The J-curve effect on the trade balance in Malawi and South Africa

The purpose of this paper is to investigate the effects of devaluation on the trade balance in Malawi and South Africa using a vector error correction model (VECM). The generalized impulse response functions are used to trace the response of the trade balance to the shocks in the exchange rate. The vector error correction model suggests the existence of a long-run equilibrium relationship among the variables for both Malawi and South Africa. There is a positive relationship between the trade balance and the real effective exchange rate indicating that a real depreciation will improve the trade balance in the long run. The study finds evidence of the J-curve on the South African trade balance. This suggests that following a real depreciation the South African trade balance will initially deteriorate but improve in the long run. However, Malawi does not exhibit a statistically significant J-curve phenomenon.