Aggregation, Asymmetry and Common Factors for Bangladesh's Exchange Rate-Trade Balance Relation

Rabeya Khatoon*, Emran Hasan, Wahid Ferdous Ibon, Shahidul Islam, Jeenat Mehareen, Rubaiya Murshed, Nahid Ferdous Pabon, Jillur Rahman, Musharrat Shuchi

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

We present an application of the recent CS-ARDL methodology in the context of a country's trade balance-exchange rate relationship. The trade balance is expected to deteriorate first before improving in response to currency depreciation and vice versa, widely known as the J-curve effect satisfying the Marshal-Learner condition in the long run. Combining bilateral and aggregate analysis in one setting by constructing specific panel data with one reference country, we find that aggregate analysis is sensitive to our allowance for heterogeneity. Estimates using the aggregate time-series data show evidence favouring the J-curve relation whereas, the aggregate analysis resulting from the panel time-series data shows that currency appreciation improves trade balance in Bangladesh in the long run, which goes against the Marshall-Lerner condition. With the reference of existing commodity level literature, we argue that this atypical scenario lines with the realities of a 'small' economy like Bangladesh, where her exporters attempt to maintain their market share with some government support. The study provides essential policy suggestions by identifying the significant contributors to Bangladesh's trade balance-exchange rate relationship: China, Japan, and Singapore.
Original languageEnglish
JournalEmpirical Economics
Publication statusAccepted/In press - 25 Aug 2021

Structured keywords

  • ECON Applied Economics

Keywords

  • exchange rates
  • Trade Balance
  • Cross-sectionally augmented Non-linear ARDL
  • Panel time series
  • Common Correlated Effects
  • Aggregation bias

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