The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

AuthorGan-Ochir Doojav
Published date01 November 2018
Date01 November 2018
Subject MatterArticles
The Effect of Real Exchange
Rate on Trade Balance in
a Resource-Rich Economy:
The Case of Mongolia
Gan-Ochir Doojav1,2
For resource-rich developing economies, the effect of real exchange rate depre-
ciation on trade balance may differ from the standard findings depending on
country specific characteristics. This article employs vector error correction
model to examine the effect of real exchange rate on trade balance in Mongolia,
a resource-rich developing country. Empirical results show that exchange rate
depreciation improves trade balance in both short and long run. In particular, the
well-known Marshall–Lerner condition holds in the long run; however, there is
no evidence of the classic J-curve effects in the short run. The results suggest that
the exchange rate flexibility may help to deal effectively with current account
deficits and exchange rate risk.
JEL Classification: C32, C51, F14, F32
Trade balance model, exchange rate adjustment, Marshall–Lerner condition,
Theoretical models focusing on natural resource-rich economies suggest that the
presence of natural resource sector has serious consequences on the effect of real
exchange rate depreciation on trade balance and real income. According to
Foreign Trade Review
53(4) 211–224
©2018 Indian Institute of
Foreign Trade
SAGE Publications
DOI: 10.1177/0015732518797184
1 The Bank of Mongolia (The Central Bank of Mongolia), Ulaanbaatar, Mongolia.
2 Crawford School of Public Policy, College of Asia and Pacic, The Australian National University,
Corresponding author:
Gan-Ochir Doojav, Research and Statistics Department, The Bank of Mongolia, Baga toiuu-3, 15160,
Ulaanbaatar-46, Mongolia.

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