The bilateral J-curve between Ghana and her key trading partners

Abstract

This study examines the J-Curve phenomenon of a developing country for the case of Ghana and its major trade partners: Switzerland (Swiss) and China. Using quarterly bilateral data from Q1-1995 to Q4-2018 to investigate the impact of currency depreciation on the bilateral trade balance in the short and the long run, it was established that the depreciation of Ghana Cedis in recent years could be considered as a successful policy for the trade balance improvement of Ghana. First, the real depreciation of Ghana Cedis improves Ghana’s trade balance with China and the Swiss after worsening the trade balance in the short run. Second, in the long run, the Ghana trade balance is improved from a real depreciation of Cedis, which formed 3.235 percent and 1.594 percent of Ghana’s total trade share with China and Swiss, respectively. Third, the estimates show evidence of the J-Curve phenomenon only in the cases of China, not for the Swiss. Additionally, the real income of trading partners has a positive and significant effect in the long run, indicating that an increase in the real income of partners has an important role in determining imports from Ghana. However, there is no significant effect on Ghana’s real income on the trade balance. Lastly, the results from diagnostic tests show that the estimated relationships have been stable and reliable over the last 24 years. Consequently, in line with the study results, the authors recommend several policy implications to improve the trade balance in Ghana.

Keywords:

• J-Curve phenomenon
• bilateral trade balance
• real exchange rate
• ARDL approach
• Ghana

JEL Codes:

• F13
• F14
• F31
• B27

PUBLIC INTEREST STATEMENT

Local currency movement is of crucial interest to policymakers and stakeholders owing to its ripple effect in all spheres of the economy. A higher-valued currency makes a nation’s imports relatively affordable and its exports relatively expensive in foreign markets, whiles a lower-valued currency makes a country’s imports more expensive and its exports less expensive in foreign markets. Therefore, a higher exchange rate can be expected to worsen a country’s balance of trade, while a lower exchange rate can be expected to improve it, as argued by the J-curve theory. However, this study, among other studies, shows that an initial worsening of a nation’s trade balance following a depreciation of its currency might not always result in a dramatic gain in the trade balance in the long run. Thus, nations especially developing countries such as Ghana, in this case, should strive for a stable and competitive exchange rate policy anchored on the nation’s trade prowess.

Disclosure statement

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

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Benedict Arthur

Benedict Arthur is a Researcher at the School of Finance, Zhongnan University of Economics and Law in China. His current research interests span across International Finance, Monetary Economics, Sustainability, Corporate Governance, and Finance.

Millicent Selase Afenya

Millicent Selase Afenya is a Ph.D. accounting student at Zhongnan University of Economics and Law. Her main research interests lie in the area of Auditing and Corporate Governance.

Michael Asiedu

Michael Asiedu is a Ph.D. student in Finance at Zhongnan University of Economics and Law in Wuhan - China. His research interests include securities analysis, asset valuation and pricing, financial innovation and inclusion, monetary policy, and growth theories.

Rebecca Aduku

Rebecca Aduku is a master’s student at Zhongnan University of Economics and Law in China. She majors in International Business, and her current interest lies in international trade policies and E-commerce.