Nexus between Devaluation and Trade Balance: Testing for the Existence of J-Curve Effect in Bangladesh

Abstract

This paper tries to find out whether Real Exchange Rate (RER) devaluation has any significant impact on trade balance of Bangladesh. Different estimation techniques like co-integration test, Vector Error Correction Model (VECM) and Impulse Response Functions (IRFs) derived from the VAR (3) on the yearly data for the sample period from 1972 to 2018 support a positive impact of devaluation on trade balance in both short and long run for Bangladesh. That is, there exists a positive relationship between devaluation and trade balance which implies that the increasing segment of the ‘J-curve effect’ has evidenced in both short and long run for Bangladesh.