This paper examines the impact of currency devaluation on trade balance performance in Lesotho using a nonlinear time-series framework. Unlike conventional linear approaches, the analysis explicitly models regime-dependent effects to capture how the impact of devaluation varies across different economic states. A smooth transition regression (STR) model is employed to account for structural shifts, using annual data for the period 1983–2018. The results show that currency devaluation significantly improves the trade balance, consistent with the Marshall–Lerner condition, with stronger effects observed under high-devaluation regimes. Macroeconomic fundamentals, particularly inflation and economic growth, play an important role in shaping external sector outcomes, while fiscal variables have limited influence. These findings are robust to alternative measures of trade balance and to heteroskedasticity- and autocorrelation-consistent (Newey-West) standard errors. Overall, the results suggest that exchange rate policy can support external adjustment, conditional on prevailing macroeconomic conditions.
Lesaoana et al. (Fri,) studied this question.