Is there a J-Curve effect in Sierra Leone? An empirical analysis with VECM

This paper examines the relationship between exchange rate and trade balance in determining whether the J-Curve phenomenon hold in the short and long-run for Sierra Leone during the period 2002Q2 – 2019Q4. The econometric technique commenced with an assessment of unit root to ascertain the order of Unit Root and followed by an Unrestricted Vector Autoregressive (VAR) estimation. The procedure leading to using Vector Error Correction Model (VECM) was confirmed through Johansen Cointegration test. The result suggests long-run relationship running between exchange rate and trade balance for all three model equations, but weakly for the Trade Balance Model, which is also attested in the impulse response shock for trade balance and real effective exchange rate. The Marshall-Lerner (ML) condition was also satisfied, with the joint elasticity for Export and Import summing up to more than one. The short-run dynamic situation for Sierra Leone was not satisfied with the Wald Tests for all three models – this could be due to internal macroeconomic bottlenecks associated with weaknesses in the real sector. The findings for this study is relevant for Central Bank policy formulation and fiscal consolidation efforts. It is highly recommended that domestic production is boosted to ascertain macroeconomic stability in the economy