Page 87 - Azerbaijan State University of Economics

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

elasticity grows with time, a key assumption behind the Marshall-Lerner

condition, the balance of trade improves. As proven by the signs in the
co integrating equations presented earlier, Azerbaijani non-oil export

demand is strongly elastic in the long-run.
One of the assumptions of the J-curve theory is that the balance of

trade is equal to zero at the time of the devaluation. Should a deficit or

surplus exist, however, as is often the case with the majority of countries,
the analysis gets more complicated. In particular, it is more difficult to

deduce concrete policy-relevant alternatives for action. In principle, the
intention to depreciate the currency in order to improve the current account

has logic if the nation carries a significant trade deficit. Azerbaijan has been

enjoying a trade surplus in the past years, when considering total exports.
However, the non-oil component alone, which currently stands at around

5% of the total value of exports does not balance out total imports. It’s
therefore difficult to extrapolate the results of this study carried out only

over the non-oil segment of Azerbaijani exports to the general trade balance
with the inclusion of the vast oil and gas industries.

Furthermore, there is an additional potential contemporaneous

currency effect vis-à-vis the American dollar, in which the country’s oil
exports are traded. Depending on how the exchange rate fluctuations are

managed, the domestic manat can be converted to the Euro either
directly or via the third currency, namely Dollar. A bilateral AZN/EUR

depreciation could therefore potentially devalue the manat with respect
to the Dollar as well, implying an existence of additional influences on

the foreign trade prices, and volumes, which could or could not reinforce

the J-curve dynamic. It is thus desirable that future studies would
consider an aggregated analysis with a pool of currencies, to capture the

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