J-Curve dynamics and the Marshall-Lerner condition: evidence from Azerbaijan

Is there a J-curve for Azerbaijan? In answering this question, we are estimating a bilateral trade model for Azerbaijan vis-à-vis its major trading partner – Europe. The Johansen approach to cointegration and error correction modeling is employed. We analyze the total bilateral trade turnover and specifically the trade in the non-oil sector. Our results prove that a real depreciation of the Azerbaijani Manat will cause a temporary decline in the balance of trade in the short-run, but an improvement in the long-run. The outcome holds both for the total and for the non-oil trade models. Robustness tests with export and imports prices show that the volume effect is the underlying driver for the trade balance improvement in the case of total trade but not for the non-oil sector, in which the price effect seems to be dictating the short-run dynamics. Overall, results of this study suggest a fulfillment of the Marshall-Lerner condition criteria both for the total and for the non-oil sectors, indicate the existence of the J-curve patterns in both scenarios, and the presence of a dominating volume effect in the case of total trade.