Bilateral trade flows and exchange rate sensitivity: Evidence from likelihood-based panel cointegration

This paper estimates price and income elasticities for bilateral trade equations between Sweden and her eight major trading partners for the period 1960-2001. The methodology used here is the likelihood-based panel cointegration recently developed in the literature. Evidence is found that depreciation of the SEK is expected to improve the Swedish export sector towards six of her eight major trading partners. Regarding Swedish imports, only in four of the eight cases, the price elasticity indicates that depreciation of the SEK decreases Swedish imports. Considering the Marshall-Lerner condition, this is fulfilled for two of the eight countries in the sample. The income elasticities are found to be positive for all countries in the sample. The policy implications of our results are discussed.