Determinants of Trade Balance in Jordan

Abstract

#This paper examines the determinants of trade balance for Jordan. The newly introduced bounds co-integration test within an ARDL model is applied to annual data covering the period of 1970-2010. In addition, the generalized approach to error forecast variance decomposition and impulse response functions are simulated for further inference regarding the dynamic interactions among variables in the model. The determinants included are real exchange rate, domestic income, and foreign in- come. The empirical investigation, using ARDL bounds test shows that trade balance and its determinants are co-integrated. However, the analysis reveals that real exchange rate is insignificant determinant of trade balance in either the short or long run. In contrast to domestic income, foreign income appears to be an important determinant of trade balance in the long run. While generalized error forecast variance confirms only the insignificancy of real exchange rate, the generalized impulse response functions support the findings already found using ARDL approach.