Bangladesh Bank Training Academy Journal

Abstract

Exchange rates are important macroeconomic policy variables. In formulating exchange rate policies, one of the major concerns of the policy makers is the responsiveness of trade fl ows to relative price changes. The Marshall - Lerner condition shows that if absolute value of price elasticity of export and import demand is greater than unity, devaluation will improve trade balance. Using the Johansen and Johansen and Juselius Cointegration method we test the Marshall - Lerner condition for Bangladesh for the period 1985-2014. Estimated results show that Marshall - Lerner condition holds for Bangladesh in the long run. Export is current export price inelastic which is consistent with earlier studies. Export is also lag export price inelastic. To get the benefi t of currency devaluation, export demand might be made price elastic by increasing the export base, including new products in the export basket, maintaining quality, searching new markets for exports, improving infrastructure facilties for smooth production and supply of exports.