Aggregation, asymmetry, and common factors for Bangladesh’s exchange rate–trade balance relation

Rabeya Khatoon (), Md Emran Hasan, Md Wahid Ferdous Ibon, Shahidul Islam, Jeenat Mehareen, Rubaiya Murshed, Md Nahid Ferdous Pabon, Md. Jillur Rahman and Musharrat Shabnam Shuchi
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Rabeya Khatoon: University of Bristol
Md Emran Hasan: Bangladesh University of Professionals
Shahidul Islam: Purdue University
Jeenat Mehareen: East West University
Rubaiya Murshed: University of Dhaka
Md Nahid Ferdous Pabon: Bangladesh Institute of Development Studies
Md. Jillur Rahman: Jagannath University
Musharrat Shabnam Shuchi: United International University

Empirical Economics, 2022, vol. 62, issue 6, No 5, 2739-2770

Abstract: 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 Marshall–Lerner 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 favoring 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 the 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.

Keywords: Exchange rate; Trade balance; Cross-sectionally augmented nonlinear ARDL; Panel time series; Common correlated effects; Aggregation bias (search for similar items in EconPapers)
JEL-codes: C13 C32 C33 F14 F31 F32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-021-02127-y

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