Understanding the impact of exchange rate adjustment on the Trade balance of selected Caribbean Countries

This study investigates an adjustment process in the bilateral trade balances of five countries within the Caribbean, with their largest trading partner, namely the United States. Unlike previous studies, this study controls for oil prices which play a vital role in the countries’ trade balances. A panel econometric technique was utilized using annual data over the period 19802012. Analysis of the autoregressive distributed lag (ARDL) approach reveals only limited adjustments in the trade balance to exchange rate changes both in the shortand in the long-run with some countries satisfying the Marshall-Lerner condition in the short-run. The bounds testing and error correction modeling suggests that the variables have long-run relationships with relatively slow adjustments after short-run deviations. The paper also considers the underlining policy issues of the usefulness of exchange rate as a tool for trade balance improvements. JEL Classification: F31, F32, F41