The Effect of Real Exchange Rate on Trade Balance: The Case of Mongolia

Abstract

For developing economies, the effect of real effective exchange rate on trade balance may differ from the standard findings depending on country specific characteristics. The data set includes monthly time series of domestic GDP, China GDP, domestic trade balance and real effective exchange rate for the period 2000– 2019. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, developing country. Empirical results show that exchange rate depreciation may improves trade balance. Therefore, policy makers should use appropriate policy instruments to diversify sources of foreign exchange in the country and should try to stabilize exchange rate.