How Do Trade Margins Respond to Exchange Rate? The Case of Egypt1

The trade literature provides evidence of the robust correlation between the growth of exports growth and Real Exchange Rate (RER) depreciation, especially in developing and emerging countries [1]. A depreciated currency makes exports cheaper to foreigners, and thus increases their demand for exports. Therefore, both the quantity and the value of exports are likely to be affected by exchange rate developments. In addition, exchange rate misalignment is likely to affect export performance: RER depreciation/undervaluation is likely to generate a potential comparative advantage in new and more sophisticated exportable goods and services. Indeed, countries that have managed to engineer an undervalued RER (e.g., China, the Republic of Korea, and Chile) appear to have indirectly overcome institutional constraints during the early phases of their development process [2,3].