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Impact of the Effective Exchange Rate on the Trade Balance of Sri Lanka: Evidence from 2000 to 2013

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  • Yashodha Warunie Senadheera

    (The author is at the Crawford School of Public Policy, Australian National University, emails: yashodha.ws@gmail.com, yashodha.senadheera@anu.edu.au)

Abstract

This study investigates the possibility of improving the trade balance of Sri Lanka through currency depreciation. An error correction model (ECM) was used to examine the short-term and long-term effects of nominal and real effective exchange rate depreciation on the trade balance. While there is no long-run relationship between the real effective exchange rate and the trade balance, depreciation of the nominal effective exchange rate will lead to a deterioration of the trade balance in the long term. Further, the results indicate that there is a positive causality relationship from the real GDP to the trade balance. Conversely, growth in money supply will worsen the country’s trade balance in the long run. The empirical findings show that currency devaluation is not an effective policy tool to improve the country’s trade balance. JEL Classification: F 140

Suggested Citation

  • Yashodha Warunie Senadheera, 2015. "Impact of the Effective Exchange Rate on the Trade Balance of Sri Lanka: Evidence from 2000 to 2013," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 9(2), pages 93-108, May.
    • Handle: RePEc:sae:mareco:v:9:y:2015:i:2:p:93-108
    DOI: 10.1177/0973801014568146
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    References listed on IDEAS

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    3. Rose, Andrew K., 1990. "Exchange rates and the trade balance : Some evidence from developing countries," Economics Letters, Elsevier, vol. 34(3), pages 271-275, November.
    4. Sidney S. Alexander, 1952. "Effects of a Devaluation on a Trade Balance," IMF Staff Papers, Palgrave Macmillan, vol. 2(2), pages 263-278, April.
    5. Athukorala, Prema-chandra & Rajapatirana, Sarath, 2000. "Liberalization and Industrial Transformation: Lessons from the Sri Lankan Experience," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 543-572, April.
    6. Mohsen Bahmani-Oskooee & Janardhanan Alse, 1994. "Short-Run versus Long-Run Effects of Devaluation: Error-Correction Modeling and Cointegration," Eastern Economic Journal, Eastern Economic Association, vol. 20(4), pages 453-464, Fall.
    7. Lal, Anil K. & Lowinger, Thomas C., 2002. "Nominal effective exchange rate and trade balance adjustment in South Asia countries," Journal of Asian Economics, Elsevier, vol. 13(3), pages 371-383.
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    Cited by:

    1. Selena Begoviæ & Sead Kreso, 2017. "The adverse effect of real effective exchange ratechange on trade balance in European transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(1), pages 277-299.

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