Does devaluation improve the trade balance of Iraq?

Abstract

This paper aims to investigate the impact of devaluation of the Iraqi dinar on the country's trade balance for the period 1970‐90. It follows the elasticity approach to the balance of payments. The OLS and GLS methods were used to estimate the import and export demand functions. The empirical results indicate that devaluation does not improve the trade balance, since the sum of demand elasticities for imports and exports is less than unity (point estimate). However, at 95 per cent and 80 per cent and for lower confidence intervals, the results cannot reject the hypothesis that devaluation does improve the trade balance. Only at some even lower confidence interval is the sum of the price elasticities unambiguously less than unity, resulting in the conclusion that devaluation does not improve the trade balance.