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

See all articles by Ravinder Rena

Ravinder Rena

Papua New Guinea University of Technology; Polytechnic of Namibia; University of the Western Cape; North-West University; Papua New Guinea University of Technology

Dr. Muhammad Irfan Chani

COMSATS University Islamabad

Muhammad Shahabz

affiliation not provided to SSRN

Date Written: October 29, 2011

Abstract

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

Rena, Ravinder and Chani, Muhammad Irfan and Shahabz, Muhammad, Impact of Currency Depreciation on Trade Balance: A Case Study on Papua New Guinea (October 29, 2011). Journal of Pacific Studies, Vol. 31, No. 1, pp. 117-140, 2011. Available at SSRN: https://ssrn.com/abstract=1951073

Ravinder Rena (Contact Author)

Papua New Guinea University of Technology ( email )

Private Mail Bag 411
Lae, Morobe 411
Papua New Guinea

HOME PAGE: http://www.unitech.ac.pg

Polytechnic of Namibia ( email )

13 Storch Street
Private Bag 13388
Windhoek, Khomas 13388
Namibia

HOME PAGE: http://www.polytechnic.edu.na

University of the Western Cape ( email )

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Economics, Faculty of Economic and Management Scie
Bellville, Western Cape 7535
South Africa
0027219593624 (Phone)
0027219593201 (Fax)

HOME PAGE: http://www.uwc.ac.za

North-West University ( email )

Hoffman Street
Potchefstroom, 2520
South Africa

HOME PAGE: http://www.nwu.ac.za

Papua New Guinea University of Technology ( email )

Private Mail Bag 411
Lae, Morobe 411
Papua New Guinea

HOME PAGE: http://www.unitech.ac.pg

Muhammad Irfan Chani

COMSATS University Islamabad ( email )

Mailsi Road
Off Multan Road
Vehari, Punjab
Pakistan

HOME PAGE: http://ww3.comsats.edu.pk/faculty/FacultyDetails.aspx?Uid=19095

Muhammad Shahabz

affiliation not provided to SSRN

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