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Effective Exchange Rate Changes and their Impact on the Trade Balance

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  • D.S. Wijesinghe

Abstract

This study aims to analyse the impact of exchange rate changes on the trade balance, and to construct the effective exchange rate index using the simulated trade balance effects of the exchange rate changes as the weights. The study is divided into four sections. Section I reviews various indices of effective exchange rates, highlighting their uses and limitations. Section II presents a multilateral trade model appropriate to primary commodity exporting countries. The model is employed to analyse the effects of both the nominal and real exchange rate changes during 1971-1985 on the trade balance of Sri Lanka. The results are discussed in Section III. Section IV concludes the study highlighting the major observations, limitations and further research to be undertaken.

Suggested Citation

  • D.S. Wijesinghe, 1988. "Effective Exchange Rate Changes and their Impact on the Trade Balance," Research Studies, South East Asian Central Banks (SEACEN) Research and Training Centre, number rp09, April.
  • Handle: RePEc:sea:rstudy:rp09
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    1. Magnoli Bocchi, Alessandro, 2008. "Rising growth, declining investment : the puzzle of the Philippines," Policy Research Working Paper Series 4472, The World Bank.
    2. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
    3. Jongwanich, Juthathip & Kohpaiboon, Archanun, 2008. "Private Investment: Trends and Determinants in Thailand," World Development, Elsevier, vol. 36(10), pages 1709-1724, October.
    4. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 65(2), pages 491-500, August.
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