Testing Marshall-Lerner Condition: a non-parametric approach

Abstract

This study examines the determinants of trade flows for six developed countries. Volume of imports (exports) is regressed on relative import (export) price and domestic (world) real income using non-parametric kernel estimation techniques. On quarterly data, Local Constant Least Squares (LCLS) and Local Linear Least Squares (LLLS) estimates of trade elasticities are obtained. Using pointwise and point estimates of these elasticities, the Marshall-Lemer Condition is checked for our sample countries. The condition is satisfied for two of our six sample countries. Although the existing controversy on the subject has not been solved using non-parametric regression techniques, a new room is opened for further investigation by presenting the time-behaviour of trade elasticities.