Estimation of the trade elasticities for the South African economy

Abstract

The Marshall-Lerner condition states that a trade balance improves after currency depreciation if trade elasticities exceed one. Using the Vector Error Correction Method (VECM), this study tests the condition for South Africa, focusing on how exchange rate changes affect the trade balance under a floating exchange rate regime. The analysis examines short- and long-run impacts on exports and imports to assess whether exchange rate adjustments can improve the trade balance. Findings reveal that global income growth and exchange rate appreciation positively influence exports, while imports increase with both appreciation and higher domestic income. Although exports and imports respond strongly to exchange rate changes, the Marshall-Lerner condition does not hold for South Africa, suggesting that exchange rate adjustments alone may not improve the trade balance.

Keywords: {'name': 'Marshall-Lerner Condition'}, {'name': 'Vector Error Correction Model'}, {'name': 'Exchange Rates'}, {'name': 'Trade Balance'}

Authors & affiliations

Reuben Jerome Kisten
University of KwaZulu-Natal

Ntokozo Hadebe
University of KwaZulu-Natal

Simiso Msomi
University of KwaZulu-Natal

Malibongwe Nyathi
Tshwane University of Technology

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