Empirical Evidence of J-Curve Effect and Marshall Lerner Condition: Case of Azerbaijan

Purpose of researsh. The purpose of this study is to analyze the applicability of the J-curve effect and the Marshall–Lerner condition in the economy of Azerbaijan and to evaluate the impact of exchange rate changes on the trade balance. The research focuses on identifying the responsiveness of exports and imports to currency depreciation and determining whether devaluation contributes to the improvement of the trade balance in both the overall economy and the oil sector. 

Materials and methods. The study is based on annual data for the period 1997–2024 and quarterly data for the oil sector covering 2005 to 2024. Official statistical sources include the State Statistical Committee and the Central Bank of Azerbaijan. The research applies quantitative and econometric methods, including multiple regression analysis, stationarity testing using the Dickey–Fuller test, vector autoregressive modeling, vector error correction modeling, cointegration analysis, impulse response functions, and causality testing. The estimation of parameters is conducted using the least squares method. This methodological framework allows for the analysis of both short-term dynamics and long-term equilibrium relationships between macroeconomic variables.

Results. The empirical findings indicate that the Marshall–Lerner condition is not satisfied for the overall economy of Azerbaijan, as the sum of export and import demand elasticities remains below unity. As a result, currency depreciation does not improve the trade balance and the classical J-curve effect is not observed at the aggregate level. However, in the oil sector, the results reveal a different pattern. A stable longterm relationship exists between oil exports, oil gross domestic product, oil prices, and the exchange rate. The analysis confirms the presence of cointegration and bidirectional causality among these variables. In this sector, the Marshall–Lerner condition is satisfied and the J-curve effect is partially observed over time, indicating that exchange rate depreciation contributes to improving the trade balance in the long run. 

Conclusion. The results demonstrate that the effectiveness of currency depreciation in improving the trade balance in Azerbaijan depends on the structure of the economy. While the non-oil sector shows weak responsiveness to exchange rate changes, the oil sector plays a dominant role in external adjustment processes. Therefore, strengthening non-oil export diversification, increasing production capacity, and reducing import dependence are essential for enhancing the overall effectiveness of exchange rate policy and ensuring longterm economic stability.

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