Sri Lanka's Experiment with Devaluation : VAR and Ecm Analysis of the Exchange Rate Effects on Trade Balance and GDP

There is substantial research supporting the "J-Curve" effect and contractionary effects on economies due to devaluation, especially for less developed countries (LDCs). The World Bank and the International Monetary Fund (IMF), however, have been promoting devaluation as a policy tool for economic growth and stability in LDCs. The objective of this study is to empirically analyze the impact of the devaluation of the rupee on Sri Lankan trade balance and gross domestic product. The results show a contractionary impact on the Sri Lankan economy