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The Effect of Exchange Rate on Exports

and Imports: The Case of Jordan
a
Osama D. Sweidan
a
Department of Economics and Finance , United Arab Emirates
University , Al-Ain , United Arab Emirates
Published online: 08 Mar 2013.

To cite this article: Osama D. Sweidan (2013) The Effect of Exchange Rate on Exports
and Imports: The Case of Jordan, The International Trade Journal, 27:2, 156-172, DOI:
10.1080/08853908.2013.738515

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 The International Trade Journal, 27:156–172, 2013
Copyright © Taylor & Francis Group, LLC
ISSN: 0885-3908 print/1521-0545 online
DOI: 10.1080/08853908.2013.738515

The Effect of Exchange Rate on Exports

and Imports: The Case of Jordan

OSAMA D. SWEIDAN
Department of Economics and Finance, United Arab Emirates University,
Al-Ain, United Arab Emirates
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This article aims at exploring the effect of exchange rate on exports

and imports in Jordan over the 1976–2009 period. In addition, it
tests if Jordan’s workers’ remittances create an effect, equivalent
to “the Dutch disease effect,” on Jordan’s exports competitiveness,
and it computes Marshall-Lerner condition to check the foreign
exchange market stability. We employ the bounds testing approach
to cointegration and the error correction model. We find that
Jordan’s competitiveness has a trend of deterioration. The influ-
ence of Jordan’s exchange rate on exports and imports is active
in the short-run only. Additionally, Jordan’s workers’ remittances
have an impact similar to “the Dutch disease effect” via increas-
ing the cost of living, thus reducing exports competitiveness. Also,
Marshall-Lerner condition is less than one; the foreign exchange
market will be unstable if exchange rate policy devaluation is
adopted. The policy implication of the article is against adopting
a devaluation policy in Jordan.

KEYWORDS Jordan economy, real effective exchange rate,

demand for real imports and real exports, Dutch disease, Marshall-
Lerner condition

I. INTRODUCTION

Jordan is a small open economy with about 6.11 million inhabitants and
annual per capita income at current market prices equal to $4,328 in 2010,
and it is surviving in an unstable region. For this reason, the economy is
vulnerable to external developments such as political events and economic

Address correspondence to Osama D. Sweidan, Department of Economics and Finance,

P. O. Box 15551, United Arab Emirates University, Al-Ain, UAE. E-mail: osweidan@uaeu.ac.ae

156
 Effect of Exchange Rate 157

shocks (for example, higher international oil prices and lower external loans
and grants). The Jordanian economy continued its positive performance in
2010 despite the increasing price of oil in the international markets, as well
as the conditions of uncertainty in the region and the decline in the level
of foreign assistance. The gross domestic product (GDP) at constant market
prices registered an economic growth equal to 2.3% in 2010 compared to
5.5% in 2009. The economic growth in 2010 is very close to the population
growth rate. As a result, the income per capita registered a growth rate equal
to 0.1% in 2010 compared to 3.2% in 2009. The inflation rate measured by
the consumer price index reached 5.0% in 2010 in contrast with −0.7% in
2009. Moreover, the slowdown of the economic growth in 2010 increased
the unemployment rate from 12.9% in 2009 to 13.4% in 2010.
Exports and imports of goods and services are significant sectors in
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the economy; the relative importance of both sectors to GDP is 45.0% and
77.0%, respectively, over the 1976–2009 period. For the same period of time,
the ratio of imports to exports reached 177%. This economic behavior creates
a longstanding trade balance deficit (see Figure 1). The trade balance deficit
became worse during the last decade because of the increase in the price of
oil and food items.
Table 1 presents Jordan’s key exports and imports and its relative impor-
tance. The principal conclusion from Table 1 is that Jordan imports raw
materials, namely, crude oil and chemicals, as well as transport equipment
and machinery (for example, power-generating machinery and equipment
machinery specialized for agriculture to producing finished exports).
Moreover, the geographic distribution of Jordan’s imports reveals that
about 34% of exports are from countries that maintain a fixed exchange rate
with the US dollar, for instance, the Gulf countries and the United States
itself. It implies that for about 34% of the imports, the effect of nominal
exchange rate movement will not pass through to prices. Jordan’s primary
trade partners are Gulf countries, the United States, India, Japan, China, and

–1

–2

–3

–4

–5

–6

–7
1980 1985 1990 1995 2000 2005

FIGURE 1 Jordan trade balance deficit in billions Jordanian dinar (JD = $1.4104) (color figure
available online).
 158 O. D. Sweidan

TABLE 1 Jordan’s Key Exports and Imports

Relative Relative
Exports Importance (%) Imports Importance (%)

Potash 10.7 Crude oil 22.1

Phosphates 6.3 Iron 4.2
Food and animals 14.7 Food and animals 15.2
Pharmaceuticals 10.1 Transport equipment and 22.6
machinery
Clothing 14.8 Textile yarn and fabrics 3.6
Fertilizers 7.4 Chemicals 11.1
Others 36.0 Others 21.2
Note: We calculated the ratios based on the year 2010.
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the European Union. Furthermore, Jordan is a country that is highly depen-

dent on its workers’ remittances; over the sample period of the current study,
remittances inflows averaged 19.7% of GDP. In 2009, the workers’ remit-
tances reached about $4.2 billion. Thus, real exchange rate policy is a key
strategy to mitigate a longstanding trade balance deficit and to attract more
workers’ remittances inflows.
In 1989, the Jordanian economy had a negative economic shock that
led to a high inflation rate and to a remarkable recession in the economy.
The following discusses the reasons responsible for the shock. First, in the
mid-1980s, the economic activity of the Gulf countries had slowed down
because of the decline in the price of oil. Second, the demand on Jordan’s
products and workers declined in the Gulf countries; thus, Jordan’s workers’
remittances dropped by 12.0% of GDP. Third, the external resource of loans
and aids became more limited due to political issues related to releasing
the political constitution between the east and west banks of Jordan and
the invasion of Iraq to the state of Kuwait. In that year, the Jordanian dinar
was devalued by 53.3% in nominal terms. As a result, Jordan assigned an
economic adjustment program with the International Monetary Fund (IMF).
It aimed at achieving economic stability and moving toward the market-
oriented economy.
Consequently, in October 1995, Jordan moved from a currency-basket
exchange rate to a fixed exchange rate with the US dollar, and by 1995, the
Jordanian dinar was devalued by around 33.9% in real terms. To support
the economy, Jordan launched a privatization program in 1996. It aimed
at increasing production efficiency, creating a competitive market, attracting
foreign direct investments, and limiting the role of government to that of the
regulator rather than that of the producer of goods and services. This pro-
gram concentrates on national infrastructure and utilities, including transport,
electricity, water, energy, and telecoms.
Nowadays, Jordan is facing new types of challenges after the great reces-
sion of 2007–08, the US dollar volatility, and the deterioration of the US credit
 Effect of Exchange Rate 159

rating from AAA to AA+. Hence, these new economic pressures reopen an
unending argument on the appropriate real effective exchange rate policy in
Jordan and developing countries alike. Technically, any economy is search-
ing to adopt an exchange rate policy that guarantees more economic growth
and a reasonable inflation rate with the present unstable global macroeco-
nomic environment. For whatever reason, if the US dollar, which has many
economic pressures right now, depreciated vis-a-vis foreign currencies, then
this might really cause instability in Jordan’s foreign exchange market if the
Marshall-Lerner condition1 is less than one.
The main objective of this study is to explore the effects of real effective
exchange rate on Jordan’s real exports and real imports by utilizing annual
data over the 1976–2009 period. Literature supports deliberate real exchange
rate policy that reduces the longstanding trade balance deficit and promotes
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economic growth. This is what we identify as an efficient real exchange rate

policy for the purpose of the current study. The current article contributes by
analyzing in depth the determinant of Jordan’s real exports and real imports
and by testing the efficiency of Jordan’s exchange rate policy. Furthermore,
the article contributes by highlighting if Jordan’s workers’ remittances could
have an impact, equivalent to “the Dutch disease effect,” on real exports com-
petitiveness. Also, it contributes by computing the Marshall-Lerner condition
to test the foreign exchange market stability. Therefore, the article provides
the Jordanian policymakers with analysis and information that might be use-
ful when understanding and designing exchange rate and trade policies.
Based on our knowledge, Jordan lacks such significant studies.

II. LITERATURE REVIEW

Literature suggests that a practical strategy consisting of planned real

exchange rate policy can spur exports diversification, reduce trade bal-
ance deficit, and promote economic growth. Also, it shows that the effect
of exchange rate pass-through into the economy evolves via two main
channels: aggregate demand and aggregate supply. The effect through
aggregate demand channel includes the following series of analyses: cur-
rency devaluation increases the price of foreign goods relative to the home
country goods. Consequently, currency devaluation increases net exports.
Practically, it enhances the international competitiveness of the home coun-
try products compared to foreign goods. Meade (1951) stated that gaining

1
This condition is known in the literature as Marshall-Lerner condition; (X/M)∗ |ηDX | + ∗ |ηDM | > 1,
where ηDX stands for the price elasticity of demand for home country exports, ηDM denotes the price
elasticity of demand for home country imports, M is the total expenditures on imports, and X is the total
expenditures on exports. This expression is used if the unbalanced trade is expressed in units of home
country currency.
 160 O. D. Sweidan

the currency devaluation outcomes is not that easy. He also demonstrated

that currency devaluation can produce a positive impact on trade balance if
and only if the demand on exports of the home country and the demand
on imports from the foreign country are relatively elastic. Likewise, Cooper
(1971) and Hirschman (1949) demonstrated that currency devaluation could
be contractionary if consumers and producers are unresponsive to the
devaluation policy2 or if it does not succeed to change the trade structure of
a certain country from a deficit to a surplus.
On the other hand, the aggregate supply channel effect means that cur-
rency devaluation increases the cost of production or the cost of imports
and intermediate inputs.3 The empirical literature illustrates a huge num-
ber of studies that explored the impact of real exchange rate on different
macroeconomic variables. The results are mixed since these studies utilize
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different methodologies and different samples of countries. This mas-

sive empirical work had different objectives. Some studies focused on
exploring “the Dutch disease effect,” particularly in oil exporting coun-
tries (for example, see Beine et al. [2009] and Hasanov [2010]). Others
spotlight on the effect of exchange rate risk or volatility on output,
prices, and trade balance (for example, see Du and Zhu [2001], Kandil
[2004], Nabil and Veganzones-Varoudakis [2004], Kandil and Mirzaie [2005],
Bahmani-Oskooee and Kandil [2007], Tadesse [2009], and Yusoff [2010]).
Recently, a new paradigm of research centers to answer the following
question “is devaluation expansionary or contractionary?” (for example, see
Narayan and Narayan [2007], Bahmani-Oskooee and Kandil [2009], and Ratha
[2010]).
For the purpose of the current study, we claim that Jordan’s work-
ers’ remittances might cause an effect corresponding to “the Dutch disease
effect,” which cuts real exports. The Dutch disease is an economic con-
cept that explains the relationship between an extensive exploitation of
a natural resource, namely crude oil, and the decline in the share of the
manufacturing sector or any other sector in the economy. Usually, exploit-
ing a natural resource generates huge revenues, thus the nation’s domestic
currency becomes stronger (currency appreciation) compared to the other
nations’ currencies. As a result, the exports from the manufacturing sector
or any other sector become more expensive, which will make these sec-
tors less competitive. By the same mechanism, we suggest that workers’
inflows increase Jordan’s aggregate demand, thus the cost of living in Jordan
will increase, which will make exports more expensive and less competitive
abroad.

2
If the response of the consumers and the producers has some delay, this creates a deep J-curve.
3
For more details about these channels, see Bahmani-Oskooee and Miteza (2003), Wijnbergen (1989),
and Krugman and Taylor (1978).
 Effect of Exchange Rate 161

III. THE MODEL

To accomplish the goals of the current study, we construct two separate

functions of demand for real exports and demand for real imports in Jordan.
In both functions real exchange rate is a common determinant. As for
Jordan’s real import demand function, literature and economic theory focus
on three factors: the level of final domestic expenditures, the relative price
of imports to domestic prices, and the capacity of the country to produce.4
Hence, for the purpose of the current study, we replaced the third factor
by Jordan’s workers’ remittances. Also, we utilize the real value of Jordan’s
import unit price index to compute Marshall-Lerner condition. Jordan’s real
import demand function is specified as follows:
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RMt = F (PMt , REERt , Ct , It , WRt ) (1)

where RMt is the real import of goods and services and PMt stands for
real value of Jordan’s import unit price index. We calculate this index by
computing the ratio of Jordan’s import unit price divided by Jordan’s GDP
deflator. REERt is the real exchange rate and computed based on the key
trade partners of Jordan,5 Ct indicates the sum of private and public real con-
sumption expenditure, It stands for expenditure on real gross fixed capital
formation, and WRt indicates Jordan’s workers’ remittances. Figure 2 presents
real effective exchange rate of the Jordanian dinar over the 1976–2009 period.

140

130

120

110

100

90

80
1980 1985 1990 1995 2000 2005

FIGURE 2 Real effective exchange rate of the Jordanian dinar (JD/$) (color figure available
online).

4
For more details, see Giovannetti (1989), Abbott and Seddighi (1996), and Narayan and Narayan
(2005).
5
For the purpose of this study, the trade partners of Jordan are the Gulf countries, the United
States, India, Japan, and China. For more details regarding the identity by which we calculate REERt , see
Appendix.
 162 O. D. Sweidan

Moreover, it is created in a way such that an increase reflects a real depreci-

ation of the Jordanian dinar or better competitiveness. Figure 2 tells clearly
that the competitiveness of the Jordanian dinar has a trend of deteriora-
tion. Further, the obvious improvement in Jordan’s competitiveness was over
the 1989–1995 period, and then it continues to decline. It seems that the
procedures which the government adopted directly following the crisis of
1989 supported the competitiveness for a short period of time.
On the side of Jordan’s real export demand function, economic the-
ory and literature state that there are two main determinants: the economic
activity of the trade partners and the terms of trade.6 In Jordan, we believe
that real imports are vital to encourage real exports since the majority of it
consists of raw materials, transport equipment, and machinery, which are
inputs in the production process of real exports. To test this hypothesis we
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run a Granger Causality test between real exports and real imports. The
results reveal that Granger Causality runs one way, as expected, from real
imports to real exports and not the other way.7 Moreover, we intend to test
whether remittances inflows have an effect or not, equivalent to “the Dutch
disease effect,” on Jordan’s real export competitiveness. Workers’ remittances
might increase living cost in Jordan and make exports more expensive and
less competitive abroad. Given all these information, Jordan’s real export
demand function can be specified as follows:

RXt = F (PXt , Yt , RMt , REERt , WRt ) (2)

where RXt indicates the real export of goods and services and PXt is the
real value of Jordan’s export unit price index. We estimate this index by
computing the ratio of Jordan’s export unit price divided by the price level
index of trade partners.8 Yt stands for real gross domestic product of the
trade partners, RMt , WRt , and REERt are the same as stated in equation (1).

IV. METHODOLOGY AND DATA

The current study’s main mission is to estimate equation (1) and equation (2)
by utilizing the bounds testing approach to cointegration and error correction
model as proposed by Pesaran et al. (2001). We re-write equations (1) and (2)
to match this methodology and to capture short-run and long-run coefficients
and the speed of adjustments. The specification of the model is as follows:

6
Dornbusch (1988) and Hooy and Choon (2010).
7
We run Granger Causality test by using 5 lags, the Granger Causality test shows significant results
at lags 1, 3, and 4, the probability of F-Statistic is 0.040, 0.092, and 0.055, respectively.
8
We computed the price level index of trade partners by summing up the multiplication of the trade
share (exports plus imports) of each trade partner times the consumer price index of each partner.
 Effect of Exchange Rate 163


3 
3 
3
LnRMt = β0 + β1i LnRMt−i + β2i LnCt−i + β3i LnIt−i
i=1 i=0 i=0


3 
3 
3
+ β4i LnREERt−i + β5i LnWRt−i + β6i LnPMt−i (3)
i=0 i=0 j=0

+ γ0 LnRMt−1 + γ1 LnCt−1 + γ2 LnIt−1 + γ3 LnREERt−1

+ γ4 LnWRt−1 + γ5 LnPMt−1 + ut


3 
3 
3
LnRXt = α0 + α1k LnRXt−k + α2k LnYt−k + α3k LnRMt−k
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k=1 k=0 k=0


3 
3 
3
+ α4k LnREERt−k + α5k LnWRt−k α6k LnPXt−k (4)
k=0 k=0 k=1

+ λ0 LnRXt−1 + λ1 LnYt−1 + λ2 LnRMt−1 + λ3 LnREERt−1

+ λ4 LnPXt−1 + λ5 LnWRt−1 + εt

where  is the first difference operator, Ln is the natural logarithm, ut , and εt

is the white noise error terms. The short-run coefficients in equations (3) and
(4) are introduced by the parameters (β1i − β6i ) and (α1k − α6k ), respectively.
Meanwhile, the long-run coefficients in equations (3) and (4) are introduced
by the parameters (γ1 − γ5 ) and (λ1 − λ5 ) normalized by γ0 and λ0 , respec-
tively. The source of the annual data is the yearly statistical series which
is extracted from the Central Bank of Jordan website9 and the World Bank
Development Indicators via the EconStats website.10
The current methodology has a significant feature which is conducting
unit root tests for the variables in equations (3) and (4) are not required. The
variables in the model could be a combination of I(1) and I(0). To check
for cointegration, we apply two techniques: First, compute the F-statistic
and compare it with the one constructed by Pesaran et al. (2001). This test
has a non-standard distribution and depends on several factors: sample size,
number of regressors, the inclusion of intercept, and trend variable in the
estimation. If the computed F-statistic is less than the lower bound critical
values, we cannot reject the null hypothesis of no cointegration.11 Quite

9
http://www.cbj.gov.jo/.
10
http://www.econstats.com/wdi/wdiv_431.htm.
11
The null hypotheses of the current study are γ0 = γ1 = γ2 = γ3 = γ4 = γ5 = 0 for equation (3) and
λ0 = λ1 = λ2 = λ3 = λ4 = λ5 = 0 for equation (4).
 164 O. D. Sweidan

the opposite, if the estimated F-statistic is greater than the upper bound
critical values, we reject the null hypothesis and the long-run relationship
exists. Finally, if the F-statistic falls within the lower and upper bound critical
values, then the results are uncertain. Second, following Bahmani-Oskooee
and Kandil (2009), we use the estimated long-run coefficients to calculate
an error correction term for each equation. Then we replaced the long-run
coefficients by this new term and re-estimate the model again. A statistically
significant and negative coefficient supports the case of cointegration.

V. EMPIRICAL RESULTS

In this part the error correction model outlined in equations (3) and (4) is
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estimated by employing the ordinary least squares method. As for the opti-
mum lags, we impose a maximum three lags for each variable in the model
and we use Akaike Information Criteria to choose the optimum number of
lags. The most favorable lag of the model is zero lag for equations (3) and (4),
but we add the lag of real imports to equation (4) in order to eliminate the
problem of autocorrelation. At the same time, we run Serial Correlation LM
Test to confirm auto-correlation free residuals.12 We also reported Ramsey’s
Regression Specification Error Test (RESET) to check for functional mis-
specification. The calculated RESET statistic is less than the critical values
for equations (3) and (4), indicating that the two equations are correctly
specified. Further, we have checked for the stability of the estimated coef-
ficients by utilizing the cumulative sum of the recursive squared residuals
(CUSUMSQ) (Figure 3). This test confirms that the estimated coefficients are
stable. Furthermore, we conduct white heteroscedasticity test and the results
show that we cannot reject the null hypothesis of no heteroscedasticity.
The results of the error correction model are reported in Table 2 and
Table 3. It illustrates a strong evidence of conintegration or long-run relation-
ship among the variables in each equation. The calculated F-statistic13 for
equation (3) is statistically significant at 10% level. Meanwhile, the computed
F-statistic for equation (4) is statistically significant at 1% level. Moreover, the
error correction term for each equation is statistically significant and negative
which supports the existence of cointegration.
To analyze the demand for real imports, consider first the short-run coef-
ficients in Table 2. It is apparent that there is a statistically significant positive
relationship between real imports and real effective exchange rate, real con-
sumption, and real investment. However, the real value of imports unit price

12
The results of the test are reported in the diagnostic section of Table 2 and Table 3.
 
R2 −R2 /m
13
F=  UR  R
2 /(n−k) , where m is the number of linear restrictions, n is the number of observations,
1−RUR
and k is the number of the parameters in the unrestricted regression.
 Effect of Exchange Rate 165

A) Imports
1.6

1.2

0.8

0.4

0.0

–0.4
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92 94 96 98 00 02 04 06 08
B) Exports
1.6

1.2

0.8

0.4

0.0

–0.4
92 94 96 98 00 02 04 06 08

FIGURE 3 Plot of cumulative sum of squared recursive residuals (CUSUMSQ) for imports and
exports (color figure available online).
Note: The straight lines represent critical bounds at 5% significant level.

index has a statistically significant negative relationship with real imports.

The value of the coefficient is equal to (−0.55), which proves that the price
elasticity of Jordan’s imports in the short-run is relatively inelastic.14 Jordan’s
workers’ remittances have a statistically insignificant relationship with real
imports in the short-run. It seems that Jordan’s real effective exchange rate
(failing competitiveness) is working against the theory in the short-run and
looks unable to control the level of real imports. This behavior can be
explained by the fixed purchase contracts which maintain the quantity of
imports fixed in the short-run.

14
For more details about trade elasticities, see Hooper et al. (2000) and Aziz and Li (2008).
 166 O. D. Sweidan

TABLE 2 Coefficients of Equation (3) (Dependent Variable LnRMt )

Coefficient T-Statistic

A) Short-run
LnRMt−1 −0.16 −1.82
LnCt 0.82 4.39
LnIt 0.29 3.45
LnREERt 0.42 1.83
LnPMt −0.55 −5.41
LnWRt −0.06 −0.82
B) Long-run
Constant 1.28 1.07
LnCt 0.82 3.20
LnIt 0.43 3.55
LnREERt 0.18 0.60
LnPMt −0.64 −3.49
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LnWRt −0.20 −2.56

C) Diagnostics
AdjR 2 0.83
F − Stat ∗ 3.46
ECMt−1 −0.75 −4.82
LM − Stat 0.56
Ramsey RESET 1.02 (0.38)∗∗
Heteroscedasticity 0.75 (0.72)∗∗
CUSUMSQ Stable
∗
At K = 6, the lower bound critical values are 2.12 (10%), 2.45 (5%), and 3.15 (1%) while
the upper bound critical values are 3.23 (10%), 3.61 (5%), and 4.43 (1%).
∗∗
The probability of F-statistics.

In the long-run the results have minor changes. It is apparent that the
short-run effects survive fully in the long run. The effect of the final expen-
diture, real consumption, and real investment expenditures is statistically
significant and positive exactly as in the short-run. Moreover, the real value
of imports unit price index has a statistically significant negative relationship
and its long-run price elasticity coefficient is equal to (−0.64). This finding
confirms a considerable conclusion which is the price elasticity of Jordan’s
real imports in the long-run is relatively inelastic too. Jordan’s real effective
exchange rate is statistically insignificant and has no influence on real
imports.
The unexpected and interesting result of the current article is that
Jordan’s workers’ remittances have a statistically significant negative rela-
tionship with real imports. We believe that the deterioration in real
effective exchange rate of the Jordanian dinar (weak competitiveness) force
Jordanians to switch from spending their remittances (income) on consump-
tion goods to purchasing local investment fixed assets such as lands and
houses. To double check the importance of workers’ remittances in equation
(3), we omitted it from equation (3) and we run the omitted variable test. The
test’s result rejects the null hypothesis which states that workers’ remittances
do not belong to equation (3) at a 5% significant level.
 Effect of Exchange Rate 167

TABLE 3 Coefficients of Equation (4) (Dependent Variable LnRXt )

Coefficient T-Statistic

A) Short-run
LnRXt−1 0.04 0.22
LnYt −0.96 −1.01
LnRMt 0.52 3.63
LnRMt−1 −0.46 −2.52
LnREERt 0.61 2.17
LnPXt −0.49 −3.92
LnWRt −0.06 −0.77
B) Long-run
Constant −6.52 −2.74
LnYt 0.87 3.75
LnRMt 1.27 3.77
LnREERt 0.40 1.01
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LnPXt −0.59 −3.57

LnWRt −0.21 −2.88
C) Diagnostics
AdjR 2 0.75
F − Stat ∗ 5.82
ECMt−1 −0.78 −6.77
LM − Stat 1.47
Ramsey RESET 0.25 (0.78)∗∗
Heteroscedasticity 2.52 (0.15)∗∗
CUSUMSQ Stable
∗
At K = 6, the lower bound critical values are 2.12 (10%), 2.45 (5%), and 3.15 (1%) while
the upper bound critical values are 3.23 (10%), 3.61 (5%), and 4.43 (1%).
∗∗
The probability of F-statistics.

The demand for real exports of goods and services (Table 3) proves that
the real effective exchange rate (better competitiveness) is statistically signif-
icant and enhances real exports in the short-run. However, this effect does
not survive in the long-run. At the same time, the findings state that the price
elasticity of Jordan’s real exports is statically significant and relatively inelas-
tic in the short-run and the long-run, with coefficients equal to (−0.49) and
(−0.59), respectively. This outcome is significant and states that Jordan’s real
exports have the capability of surviving and accessing external markets in
the short-run and the long-run. Consequently, we utilize the price elastic-
ity of real exports and real imports to compute Marshall-Lerner condition
in the short-run and the long-run. The calculation process proves that the
condition is less than one.15 This implies that the trade balance will worsen
if a devaluation policy is adopted and the foreign exchange market will be
unstable. For this reason, Jordan policy makers should carefully monitor the
US dollar through the current crisis. Any depreciation in the US dollar will
cause instability in Jordan’s foreign exchange market.

15
Jordan’s Marshall-Lerner condition in the short-run = 0.83 and in the long-run = 0.98.
 168 O. D. Sweidan

Furthermore, the results reveal that Jordan’s real imports encourage real
exports. A large portion of Jordan’s imports are raw materials and interme-
diate goods, as stated in Table 1, to produce finished exports. The effect
of Jordan’s real imports on real exports is not decisive in the short-run.
Quite the opposite, this effect is statistically significant and positive in the
long-run. Jordan’s workers’ remittances and real GDP of the trading partners
have a statistically insignificant relationship with real exports in the short-run.
However, in the long-run, the effects of those two variables are statistically
significant but the former has a negative sign and the latter a positive sign.
This finding supports our claim that workers’ remittances in Jordan create an
effect similar to “the Dutch disease effect” and lead to reductions in Jordan’s
real exports competitiveness.
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VI. CONCLUSIONS AND POLICY IMPLICATIONS

The above-mentioned analysis has five main conclusions. First, Jordan’s

real effective exchange rate effects real exports and real imports in the
short-run only; however, in the long-run it has no effect on those two
macroeconomic variables. This conclusion highlights the inefficient role of
real effective exchange rate policy in Jordan and proves that there are more
powerful macroeconomic variables that explain the behavior of real exports
and real imports. Second, the short-run and the long-run price elasticity of
Jordan’s real imports and real export are relatively inelastic. This implies
that Marshall-Lerner condition is not applicable in the case of Jordan. Third,
Jordan’s real expenditure terms, for instance, domestic expenditure on real
final consumption and real investment, play a major role in determining
real imports in the short and the long run. Fourth, real GDP of the trade
partners encourages Jordan’s real exports in the long-run only. Fifth, this
study proves that Jordan’s dinar competitiveness has a clear deterioration
over the sample period of the study and it motivates workers abroad to
switch their consumption behavior toward buying local fixed assets. At the
same time, workers’ inflows create an effect equivalent to “the Dutch disease
effect” via increasing cost of living, thus reducing real exports competitive-
ness. As a result, we believe workers’ remittances are one of the factors
responsible for deteriorating Jordan’s real exports competitiveness over the
1976–2009 period.
Jordan is a small open economy living in a vulnerable region. In 1989,
the Jordanian economy had a negative economic shock that led to a high
inflation rate and to a negative economic growth. Jordan has adopted an eco-
nomic adjustment program intended to support economic growth and to cre-
ate a productive economic environment. As a result, the Jordanian dinar was
devalued by approximately 53.3% in nominal terms in that year. Despite that,
 Effect of Exchange Rate 169

the current article finds a clear trend of Jordan’s dinar competitiveness dete-
rioration. Simultaneously, Jordan has a longstanding trade balance deficit.
The main objective of this study is to explore the effect of real effec-
tive exchange rate on Jordan real exports and real imports by employing
annual data over the 1976–2009 period. The study tested the efficiency of
Jordan’s real effective exchange rate policy and the article aims to pro-
vide policymakers and scholars with valuable information regarding the key
determinants of real exports and real imports in Jordan. Moreover, this article
makes significant contributions since it provides evidence that Jordan’s work-
ers’ remittances have an effect, equivalent to “the Dutch disease effect,” on
Jordan’s real exports competitiveness. Additionally, it provides evidence that
the foreign exchange market will be unstable if an exchange rate devaluation
policy is adopted. Based on the economic theory and literature, we construct
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two separate functions: one specifies the demand on Jordan’s real exports
and the other identifies Jordan’s demand on real imports. Jordan’s real effec-
tive exchange rate is a common determinant in both equations. We employ
the bounds testing approach to cointegration and error correction model to
estimate those two functions.
Prior to the estimation process we expected to find real effective
exchange rate is the most important factor in this estimation process. Our
empirical estimate finds that Jordan’s real effective exchange rate has an obvi-
ous trend of decline over the 1976–2009 period. The influence of Jordan’s
real effective exchange rate on real exports and real imports is active in the
short-run only. The current article discovered that there are other macroeco-
nomic variables which are able to take a leading role in steering real exports
and real imports. The results prove that the real values of the export unit
price index and the import unit price index are significant determinants in
the short-run and the long-run. Moreover, real expenditure terms (for exam-
ple, domestic expenditure on real final consumption and real investment) are
crucial controllers of real imports in the short-run and the long-run. Likewise,
real imports play a key role to determine real exports in the short-run and the
long-run. Meanwhile, workers’ remittances are an important determinant of
real exports and real imports in the long-run only. We also provide evidence
that workers’ inflows have a key role in increasing the cost of living and thus
reducing real exports. At the same time, workers’ steer their remittances to
local investment in the form of fixed assets when they feel that the Jordanian
economy has a lower level of competitiveness. Furthermore, real GDP of the
trade partners is a crucial determinant of real exports in the long-run only.
The policy implications of the current article focus on four directions:
First, Jordan’s real effective exchange rate is not the main economic and
powerful variable that affects real exports and real imports; its influence
is limited. The current article finds other macroeconomic variables that
have a more dominant effect on the Jordanian trade sector. Second, the
results propose not to implement any exchange rate devaluation policy since
 170 O. D. Sweidan

the Marshall-Lerner condition is less than one. Third, the Jordanian eco-
nomic policymakers should utilize workers’ remittances efficiently. Fourth,
the Jordanian policymakers should monitor carefully the US dollar exchange
rate fluctuation throughout the current crisis.

ACKNOWLEDGMENTS

The author would like to thank the editor and two anonymous referees of
The International Trade Journal for their valuable and helpful comments.
The author is responsible for any errors.
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 172 O. D. Sweidan

APPENDIX

We follow the method of Bahmani-Oskooee and Kandil (2009) in construct-

ing real effective exchange rate. However, we compute it in a way such that
an increase reflects a real depreciation of the Jordanian dinar or
 better com-
petitiveness. The real effective exchange rate for Jordan REERJ is calculated
by the following identity:
⎡  
 ⎤

n EJ /TP ∗ PTP PJ
⎢ ⎥
REERJ = βJTP ⎣  
 ∗ 100⎦
TP=1 EJ /TP ∗ PTP PJ
2000

where β
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JTP is the trade share (exports plus imports) of trading partner with
Jordan, βJTP = 1. The trading partners used in this calculation process
are Gulf countries, the United States, India, Japan, and China. EJ /TP denotes
the nominal bilateral exchange rate of the Jordanian dinar with each trade
partner. PJ and PTP are the consumer price index of Jordan and each trad-
ing partner, respectively. To make the real bilateral rate unit free across all
Jordan’s partners, we divide it by its own value in a base year (2000) and
multiply it by 100 to set it in an index form.