Revisiting the Relationship between Real Exchange Rate and Trade Balances

This paper examines a study, which investigates the impact of real exchange rates on trade balances of three countries in South with the US. The relationship between real exchange rates and trade balances was found to be ambiguous as revealed by previous empirical studies. This study applies Augmented Dickey-Fuller and Phillips-Perron tests for stationarity followed by the cointegration tests. All variables in the model have been found to be non-stationary but cointegrated for all the countries studied. The results show that the impact of real exchange rates on trade balances is significant in most cases and that the generalized Marshall-Lerner condition seems to hold. We also specify and estimate a model by Stock and Watson (1989) to investigation whether and to what extent bilateral trade balances respond to real exchange rates.