The Effects of Balance of  Trade and Economic Development Factors on The Exchange rate:  Case of Morocco

Ahmad Baijou; Mohammed Kamal Zaraba

Ahmad Baijou AL Akhawayn University
Mohammed Kamal Zaraba AL Akhawayn University

Keywords: Balance of Trade, Exchange Rate, Granger Causality, Johansen Co-integration, VAR, VECM

Abstract

The relationship between accounts of trade balance and exchange rates has long been examined by previous studies, and the obtained results differ from one research to another depending on the methodology applied. This paper examines the various effects of Morocco’s balance of trade and other economic factors on the exchange rate of the Moroccan Dirham (MAD) with respect to the American Dollar (USD). An annual time series data was collected from 1960 to 2018 from the World Bank Data Group concerning exports, imports, gross domestic product (GDP), inflation, and the official exchange rate. Johansen co-integration test, vector autoregressive (VAR) model, Vector error corrective model (VECM), and Granger Causality were applied to test the significance and impact of variables related to the trade balance and economic factors. Results revealed a cointegration association between the variables. This association is exhibited on both the short-run and the long-run. Only inflation displayed an association with the exchange rate on the short run. On the other hand, exports, imports, and GDP appeared to be cointegrated with the exchange rate on the long run. Unlike the trade balance components, GDP and inflation appeared to Granger-cause the exchange rate of Morocco.

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