J-Curve Dynamics and the Marshall–Lerner Condition : Evidence from Azerbaijan

Is there a J-curve for Azerbaijan? In answering this question, we are estimating a conventional trade model for Azerbaijan vis-à-vis its major trading partner—Europe. We are employing a Johansen approach to cointegration and error correction modeling. Our results suggest that a real depreciation of the Azerbaijani Manat will cause a decline in the balance of trade in the short run, and an increase in the long run. When we include the prices of exports and imports into the analysis, the new model shows that the terms of trade ratio diminishes following the devaluation but does not return to its pre-depreciation level in the long run. The balance of trade, however, continues to improve. This observation points at the presence of an underlying volume effect which is the key driver of the trade balance growth. Overall, the results of this study suggest a fulfillment of the Marshall–Lerner condition criterion, indicate the existence of the J-curve, and of the price and volume effects