Do Exchange Rate Changes Improve the Trade Balance in GCC Countries: Evidence from Nonlinear Panel Cointegration

ABSTRACT

This study examines the asymmetric impact of the nominal effective exchange rate (NEER) on the trade balance in GCC countries over the period of 2000:Q1 to 2017:Q4. The empirical findings of the nonlinear pooled mean group (PMG) estimator reveal the presence of a J-curve shape where an increase in NEER (currency depreciation) deteriorates the trade balance in the short run and improves it in the long run. Findings also prove that the trade balance’s response to NEER positive changes is greater compared to negative changes. The policy implication of these findings reveals that NEER is a useful tool to sustain the trade balance.

KEYWORDS:

• Trade balance
• nominal effective exchange rates
• foreign prices and nonlinear panel cointegration
• GCC countries

Acknowledgment

Open Access funding provided by the Qatar National Library. This paper was made possible by an NPRP grant (NPRP12S-0311-190314) from the Qatar National Research Fund.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The Gulf Cooperation Council consists of six countries, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

² Trade balance data for some GCC countries are not available before 2000.