Impact of Currency Depreciation on Trade Balance: A Case Study on Papua New Guinea
Journal of Pacific Studies, Vol. 31, No. 1, pp. 117-140, 2011
Posted: 30 Oct 2011
Date Written: October 29, 2011
The article attempts to delve the comprehensive understanding between trade balance and currency depreciation by incorporating the absorption and monetary approaches, including the Marshal Lerner condition. In doing so, the Ng-Perron test is employed to find out the order of integration and the cointegration technique developed by Johansen and Juselius (1990) to examine the long-run relationship between currency depreciation and trade balance. Our results reveal that there is a long-run relationship among trade balance, currency depreciation, real income and money supply. Any depreciation in local currency worsens the trade balance. The reforms in trade policies improve the trade balance in the future but deterioration in the trade balance seems to reverse this impact due to currency depreciation. A fall in money supply plays a vital role in improving the trade balance in Papua New Guinea. A rise in domestic income seems to recover the trade deficit.
Keywords: Currency depreciation, Trade balance, Cointegration, monetary approach, Bank of Papua New Guinea
JEL Classification: C51, E5, E52, F31
Suggested Citation: Suggested Citation