This report analyses the impact of the real exchange rate two years beforehand and the GDP on Germany’s trade surplus between the second quarter 1993 and the first quarter 2007. It is found that both factors had significant impact on Germany’s trade surplus during the analysed period. Use of a piecewise linear regression technique, moreover, identifies changes in the development of Germany’s trade surplus over time. A temporary downward shift in the consistent growth trend of Germany’s trade surplus between the first quarter 1998 and the fourth quarter 2002 is seen to be due to changes in Germany’s fiscal and monetary policy during the introduction phase of the Euro.
Table of Contents
1. Introduction
2. Theoretical Considerations
3. Germany’s Trade Surplus Model
3.1. The Methodology
3.2. The Data
3.3. Discussion of the Estimation Results and their Implications
4. Conclusion
Research Objectives and Core Themes
The primary objective of this study is to empirically examine the influence of the real exchange rate (with a two-year time lag) and Gross Domestic Product (GDP) on Germany’s trade surplus between the second quarter of 1993 and the first quarter of 2007.
- Analysis of the relationship between real exchange rate fluctuations and trade surplus.
- Investigation of the causal impact of GDP on trade performance.
- Application of a piecewise linear regression model to identify temporal shifts.
- Evaluation of the "delivery lag" hypothesis regarding high-technology exports.
- Assessment of the impact of fiscal and monetary policy changes related to the Euro introduction.
Excerpt from the Publication
1. Introduction
The real exchange rate is important for international business as it measures changes in a country’s competitiveness due to differing inflation rates among countries. Economic theory suggests that a drop in a country’s real exchange rate has a positive effect on its amount of exports, whereas an increase in real exchange rate causes exports to drop. Over the last four years Germany has been the world’s top exporting nation with exports (f.o.b.) mounting to € 896 billion in 2006 (IFS, 2007). However, while the country’s exports have continuously been growing since the reunification of West and East Germany in 1990, its CPI-based real exchange rate has seen considerable fluctuations during the same period (see Exhibit 1). Increasing from a base index of 100.0 in the second quarter 1991 to a peak of 117.9 in the second quarter 1995, it dropped to an index as low as 93.3 in the fourth quarter 2000 before moving back to a level slightly above 100 in early 2007 (IFS, 2007). Hence, no obvious relation can be determined between the development of Germany’s exports and its real exchange rate.
A further trade-related variable that has been suggested to develop dependant on a country’s real exchange rate is the trade surplus. Lecraw (1997) has identified an inverse relationship between the development of the U.S. real exchange rate from 1970 to 1993 and the US trade deficit lagged by two years. The author included a lag of two years in his analysis, because the time it takes importers and exporters to switch suppliers allows them to respond to changes in the real exchange rate only some time after the changes have occurred.
Summary of Chapters
1. Introduction: Outlines the significance of the real exchange rate and GDP for international trade, introducing the research context of Germany's export performance and the specific focus on lagged effects.
2. Theoretical Considerations: Reviews existing literature and economic theories regarding the impact of real exchange rate changes on trade balances and the bidirectional relationship between trade and GDP.
3. Germany’s Trade Surplus Model: Presents the econometric model, defines the methodology including dummy variables, details the data sources, and interprets the regression results regarding the statistical significance of the variables.
4. Conclusion: Summarizes the key findings, confirming the significant impact of GDP and lagged real exchange rates, and acknowledges limitations such as the exclusion of additional external trade factors.
Keywords
Real Exchange Rate, GDP, Trade Surplus, Germany, International Business, Piecewise Linear Regression, Export-led Growth, Euro, Monetary Policy, Trade Deficit, Competitiveness, Economic Theory, Time Lag, Macroeconomics, Statistical Analysis.
Frequently Asked Questions
What is the fundamental focus of this research?
The paper examines how the real exchange rate and GDP influence Germany's trade surplus over the period from 1993 to 2007, specifically looking for lagged effects.
Which key variables are analyzed in the model?
The study primarily analyzes the real exchange rate (with a two-year time lag) and Germany's Gross Domestic Product (GDP) as determinants of the country's trade surplus.
What is the primary research goal?
The main goal is to determine if a statistically significant correlation exists between these economic variables and the development of Germany's trade surplus, using historical data from the IMF.
What methodology is employed?
The author utilizes a piecewise linear regression analysis, incorporating dummy variables to account for different economic phases during the study period.
What does the main body of the work cover?
It covers the theoretical background of trade dynamics, the derivation of the regression model, the handling of data (including currency conversions), and a detailed interpretation of the estimation results.
Which keywords best characterize this work?
Key terms include Real Exchange Rate, Trade Surplus, GDP, Germany, Regression Analysis, and Export-led growth.
Why is a two-year time lag included in the model?
The lag accounts for the time required by importers and exporters to adapt to exchange rate changes, due to advance ordering and long-term contractual obligations common in high-technology machinery trade.
How did the Euro introduction affect the model?
The study identifies a downward shift in the growth trend of Germany's trade surplus between 1998 and 2002, which is attributed to fiscal and monetary policy adjustments during the Euro implementation phase.
What did the F-test reveal about the model?
The F-test results suggest that the hypothesis that the trade surplus depends on the real exchange rate and GDP cannot be rejected at a 99% confidence level, indicating the model's robustness.
What are the acknowledged limitations of this study?
Limitations include the limited number of independent variables, the potential need for seasonally adjusted data, and the possibility that a shorter time lag might provide more accurate results in the modern technological environment.
- Quote paper
- Jens Hillebrand (Author), 2007, Trade Surplus in Germany, Munich, GRIN Verlag, https://www.grin.com/document/90126
