Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from Threshold Nonlinear ARDL Model

Abstract

The objective of this paper is to shed new light on the nonlinear relationship between real exchange rate changes and trade balance in Cote d’Ivoire. In examining this issue, previous studies have relied on the nonlinear autoregressive distributed lag model developed by Shin et al. (2014) where real exchange rate is decomposed into partial sum of positive and negative changes. They fail to examine the response of the trade balance to extreme changes in the real exchange rate. In order to investigate possible sign and size-dependence in the response of the trade balance to exchange rate, this study uses multiple threshold nonlinear ARDL modeling. The approach is implemented using annual data covering the period 1975-2017. The results reveal that the effects of changes in real exchange rate are asymmetric in both time horizons. More specifically, real exchange rate appreciations deteriorate the trade balance while real depreciations improve it. Further, the effect of large depreciations is higher when compared with large appreciations.