Title: Trade balance and real exchange rate: new evidence from Mauritius-UK trade
Authors: Rakesh K. Bissoondeeal
Addresses: Economics and Strategy Group, Aston Business School, Aston University, Birmingham B4 7ET, UK
Abstract: Two main questions are addressed here: is there a long-run relationship between trade balance and real exchange rate for the bilateral trade between Mauritius and UK? Does a J-curve exist for this bilateral trade? Our findings suggest that the real exchange rate is cointegrated with the trade balance and we find evidence of a J-curve effect. We also find bidirectional causality between the trade balance and the real exchange rate in the long-run. The real exchange rate also causes the trade balance in the short-run. In an out-of-sample forecasting experiment, we also find that real exchange rate contains useful information that can explain future movements in the trade balance.
Keywords: trade balance; real exchange rates; cointegration; J-curve; Granger causality; forecasting; Mauritius; UK; United Kingdom.
Global Business and Economics Review, 2009 Vol.11 No.2, pp.167 - 179
Accepted: 18 Aug 2009
Published online: 19 Oct 2009 *