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Does a real devaluation improve the balance of trade?: empirics from Bangladesh economy

Author

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  • Nusrate Aziz

    (University of Birmingham, UK
    University of Chittagong, Bangladesh)

Abstract

Similar to many other developing countries Bangladesh, which is the country of my concern, has been pursuing an active exchange rate policy basically to maintain a viable external account position, and competitiveness of its products in world market. The purpose of the study is, therefore, to estimate the impact of real devaluation on country's trade balance. The study constructs nominal and real effective exchange rates which are not readily available for the country. Using multivariate cointegration tests for non-stationary data, the error correction model, and impulse response functions the paper examines the impact of exchange rate policy in both short-and long-run. The estimated results demonstrate that real exchange rate has a significant positive impact on trade balance in the long-run. Thus, currency devaluation has been a significant stimulus for country's exports growth and improvement in current account position. However, the J-curve hypothesis can be explained as the appropriate phenomenon to improve its trade balance in response to exchange rate devaluation.

Suggested Citation

  • Nusrate Aziz, 2012. "Does a real devaluation improve the balance of trade?: empirics from Bangladesh economy," Journal of Developing Areas, Tennessee State University, College of Business, vol. 46(2), pages 19-41, July-Dece.
    • Handle: RePEc:jda:journl:vol.46:year:2012:issue2:pp:19-41
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    File URL: http://muse.jhu.edu/journals/journal_of_developing_areas/v046/46.2.aziz.html
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    Citations

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    Cited by:

    1. Cenap Ilter, 2019. "Inflation and devaluation effects on financial statements: The case of Turkey in 2018," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2019(2), pages 49-61.

    More about this item

    Keywords

    Real Effective exchange rate; J-curve; Cointegration; ECM; Impulse response;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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