Impulse response analysis and Orcutt's hypothesis in trade: evidence from developing countries

Orcutt's hypothesis in international economics implies that trade flows respond to exchange rate changes faster than to changes in relative prices. Most previous studies used import and export demand models and tested the hypothesis by imposing and comparing lag lengths on the exchange rate and relative prices. One recent study, however, employed impulse response of trade flows to one SD shock to the nominal exchange rate and one SD shock to relative prices and tested the Orcutt's hypothesis for several industrial countries. In this article we follow this study and test the hypothesis for six developing countries using impulse response analysis. Like the other study for industrial countries, we do not find much support for the hypothesis.