Trade balance and real exchange rate: new evidence from Mauritius-UK trade
by Rakesh K. Bissoondeeal
Global Business and Economics Review (GBER), Vol. 11, No. 2, 2009

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.

Online publication date: Mon, 19-Oct-2009

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