Exchange rate sensitivity of the Canadian bilateral inpayments and outpayments

What is it about?

The traditional way of assessing the impact of currency depreciation on the trade balance has been to estimate the import and export demand elasticities using aggregate trade data and check the Marshall–Lerner condition. To reduce the aggregation bias, the trend now is to estimate these elasticities on a bilateral basis. However, due to lack of data on import and export prices at bilateral level, the new models relate import or export values directly to the exchange rate. In this paper, we estimate such models between Canada and her 20 largest trading partners using recent advances in time-series modeling. The results reveal that in many cases while export values (inpayments) are not sensitive to the exchange rate, import values (outpayments) are.

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Why is it important?

In this paper, rather than estimating import and export demand elasticities between Canada and her major trading partners, following recent trends, we directly related Canadian import value (outpayments) and her export value (inpayments) to real exchange Table 4 Stability test results for the export and the import demand models Partners Export Import CUSUM CUSUMSQ CUSUM CUSUMSQ Australia Stable Unstable Stable Stable Austria Stable Unstable Unstable Stable Denmark Stable Unstable Unstable Stable Finland Stable Stable Stable Stable France Stable Unstable Stable Unstable Germany Stable Unstable Stable Unstable India Stable Stable Stable Unstable Ireland Stable Stable Stable Stable Italy Stable Unstable Stable Stable Japan Stable Unstable Stable Unstable Korea Stable Unstable Stable Unstable Malaysia Stable Unstable Stable Stable Netherlands Stable Unstable Unstable Stable Norway Stable Unstable Stable Unstable Singapore Unstable Unstable Stable Unstable Spain Stable Stable Stable Stable Switzerland Stable Unstable Stable Stable Sweden Unstable Unstable Stable Stable UK Stable Unstable Stable Unstable USA Stable Unstable Stable Unstable M. Bahmani-Oskooee et al. / Economic Modelling 22 (2005) 745–757 755 rate. After including a scale variable in each model and after specifying each model in an error-correction format, we estimated the models between Canada and each of her 20 major trading partners (i.e., Australia, Austria, Denmark, Finland, France, Japan, Germany, India, Ireland, Italy, Korea, Malaysia, Netherlands, Norway, Singapore, Spain, Sweden, Switzerland, UK and the US). The results showed that while in many cases real depreciation lowers Canadian outpayments, it has no significant impact on her inpayments. One explanation could be the fact that in order to retain their market share, Canadian exporters adjust their profit margins in response to exchange rate changes rendering export earnings (inpayments) insensitive to exchange rate changes. These findings are similar to those found for Japan by Bahmani-Oskooee and Goswami (2004).