Relationship between Real Effective Exchange Rate and Trade Balance in Nepal
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Department of Economics
Abstract
This study investigates the relationship between real effective exchange rate and trade
balance in the context of Nepal using the Engle-Granger cointegration test and Error
correction model based on annual data from 1979 to 2019 and suggests that the variables
are cointegrated and shows that real effective exchange rate and real GDP have a
significant positive role in increasing trade deficit in the long-run but remittance has been
found to have negative impact. The result of the Error Correction Model further indicates
that in the short-run, the real effective exchange rate and the real gross domestic product
have a positive effect but, the remittance has a negative and significant effect on the trade
deficit. The Error correction term ECM(-1) being negative and significant indicates that
the variables get converged into long-run equilibrium.