The Devaluation Policy of Domestic Currency’s External Value and its Impact on the Egyptian Trade Balance Deficit During the Period (1980-2022) Using NARDL Methodology

Document Type : Original Article

Authors

1 Lecturer of Economics and Researcher at the Center for Economic Research and Studies - Faculty of Economics and Political Science - Alexandria University

2 Assistant Professor of Economics at the Faculty of Economics and Political Science, Economics Researcher at the Center for Economic Research and Studies

3 Assistant Lecturer of Economics and Researcher at the Center for Economic Research and Studies, Faculty of Economics and Political Science - Alexandria University

4 Teaching Assistant at the Department of Economics, Faculty of Economics and Political Science, Economic Researcher at the Center for Economic Research and Studies

Abstract

This study aims to discuss the devaluation policy of the domestic currency’s external value in economic literature and empirical studies in an effort to estimate the asymmetric impact of that policy on the trade balance deficit in Egypt between 1980 and 2022. To do this, the research analyses the development of the external value of the Egyptian pound and its relationship to the development of the Egyptian trade balance deficit during the study period. The study adopts an econometric approach utilising the Nonlinear Autoregressive Distributed Lag (NARDL) model to estimate the asymmetric impact of the external value of the Egyptian pound devaluation policy on the Egyptian trade balance deficit. The Bounds Testing Approach is also used to ensure that there is a cointegration relation between the study variables. Furthermore, the Error Correction Model (ECM) is employed to estimate short-run relationships. The results of the study revealed that fluctuations in the real foreign exchange rate have an asymmetric effect on the trade balance deficit in the Egyptian economy. This was evident by the inverse effect of the positive shock, represented by the rise in the foreign exchange rate and the devaluation of the pound, on the trade balance deficit, indicating that the pound devaluation policy had an effective effect in reducing the trade balance deficit. However, the negative shock, which includes the decline in the foreign exchange rate and the rise in the Egyptian pound’s value, did not significantly impact the trade balance deficit. The short-run results regarding the asymmetric effect of the real foreign exchange rate were consistent with the long-run results.

Keywords

Files

Share

How to cite

Statistics