Effects of exchange rate changes on the Zambi's trade balance

In this paper, we examined the effects of real effective exchange rate (REER) changes on the Zambia´s trade balance, and whether the Marshal-Lerner condition (M-Lerner condition) and the Jcurve effect are satisfied in Zambia following the depreciation of the Zambian Kwacha (ZMK) against the U.S. dollar. Using annual time series data from 1990 through to 2019, the Johansen cointegration test results show that there is a long run relationship between the trade balance, the real effective exchange rate, the Zambia's GDP growth, the world´s GDP growth, and the Zambia´s terms of trade. A standard trade balance model was employed to estimate the long run and short run relationships between the trade balance and the variables in the trade balance model. The results from the trade balance show that the depreciation of the ZMK against the U.S. dollar improves the trade balance in the long run though the results could not validate the M-L condition since the coefficient value of REER was found to be far much less than unity (1). The results further uncover that the world´s GDP growth and the terms of trade both have a significant positive effect on the trade balance in the long run. The Zambia´s GDP growth was found to be statistically insignificant. In the short run, the results from the trade balance model show that the effects of the depreciation of the ZMK against the U.S. dollar on the trade balance were statistically insignificant, thus not consistent with the J-curve effect. The results from the Error Correction Model (ECM) on the other hand show that about 6.3% of the disequilibrium in the Zambia´s trade balance model is corrected every after one year.