Short and long run effects of currency devaluation policy on Egypt-Saudi bilateral trade

Abstract EN

Egypt suffers from a growing bilateral trade deficit with Saudi Arabia, one of its most important trading partners.

Although the devaluation of the domestic currency is anticipated to improve Egypt’s trade balance, few studies have confirmed the effectiveness of this exchange rate policy.

Therefore, the objective of this study is to evaluate whether the J curve hypothesis holds for Egypt’s bilateral trade balance with Saudi Arabia from 1995 to 2016, using the ARDL approach to capture both short run dynamics and long run effects.

The empirical results support the existence of the J curve, i.e.

that the devaluation of the Egyptian pound has a positive impact on Egypt’s bilateral trade balance with Saudi Arabia after a deterioration in the short run.

As the coefficient of the lagged error correction term implies that the short run adjustment process fluctuates around the long run value before eventually