Page 91 - Azerbaijan State University of Economics

J-CURVE AND THE MARSHALL-LERNER CONDITION - THE CASE OF AZERBAIJAN

Industrial diversification is an existential strategic concern for all

resource-rich states. Allowing for a temporary devaluation of the currency
should, according to recent research results, act as a price-driven booster

for non-oil exports. With time, retained investments will initiate a build-up
of technology- and productivity-based competitive advantage, kick-

starting sustainable growth from within. While there are several potential

drawbacks to this policy recommendation, there seem to be very few other
alternatives capable of delivering such fast, value-added results.

6. Conclusion
This study has attempted to estimate the J-curve phenomenon for

Azerbaijan through an analysis of the country’s non-oil exports and total

imports. The Johansen co integration approach has been employed to
measure the long-run responses of the balance of trade to currency

depreciation, and an Impulse Response Function was built to analyze the
short-run trade dynamics. The empirical results have indicated one long-

run co integrating equation, according to which a real devaluation causes a
decrease in the trade balance in the short-run and an increase in the long-

run. An additional set of models with the export and import prices was

constructed to reveal the underlying reasons for the long-run improvement
in the balance. The test has shown that the terms of trade ratio drops

following the devaluation in parallel with the balance of trade worsening.
The ratio does not return to its pre-depreciation level in the long-run,

while the balance of trade continues to improve suggesting an underlying
presence of the volume effect. Overall, the results of this study suggest a

fulfillment of the Marshall-Lerner condition criteria, indicate the existence

of the J-curve pattern, as well as the price and volume effects. However,

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