Conceptos que aportan los cimientos de los métodos instruccionales

The thesis attempts to estimate the role of the exchange rate in the balance of trade, aggregate import demand, and import and domestic prices for Bangladesh. The research also tests the hysteresis hypothesis in bilateral trade.

Since Bangladesh‘s independence in 1971, similar to many other developing countries, it has been pursuing an active exchange rate policy. On average, Bangladesh‘s exchange rate is devalued approximately by 4 times in a year. The main objectives of the exchange rate policy are to rearrange resources to import substitutes and export oriented sectors and pursue an export-led growth. Hence, first of all, the study estimates the impact of exchange rate movements on the trade balance of Bangladesh and evaluate whether the objectives of exchange rate policy and its effectiveness are performing in the same direction.

Secondly, the key exporting firms of Bangladesh require their raw materials and intermediate goods which they import. The country therefore has shifted from inward- looking trade regime towards a liberalized market oriented regime since the mid-1980s in order to ease the imports of exporting firms. Bangladesh has adopted a trade liberalization policy since the early-1980‘s which it continues to do today. Although trade liberalization has been taking place from the mid-1980s, according to Dutta and Ahmed (1999), the impact of the policy has actually been felt by the economy from 1992 onwards. The study therefore estimates the import demand function, exchange rate pass-through to import prices and exchange rate pass-through to domestic inflation of Bangladesh in the short- and long run by including a trade liberalization variable in the models to test whether trade openness has any significant effect on Bangladesh‘s import volume, import prices and inflation.

Generally, theories suggest that aggregate import is determined by the relative prices and real income. However, in this study we argue that there are some country specific determinants of import demand for developing countries. Thus, the study estimates an empirical model including the export demand variable as an additional determinant in the conventional import demand function. It is worth noting that the non-traditional determinants have also been proposed by recent literature.

The existing literature suggests that the relative prices of imports is a significant determinant for import demand. It is worth mentioning that the relative prices of imports is the ratio of import price to domestic price and the import price is affected by exchange rate movements. How much the import price is affected by the exchange rate, depends on the exchange rate pass-through to import price. If the exchange rate pass-through to import prices is ‗complete‘, any exchange rate devaluation or revaluation would have a ‗full‘ effect on import price which would increase or decrease import price one-to-one (e.g., 1 percent devaluation would increase import price by 1 percent and vice versa). However, if pass-through is partial, any exchange rate movements would have only a ‗partial‘ effect on import price and thereby import demand. Hence the study also estimates the exchange rate pass-through to import price.

Although the monetary authority of Bangladesh has not been targeting ‗inflation‘, the country is always concerned about its high inflation rate. Generally, the price level of a country is affected by output level, aggregate demand, fiscal policy and monetary policy. External prices can also affect the domestic prices; especially, import prices affect domestic prices. As the exchange rate can influence the import prices, the domestic prices can be affected by exchange rate movements indirectly. This is called the ‗second-stage- pass-through‘ in international economics. Hence, to detect the actual reasons for higher

inflation in Bangladesh, it is important to test whether the exchange rate has a significant effect on domestic prices. If the exchange rate pass-through to domestic price is significantly high, the monetary authority would have to be careful about its exchange rate policy because the exchange rate policy would have an affect on domestic inflation. This study therefore estimates the exchange rate pass-through to domestic prices as well.

There is a common belief in international economics that devaluation/depreciation in the exchange rate leads to an increase in export demand and decrease in import demand. On the contrary, revaluation/appreciation in the exchange rate reduces export demand and increases import demand. However, this depends on the effectiveness of the exchange rate. It also depends on the magnitude of depreciations and appreciations. Recent literature suggests that even if the exchange rate movements influence export and import demand significantly in the expected directions, it does not necessarily influence the magnitude as expected. Subsequently, certain levels of appreciation can increase import demand up to a certain amount; it cannot reduce the import demand to the equal magnitude even if there is equal level of depreciation in exchange rate. Hence, appreciation and depreciation may not symmetrically affect the import volume. A temporary exchange rate shock may have persistence effect on international trade. This is known as ‗hysteresis‘ in international trade. It is believed that the US and the UK trade deficit in the 1980s long-last due to the hysteresis effect. This thesis therefore tests an important proposition of international economics called, the ‗hysteresis hypothesis‘. We test the hypothesis in bilateral aggregate and disaggregate UK imports from Bangladesh, India, Pakistan and Sri Lanka.

The study employs a group of state-of-the-art time series econometric tests and techniques namely, ‗unit root‘ tests (which includes the Augmented Dickey Fuller, the Phillips-Perron, and the Kwiatkowski-Phillips-Schmidt-Shin), co-integration tests (which

includes Engle-Granger two-step procedure, and Johansen‘s full information maximum likelihood technique), error correction model, vector auto regression, impulse response function, recursive estimates, and the delta method. We use modern econometric packages namely, Eviews, OxMetrics, and Stata, which are suitable for time series estimations.