Abstract
Most of the previously examined studies that investigated the repercussion of the trade balance to exchange rate mutation relied on the assumption that appreciation and depreciation behave symmetrically, recently several works have been conducted using the asymmetric analysis. In this work, we exhibited a model employing the disaggregated data (bilateral) of trade balance with the USA. In our pursuit, we endeavored to disclose a phenomenon of the J curve, is this pattern present in our trade balance and exchange rate bearing? In this article, first, we checked the stationary of data set and discovered the stationary employing the Augmented Dickey-Fuller test, Phillips Peron then applying the ARDL bounds test of cointegration apropos to find out the long run co integrated equations and last of all, tried to investigate the short-run and long-run relationship among the variables, while we used the ECM (error correction model). The Toda-Yamamoto Procedure for Granger Causality in a VAR framework has been applied to detect the causal direction. In our model, we have blazoned the negative short-run rapport between the exchange rate and trade balance in the bilateral data, whereas we have remarked a discrepant bearing in the long run and we did receive the evidence of the appearance of j pattern in the relationship between exchange rate and trade balance. Dispensing the error correction model, we found domestic higher price level hinders the trade balance in the short run, did not find any evidence of foreign income stimulate the export. Toda-Yamamoto Procedure for Granger Causality reveals the unidirectional causal effect from exchange rate to trade balance of Bangladesh with the USA.
Highlights
The cohesion between the trade balance and the exchange rate has a lingering history
In terms of policy implications, the results show that exchange rate can be used as a crucial tool to ameliorate the trade balance in the long run
Adopting the Toda-Yamamoto (Toda and Yamamoto, 1995) procedure for Granger Causality in an augmented VAR frame-work, the unidirectional causal relation is established from exchange rate to trade balance
Summary
The cohesion between the trade balance and the exchange rate has a lingering history. Studies that attempted to test the phenomenon whereas used aggregate trade data between one country and rest of the world .According to many researchers as Hossain and Alauddin (2005), Aziz (2008) the main objectives of exchange rate changes in Bangladesh are to easing international competitiveness, encourage exports diversification, discourage imports growth, rearrange resources in import substitutes and export oriented sectors, encourage remittances inflow from expatriate wage earners, maintain stable internal price, and maintain a viable external account position. Our research work is different from others in the sense that we are going to employ the bilateral trade data of Bangladesh and united states of America and want to test the existence of j curve phenomenon in the trade balance and exchange rate relationship within this two country’s data, for the sake of avoiding the aggregation bias problem we avoid the aggregate trade balance data of Bangladesh with its all trading partners. Many prominent economists believe that undervaluation promotes growth because it motivates firms to invest in high productivity tradable industries, which increases overall productivity rates (Rodrik, 2008)
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