Exchange Rate Effects on Bilateral Agricultural Trade: Analysis on the DR-CAFTA
Economic theory states that the exchange rates influences movements in agricultural prices and are in an important determinant of the agricultural sector trade. This paper reviewed the theory and economic models under which exchange rate fluctuations create shifts in the excess supply and demand between countries in the international market along with a history of relations between the United States and the DR-CAFTA region.
The theory is econometrically tested through the OLS method to examine to what extent the real exchange rates between the United States and less developed countries were constant with accepted theory. The agricultural trade movements were investigated by examining imports and export values between the United States and the selected counties and proposing the exchange rate as one of the explanatory variables in the econometric model. Given the interdependence of the trade flows within the region, the OLS equations were run as a system of equations under Seemingly Unrelated Regression estimation for annual exports and imports from 1976 to 2004.
The exchange rate effect entered into the model was expressed as the foreign countries' currency value with respect to the U.S. dollar. The expectation was that depreciations in the U.S. dollar would have a positive effect on U.S. exports and a negative effect on U.S. imports from the DR-CAFTA region. There were some major concerns of this study in the underlying interdependence of the factors and their effects on trade. Among the results of this study, U.S. agricultural exports are given more emphasis, as the more stable and larger economy. The developed economy of the United exhibited behavior conforming to economic theory. The less developed Central American countries could not be expected to comply with economic theory when there are underlying socioeconomic factors affecting trade. The results, while inconclusive on the U.S. import side, show that exchange rates were important in explaining U.S. exports to the DR-CAFTA region.
Advisor:R. Wes Harrison; Matthew Fannin; P. Lynn Kennedy
School:Louisiana State University in Shreveport
School Location:USA - Louisiana
Source Type:Master's Thesis
Keywords:agricultural economics agribusiness
Date of Publication:06/01/2006