Abstract
The original objective of this paper is to study the impact of the exchange rate on the trade balance for Kazakhstan and Russia. Baseline empirical results indicate that an exchange rate depreciation actually decreases exports and deteriorates the trade balance for these countries; this is the opposite of the traditional theory of the J-curve and Marshall–Lerner condition. The paper then explores why these major oil exporters do not conform to the theory. It argues that it is the oil price that affects both the exchange rate and the trade balance, thereby masking the true impact of the exchange rate on the trade balance. More formally, the paper augments the traditional theory to take into account the behavior of oil prices in the export and trade balance equations. The augmented theory posits that a decrease in the oil price leads to a real exchange rate depreciation and a decline in exports, thereby creating the positive correlation seen in the baseline results. In accordance with the augmented theory, the regression results suffer from omitted variable bias; when the oil price is taken into account, the results again support the theory.