Testing the Marshall-Lerner Condition in Kenya

28 Pages Posted: 13 Oct 2012

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

Robert Mudida

affiliation not provided to SSRN

Date Written: September 1, 2012

Abstract

In this paper we examine the Marshall-Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export-import ratio and relative (US) income for the time period 1996q1 - 2011q4, and employ techniques based on the concept of long memory or long-range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well-defined cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilizing influence on the balance of payments through the current account without the need for high interest rates.

Keywords: Marshall-Lerner condition, fractional integration, fractional cointegration

JEL Classification: C22, C32, F32

Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A. and Mudida, Robert, Testing the Marshall-Lerner Condition in Kenya (September 1, 2012). DIW Berlin Discussion Paper No. 1247, Available at SSRN: https://ssrn.com/abstract=2160769 or http://dx.doi.org/10.2139/ssrn.2160769

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

Robert Mudida

affiliation not provided to SSRN ( email )

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