Determinants Of Trade Balance In Liberia: A Vector Error Correction Model Approach
Kollie, Genesis Bhenda
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The issue of international trade and gains from trade have been of major concern to economies of the world. For the Liberian case, the Balance of Trade (BoT) has, in recent decades, been unfavourable. Recent statistics shows that the deficit is increasing beyond bound on a yearly basis. This study is, therefore, intended to empirically establish the factors that influence the position of the balance of trade for the Liberian economy. The motivation for this study is drawn from the Keynesian-Absorption approach to the balance of trade. It maintains that to improve trade balance, output growth should exceed expenditure growth. We used Johansen cointegration to test for the long run relationship between BoT and its determinants, and we found existence of a long run relationship; thus indicating that the Vector Error Correction Model (VECM) estimation technique was appropriate in establishing the determinants of Liberia’s trade balance. However, due to the issue of over-parameterization of the VECM estimates, we used the Impulse Response Function (IRF) and the Forecast Error Variance Decomposition (FEVD) to interpret the findings of the VECM estimation. Using secondary, annual time series data spanning from 1970 to 2015, and the VECM estimation technique, we found that gross domestic product and lending interest rate positively impact BoT in the long run; while exchange rate, trade openness and money supply negatively influence BoT in the long run. We also found merchandise import and primary commodity export having inconsistent effects on BoT from the short run to the long run. Based on these findings, we found evidence of the Keynesian-Absorption Approach to BoT; thus, we recommend that to improve Liberia’s BoT, effort should be made to increase domestic output over expenditure; there should also be efforts to diversify the export commodities of Liberia. And efforts should be made to have stability in the exchange rate.
University of Nairobi
RightsAttribution-NonCommercial-NoDerivs 3.0 United States
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