COINTEGRATION TEST OF A LONG-RUN RELATION BETWEEN THE REAL EFFECTIVE EXCHANGE RATE AND THE TRADE BALANCE 授課教授：楊奕農 學生：姜旭東

Content Introduction Methodology and Model Empirical Results Conclusion

Introduction The paper used cointegration methodologies to examine the long-run relation between the real effective exchange rate and the trade balance in nine Asian economies over the present flexible exchange rate period, 1973Q1 through 1991Q1. Quarterly data for the period 1973Q1 through 1991Q1 are collected from the following sources: International Financial Statistics of IMF, various issues including supplement on prices and exchange rates. Direction of Trade Statistics, IMF

Methodology and Model the Marshall-Lerner (M-L) condition Unit root test Cointegration Test

Where TB is a measure of the trade balance and is represented by the ratio of exports to imports; rer is a measure of real effective exchange rate and is defined as the product of foreign price level (Pf ) and the nominal effective exchange rate (domestic currency per unit of foreign currency) divided by the domestic price level; and is an error term.

Empirical Results

Conculsion The most significant observation appears to be the positive relation between the trade balance and the real effective exchange rate in most of the Asian economies. Despite some obvious exceptions, our results indicate that the two variables are cointegrated. This implies that in the long-run devaluation improves the trade balance. Put differently, an increase in real effective exchange rate (defined as the number of units of domestic currency per unit of foreign currency) implies a devaluation of domestic currency.