Simultaneity between export and import flows and the Marshall-Lerner condition

This paper presents an analytical reformulation of the Marshall-Lerner condition under the assumption that the independence of the GDP from the exchange rate cannot be postulated in open economies in which the foreign trade flow/GDP ratio is high. This paper attempts to analyse how, in open economies in which the export and import flow/GDP ratio is very high, independence between the GDP and the exchange rate is not a plausible assumption, so the traditional version of the Marshall-Lerner condition is not sustained.The analytical model attempts to explain the potential impact of currency devaluation on the balance of trade, breaking down the total effect according to the degree of simultaneity among export and import flows.We use the Maximum Likelihood cointegration procedure to study the long-run equilibrium of exports and imports. Our long-run approach supports the notion that devaluation could improve the Spanish balance of trade.

► This paper presents an analytical reformulation of the Marshall-Lerner condition. ► In this paper, we study the impact of currency devaluation on the balance of trade. ► In this paper, we study the long-run equilibrium of exports and imports for Spain.