Exchange Rate and Sectoral Trade Balance Dynamics: Empirical Evidence from Eastern Africa Panel Data

This study examines the effect of the real exchange rate (RER) on the three sectors' trade balances in East Africa by using ARDL procedures. The linear ARDL results show that RER depreciation improves the manufacturing and mining trade balances, but worsens the agricultural trade balance in the long run. However, nonlinear ARDL results show an absence of the asymmetric effect of RER on trade balances, except the manufacturing sector. Heterogeneity effects can be obscured by the weak effect of RER on the aggregate trade balance. Our results suggest that sectoral investigation is crucial in analyzing the effects of RER on trade dynamics.