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Empirical Evaluation of the Exchange Rate Changes Effect on the Russian Trade Balance: the ARDL Bounds Testing Approach

Student: Dar`ya Kozlova

Supervisor: Andrey G. Shulgin

Faculty: Faculty of Economics

Educational Programme: Bachelor

Year of Graduation: 2014

In this paper we discuss the main reasons for the existence of the J-curve effect and conduct an empirical study to identify it on macro-economic statistics for Russia. The ARDL-model of aggregate trade balance, as well as models of bilateral trade balances with the ten main trading partners, including Germany, Netherlands, Ukraine, Italy, Turkey, the USA, Japan, France, Poland and the UK were estimated using monthly data over the periods of time from January 1994 to January 2014 and from January 2004 to January 2014 correspondingly. To study the reactions of the trade balance to currency devaluation in the short-run and long-run period it was used ARDL-model, the bounds testing approach to cointegration and vector error correction model (VECM) to assess the short-and long-term regression coefficients. The results suggest evidence of cointegration among the trade balance, the real effective exchange rate, domestic and foreign income in all the cases.The study did not find the existence of the J-curve, since; it was obtained negative and significant estimates of the exchange rate effects on the trade balance for both short- and long-term periods. The results indicate the presence of a positive impact of real effective exchange rate of the ruble devaluation on the trade balance of Russia. In the study of bilateral trade balances with Russian trading partners, only in one case the hypothesis of a J-curve effect was confirmed (Germany). Impulse response function revealed also three cases of its existence: Italy, the Netherlands and Poland. For three countries (France, the UK and Japan) it was obtained positive and significant long-term coefficient estimates for the exchange rate. This suggests that the depreciation of the ruble worsens bilateral trade balance with these countries in the long run and also in the short run periods for the first two countries. This research will be of interest to those who formulates and implements monetary policy, as it will help deal with the question of the sensitivity of some macroeconomic parameters to changes in the exchange rate and , as a result, the effectiveness of policies for economic growth. These findings can be used by governments to make decisions about what methods to use in order to adjust the trade balance.

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