Almost all countries face the problems of trade balance, although they are more inherent in developing countries and economies in transition. A majority of economists adheres to a common opinion real depreciation may lead to an improvement of the trade balance. That said, countries encountering trade balance issues use real exchange rate depreciation in order to improve the trade balance situation. Albania belongs to the group of transition countries that has been facing negative trade balance over last two decades. National currency devaluations of the lek (ALL) have been used by Albania to improve its trade balance. Therefore, this paper intends to investigate the effect of the real effective exchange rate depreciation of the ALL on the trade balance of Albania using quarterly data from 1994 to 2015. Bounds testing cointegration approach, vector error correction model (VECM) and impulse response were used for empirical analysis. The results of the study show that there exists a long-term cointegration between the real effective exchange rate depreciation and the trade balance. Specifically, real effective exchange rate depreciation positively affects the trade balance of Albania in both the long-run and short-run indicating the weak presence of the J-curve effect. Important recommendations were derived from the results.
KOLA, T., LIKKO, E. (2008) An Empirical Assessment of Alternative Exchange Rate Regimes in Medium Term in Albania. BERG Working paper series on government and growth No. 58.
KRUEGER, O. A. (1983) Exchange Rate Determination. Cambridge: Cambridge University Press.
KRUGMAN, P., BALDWIN, E. R. (1987) The Persistence of the US Trade Deficit. Brookings Papers on Economic Activity, No.1-2, pp. 1–43. DOI.org/10.2307/2534513
KURTOVIC, S. HALILI, B., MAXHUNI, N. (2016) Bilateral Trade Elasticity: B&H versus its seven trade partners. MPRA Paper No. 72297.
KURTOVIC, S., TALOVIC, S., DACIC, L. (2015) Foreign Direct Investment and Net Wages: The Case of Western Balkan Countries. British Journal of Economics, Finance and Management Sciences, 10(2), pp. 130-156.
PAHLAVANI, M., WILSON, E., WORTHINGTON, A. C. (2005) Trade-GDP Nexus in Iran: An Application of the Autoregressive Distributed Lag (ARDL) Model. American Journal of Applied Sciences, 2(7), pp. 1158-1165. DOI.org/10.3844/ajassp.2005.1158.1165
PESARAN, H. M., SHIN, Y., SMITH, R. J. (1999) Bounds Testing Approaches to the Analysis of Long-Run Relationships. Discussion Paper Series, No. 46.
PESARAN, M. H., SHIN, Y., SMITH, R. J. (2001) Bounds Testing Approaches to the Analysis of Long-Run Relationships. Journal of Applied Econometrics, 16 (3), pp. 289-326. DOI.org/10.1002/jae.616
PETROVIĆ, P., GLIGORIĆ, M. (2010) Exchange Rate and Trade Balance: J-curve Effect, Panoeconomicus, No.1, pp. 23-41. DOI.org/10.2298/PAN1001023P
WILLSON, P. (2001) Exchange rates and the trade balance for dynamic Asian economies: Does the J-curve exist for Singapore, Malaysia and Korea. Open Economies Review, No. 12, pp. 389-413. DOI.org/10.1023/A:1017982901034
YUEN-LING, N., WAI-MUN, H. (2008) Real Exchange Rate and Trade Balance Relationship: An Empirical Study on Malaysia. International Journal of Business and Management, 3(8), pp. 130-137.