Testing the Marshall-Lerner condition and the J-curve effect: empirical evidence for the Peruvian case

The Marshall-Lerner condition states that real depreciation increases net exports. However, there is empirical evidence that a real depreciation can lead to a deterioration in the external accounts in the short run, a situation that, as it reverses over time, forms a J-curve. This paper analyzes the empirical evidence for the Marshall-Lerner condition and the J-curve in the Peruvian economy during the period 1991–2008 using quarterly data. The variables considered are: the trade balance, the bilateral real exchange rate, gross domestic product, and world imports, as a proxy for income from the rest of the world. Following Breitung (2000) and Juselius (2006), the methodology used is cointegrated VAR (CVAR), which is employed to determine whether a long-run relationship exists between the series under study and, at the same time, to examine the transmission mechanisms among these series. The results show that the Marshall-Lerner condition is satisfied and that the existence of the J-curve for the Peruvian economy is rejected. Finally, it is found that the long-term determinants of Peru’s trade balance are the real exchange rate and global imports, with gross domestic product excluded from this relationship. (Audio: Department of Economic Publications)