What Do We Know of Trade Elasticities?

PIDE Knowledge Brief No. 30:2021
Author: Hafsa Hina
Publication Year : 2021

Devaluation 2 is necessitated only when policy weakness leads to a loss of reserves. It takes on a harsher form when central banks refuse to recognize the will of the market and spends reserves to preserve an artificial value of the exchange rate. Ill-informed popular debate appears to hold to the notion that the purpose of a devaluation is to devalue to improve the trade balance and as they say “improve competitiveness.” There is an old debate on whether exchange rate depreciation impacts the trade balance positively or not. We will summarize that here. The impact of an exchange rate depreciation on trade balance has not been widely endorsed. The studies in the area of depreciation can be divided into two groups. The first group of studies supports the view that depreciation is successful in improving the trade balance and demand for exports and imports are responsive to exchange rate. Whereas, the second group that do not lend support to the effectiveness of depreciation in resolving the trade deficit problem

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