Estimating exchange rate and bilateral trade balance relationships: The experiences of sub-saharan African countries

Abstract

This paper examines the effects of exchange rate changes on the bilateral trade balance of ten African countries vis-à-vis the US using annual data over period 1977-2002. Both the Johansen and panel cointegration tests find cointegration among the series. The country FMOLS results show that real exchange rate depreciation improves the trade balance in six of ten countries in contrast to Tanzania in which it worsens the trade balance, with no effect found in Ghana, Morocco and Senegal. Foreign real income improves the trade balance in two countries but worsens it in another three. Finally, domestic real income negatively affects the trade balance in four countries but improves it in another three. The three-panel coefficients are correctly signed and significant at the 1% level. © 2007 The Authors. Journal compilation © 2007 Economic Society of South Africa.