Relative Responsiveness of Trade Flows to a Change in Prices and Exchange Rate in Developing Countries

In 1950 Orcutt conjectured that a country¡¯s trade flows could respond to a change in exchange rate quicker than they do to a change in relative prices. Previous research that supported Orcutt¡¯s hypothesis employed non-stationary data rendering the results to suffer from spurious regression problem. When we account for stationarity of the data by using cointegration and error-correction modeling, no strong evidence is found in support of the Orcutt¡¯s hypothesis. The findings in this paper for developing countries are similar to those found for developed countries.