Testing Marshall-Lerner condition: a non-parametric approach

Abstract

In this study, non-parametric kernel estimation technique has been employed to estimate import and export price elasticities for six developed countries. Based on the estimates of these elasticities Marshall-Lerner condition has been examined. In general the condition is only partially satisfied in the sub-sample periods. The results also suggest that the condition is more likely to be satisfied under fixed exchange rate regime.

Acknowledgements

The authors are indebted to Prof. Fatma Taskin from Bilkent University for her invaluable comments, during the earlier phase of this study. All the views expressed in this paper belong to the authors and do not represent the views of the Central Bank of the Republic of Turkey, or its staff.

Notes

¹ Sample periods are as follows: Australia: 1966:III–1998:IV, Germany: 1960:I–1995:IV, Japan: 1960:I–1995:IV, Norway: 1966:I–1998:IV, United Kingdom: 1957:I–1997:IV, United States: 1957:I–1997:IV.

² Normally the sum of absolute values of elasticities is taken and if it is greater than one then the condition is satisfied. In our case, some of elasticity estimates are positive and therefore simple sum is more convenient.

³ Japan shifted to flexible exchange rate regime in 1973.