BANGLADESH UNIVERSITY OF BUSINESS & TECHNOLOGY

(BUBT)

Assignment On
Exchange rate devaluation expansionary and contractionary effect on economy of Bangladesh perspective

SUBMITTED TO

S.M. WOAHID MURAD

Assistant Professor, Chairman
Department of Economics, BUBT

SUBMITTED BY

Sayda Tahmida
23rd Intake
ID: 14152206004
M.Sc in Economics, BUBT
Course Code: Eco511
Course Title: Research Methodology

SUBMISSION DATE: 06-01-2016

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Title: Exchange rate devaluation expansionary and contractionary effect on economy of Bangladesh perspective

Authors Context Year Model Methodology Findings

Abdulkadir Nigeria 1971QI- ln RER t =α 1 +α 2 lnNER t +α 3 ln INF1.
t +μZivot-Andrews
I A moderate
Abdulrashid 2012QVI Unit Root Test depreciation of the
Rafindadi and Where, RERt is the real effective 2. Bayer and Hanck Nigerian local currency
Zarinah Yusof exchange rate, NERt is the nominal Cointegration test may have stabilizing
(2014) effective exchange rate, INFt is 3. VECM Granger influence on the
inflation rate peroxide by the Causality test balance of payments
consumer price index and µi is the through the current
error term. Account, without the
need for imposing
high-interest rates.
Artatrana China 1977-2006 ln Yt= a+b ln Gt+c lnMt+d 1. Augmented Currency devaluation
Ratha, lnREERt+e ln YWt+ Dickey Fuller is contractionary in
Eungmin (ADF) unit root China.
Kang, where the variables Yt,Gt, Mt, test
and Mary E. REERt, and YWtare, respectively, 2. Johansen
Edwards China’s GDP, government Cointegration
(2008) expenditure, money supply, the Test
Yuan’s effective exchange rate, 3. VECM
which is a trade-weighted average of
the indices of bilateral real exchange
rates, and the world income, all in
real terms.
Bilal Ahmed , Pakistan 1976 -2010 LogGDPt = β0 + β1 LogFDIt + β2 1. ADF unit root test The exchange rate
Xianming Wu LogINVt + β3LogLNEXt + 2. Johanson depreciation
& Ilyas Ahmed β4LogLNXPt +Ut cointegration and deteriorates economic
(2015) Engle and growth and negatively
Where, Foreign Direct Investment Granger affects the business
(FDI), Investment (INV), and net cointegration test sector, which claims
export (NXP) real exchange rate 3. Error Correction that depreciation has a
(EX). Model (ECM) contractionary effect

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 on economic
growth,
Kamal P. Four South- 1974 – log Yt = b0 + b1 log Gt + b2 log 1. Levin, Lin and A real depreciation or
Upadhyaya, East Asian 2010 MSt + b3 log REt + b4 log REt-1 Chu (2002), devaluation has a
Robert countries + b5 log RE t-2 + b6 logTOTt + u1 Breitung (2000), contractionary effect in
Rainish, (Thailand, and Im, the economy
Neetu Malaysia, Where, Y is the aggregate output, G Pesaran and Shin in the short and the
Kaushik, & Indonesia is government expenditure, MS is the (2003) unit root intermediate run, but
Rabindra N. and the money supply E is the nominal tests not in the long run. The
Bhandari, Philippines.) exchange rate of domestic currency u 2. Pedroni’s contractionary effect
(2013) is the random error term. TOT is the Panel comes from the change
terms of trade. Cointegration in nominal exchange
Test rate, not from foreign-
3. Error Correction to-domestic price ratio.
Model (ECM)

Log(GDPt)= α + β log ( RERt ) +µt 1. Augmented The analysis suggests

Khnd. Md. Bangladesh 1972 to Dickey- Fuller mixed results. In the
Mostafa 2013 Where, GDP indicates the real gross (ADF) unit root long run, currency
Kamal domestic product evaluated at test devaluation has
( 2015) constant price, RER denotes the real 2. Engle- Granger negative impact on
exchange rate. cointegration output while this
test& impact is positive in
Johnson co- the short run.
integration test
3. error correction
model (ECM).
Mohsen 42 countries 1988 to log Yt= a0 + a1 log Et+ a2 log 1. Panel Unit Root In the long-run,
Bahmani- (18 OECD 1997, Mt+ a3 log Gt+ ut Test Results (IPS devaluations
Oskooee and 24 non- where, where Y is real GDP, E Statistic) are contractionary.
and OECD) is the nominal effective 2. Pedroni’s Panel This finding was
Ilir Miteza exchange rate, M is a measure Cointegration confirmed in all model

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(2006) of the money stock and G Test specifications
represents government for non-OECD
demand for non-tradable. countries as compared
to OECD countries
Veli Yilanci Turkey Yt=f(Mt,Gt,RERt,FYt) 1. Augmented Real devaluation is
and Aycan 1987 - Dickey Fuller contractionary in the
Hepsağ (2011) 2008 where, Yt, Mt, Gt, RERt ,FYt denote (ADF) unit root short run but it is
the log of real gross domestic product test expansionary in the
(domestic income), the log of real 2. Johansen long run for Turkey.
money supply, the log of real Cointegration
government spending, the log of real Test
effective exchange rate and the log of 3. VECM
real foreign income index

Reference

1. Ahmed, B. Ahmed, I., Rehman, Z. U. and Wu, X. (2015). “The Impact of Exchange Rate Depreciation on Economic and
Business Growth in Pakistan.” European Journal of Business and Management, vol.7.
2. Bahmani-Oskooee, M., & Miteza, I. (2006). “Are Devaluations contractionary? Evidence from Panel Cointegration.”
Economic issues, 11(Part 1).
3. Rafindadi, A. A. and Yusof, Z. (2014). “An Econometric Estimation and Prediction of the Effects of Nominal Devaluation on
Real Devaluation: Does the Marshal-Lerner (M-L) Assumptions Fits in Nigeria?” International Journal of Economics and
Financial Issues, 4: 819-835.
4. Bhandari, N. R. Kaushik, N., Rainish, R., and Upadhyaya, K. P. (2013). “Exchange Rate Adjustment And Output In South–
East Asia.” The Journal of Applied Business Research, vol. 29.
5. Md. Kamal, M. K. ( 2015). “An ECM Approach for Long Run Relationship between Real Exchange Rate and Output Growth:
Evidence from Bangladesh.” Dhaka Univ. J. Sci. 63(2): 105-110.
6. Ratha, A. Kang, E., and Edwards. (2008). “Does an Undervalued Currency Promote Growth? Evidence from China".
Economics Faculty Working Papers. Paper 15.
7. Yilanci, V. and Hepsağ, A. (2011). “The Contractionary and Expansionary Effects of Devaluation: Empirical Evidence from
Turkey.”  Journal of Economic Cooperation and Development, 32, (1):19-30.