Examining Afghanistan's trade balance with its largest trading partners with emphasis on the test (J-curve phenomenon)

Abstract

Afghanistan's trade balance has been in deficit for many years, especially in the last two decades, and the deficit has always been covered by foreign aid and the Central Bank's foreign exchange reserves. The assessment, which is considered one of the most important changes in the creation of international relations, will lead to the improvement of the trade balance in order to create a framework and use appropriate currency policies. This experimental research aims to investigate the J-shaped curve phenomenon in Afghanistan's trade balance with its largest trading partners, which uses the Panel-ARDL econometric method to estimate price and income factors. The data used in this research is composite and it has studied the period from 2008 to 2018 along with twenty-one major business partners. The model outputs include the real exchange rate, Afghanistan's GDP, and each partner's GDP. In order to analyze and estimate the long-term and short-term relationships of Afghanistan's trade balance, the co-accumulation and ARDL tests were used. The research investigations, with the disconfirmation of the J-curve effect in the short term, have indicated the positive and meaningless effect of the exchange rate, and in the long term, the price factors (exchange rate) have a greater effect on the trade balance than the non-price factors (GDP). Also, on the other hand, the internal business relations of short-term partners have significance in the long-term. After estimating the model, it is concluded that devaluation policies in improving trade depend on the mutual behavior of trading partners and their currency stability.

Keywords

• j curve
• trade balance
• exchange rate