaches from autoregressive distributed lag (ARDL) model. Journal of World Economics Research. 2021;10(2):62-73.
Available:https://doi.org/10.11648/j.jwer.20211002.14
Ceyhan T, Gürsoy S. The J-Curve hypothesis: An analysis for Turkey. Gümüşhane Üniversitesi Sosyal Bilimler Enstitüsü Elektronik Dergisi, 2021;12 (3):1169-1181.
Available:https://dergipark.org.tr/tr/pub/gumus/issue/65088/948428
Kamugisha G, Assoua JE. Effects of a devaluation on trade balance in Uganda: An ARDL cointegration approach. International Journal of Economics and Finance. 2020;12(7):42-53.
Available:https://doi.org/10.5539/ijef.v12n7p42
Bahmani-Oskooee M, Arize AC. Asymmetry cointegration and the J-curve: New evidence from Africa trade balance and the J-curve, an asymmetry analysis. Journal of Economic Studies. 2020;47(5): 969-984.
Available: https://doi.org/10.1108/JES-09-2018-0333
Ibrahim AA, Bashir MS. The effect of real exchange rate changes on external trade balance in Sudan: Testing J-Curve hypothesis. Nile Journal of Business and Economics.2020;6(16):2–23. Available:http://dx.doi.org/10.20321/%25nilejbe.616
Ambe ME. Determinants of trade balance in Ethiopia. Journal of Economics and Sustainable Development. 2019;10(3):111-119.
Available: https://doi.org/10.7176/JESD/10-3-10
Tasseven O, Saracel N, Yılmaz, ÜÖN. Determinants of trade balance for Turkey: ARDL based bounds testing approach. Social Sciences Research Journal. 2019;1 (8):194-208.
Akoto L, Sakyi D. Empirical analysis of the determinants of trade balance in post-liberalization Ghana. Foreign Trade Review. 2019;54(3):177–205.
Available:https://doi.org/10.1177/0015732519851632
Nusair SA, The J-Curve phenomenon in European transition economies: A nonlinear ARDL approach. International Review of Applied Economics, 2016;31(1): 1-27.
Arize AC, Malindretos J, Igwe EU. Do exchange rate changes improve the trade balance: an asymmetric nonlinear cointegration approach. International Review of Economics and Finance. 2017; 49:313-326.
Available: https://doi.org/10.1016/j.iref.2017.02.007
Bahmani-Oskooee M, Kanitpong T. Do exchange rate changes have symmetric or asymmetric effects on the trade balances of Asian countries?. Applied Economics. 2017;49:4668-4678.
Himarios D. The effect of devaluation on the trade balance: A critical view and re-examination of Miles new results. Journal of International Money and Finance. 1985;4(4): 553-563.
Available:https://doi.org/10.1016/0261-5606(85)90029-4
Himarios D. Do devaluations improve the trade balance? The evidence revisited. Economic Inquiry. 1989;27(1): 143-168. Available:https://doi.org/10.1111/j.1465-7295.1989.tb01169.x
Bahmani-Oskooee M, Pourheydarian M. The Australian J-curve: A reexamination. International Economic Journal. 1991;5(3): 49-58.
Yang J-H, Yang GGL. The analysis of automatic adjustment mechanism of balance of payments-evidence from manufactured goods exporters. Business Prospects. 2022;2(2):51-59.
Available:https://doi.org/10.52288/bp.27089851.2021.12.09
Central Bank of Sudan (CBS). Foreign trade statistics digest. Various issues. Khartoum. Sudan.
International Monetary Fund (IMF). International financial statistics [Internet]. Available:https://data.imf.org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b. Washington D. C.
Ibrahim AA, Bashir MS. Causality between government expenditure and economic growth in Sudan: Testing Wagner’s law and Keynesian hypothesis. Journal of Economic Cooperation and Development. 2019;40(4):23–54.
Bashir MS, Ibrahim AA. Effects of macroeconomic variables on bank credit in Saudi Arabia: An ARDL bounds testing approach to cointegration. Asian Journal of Economics, Business and Accounting. 2020;19(2):1–12.
Available:https://doi.org/10.9734/ajeba/2020/v19i230298
Pesaran MH, Shin Y, Smith RJ. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 2001;16(3): 289-326.
Bashir MS, Ibrahim AA. Examining the export-led growth hypothesis: Empirical evidence from Sudan. Journal of Economics, Business, & Accountancy Ventura. 2022;25(1):77–92.
Available:http://dx.doi.org/10.14414/jebav.v25i1.2978
Ibrahim AA, Bashir MS. Does the incomplete exchange rate pass-through exist in Sudan? East African Journal of Business and Economics. 2021;3(1):147–63.
Available:https://doi.org/10.37284/eajbe.3.1.394
Wu M-L. An empirical time series econometric study of the J-curve effect of exchange rate in trade balance between China and the US. Journal of Economics, Management and Trade. 2020;26(6):35-46.
Available:https://doi.org/10.9734/jemt/2020/v26i630264
Sudan Central Bureau of Statistics, Annual statistical yearbook. Various issues. Khartoum. Sudan.
Haansende CM, Nyambe JM. Analyzing the exchange volatility relative to trade balance: The case of SACU countries. Journal of Economics, Management and Trade. 2020;26(6):60-74.
Available:https://doi.org/10.9734/jemt/2020/v26i630266
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