The Effect of Exchange Rate on Exports and Imports: The Case of Jordan

Abstract

This article aims at exploring the effect of exchange rate on exports and imports in Jordan over the 1976–2009 period. In addition, it tests if Jordan's workers’ remittances create an effect, equivalent to “the Dutch disease effect,” on Jordan's exports competitiveness, and it computes Marshall-Lerner condition to check the foreign exchange market stability. We employ the bounds testing approach to cointegration and the error correction model. We find that Jordan's competitiveness has a trend of deterioration. The influence of Jordan's exchange rate on exports and imports is active in the short-run only. Additionally, Jordan's workers’ remittances have an impact similar to “the Dutch disease effect” via increasing the cost of living, thus reducing exports competitiveness. Also, Marshall-Lerner condition is less than one; the foreign exchange market will be unstable if exchange rate policy devaluation is adopted. The policy implication of the article is against adopting a devaluation policy in Jordan.

Keywords:

• Jordan economy
• real effective exchange rate
• demand for real imports and real exports
• Dutch disease
• Marshall-Lerner condition

ACKNOWLEDGMENTS

The author would like to thank the editor and two anonymous referees of The International Trade Journal for their valuable and helpful comments. The author is responsible for any errors.

Notes

¹This condition is known in the literature as Marshall-Lerner condition; , where stands for the price elasticity of demand for home country exports, η_DM denotes the price elasticity of demand for home country imports, M is the total expenditures on imports, and X is the total expenditures on exports. This expression is used if the unbalanced trade is expressed in units of home country currency.

²If the response of the consumers and the producers has some delay, this creates a deep J-curve.

³For more details about these channels, see Bahmani-Oskooee and Miteza (2003), Wijnbergen (1989), and Krugman and Taylor (1978).

⁴For more details, see Giovannetti (1989), Abbott and Seddighi (1996), and Narayan and Narayan (2005)

⁵For the purpose of this study, the trade partners of Jordan are the Gulf countries, the United States, India, Japan, and China. For more details regarding the identity by which we calculate , see Appendix.

⁶ Dornbusch (1988) and Hooy and Choon (2010).

⁷We run Granger Causality test by using 5 lags, the Granger Causality test shows significant results at lags 1, 3, and 4, the probability of F-Statistic is 0.040, 0.092, and 0.055, respectively.

⁸We computed the price level index of trade partners by summing up the multiplication of the trade share (exports plus imports) of each trade partner times the consumer price index of each partner.

⁹ http://www.cbj.gov.jo/.

¹⁰ http://www.econstats.com/wdi/wdiv_431.htm.

¹¹The null hypotheses of the current study are for equation (3) and for equation (4).

¹²The results of the test are reported in the diagnostic section of Table 2 and Table 3.

¹³ , where is the number of linear restrictions, is the number of observations, and is the number of the parameters in the unrestricted regression.

¹⁴For more details about trade elasticities, see Hooper et al. (2000) and Aziz and Li (2008).

¹⁵Jordan's Marshall-Lerner condition in the short-run = 0.83 and in the long-run = 0.98.