Assessing the Existence of the J-Curve Effect in Bangladesh

This paper estimates the short run and long run impact of depreciation of Taka on trade balance in Bangladesh using cointegration techniques. The results support a positive influence of devaluation on trade balance both in the short and long run. The causal relationship between real exchange rate and trade balance is not robust, while the Granger test suggests a bidirectional causal relationship between devaluation and trade balance. The Sims test does not support the hypothesis that trade balance has influence on real exchange rate. On average, the declining segment of the ‘J-curve effect’ has not been evidenced for Bangladesh.