Abstract
Since introduction of cointegration and error-correction modeling, the definition of the J-curve has changed to reflect short-run deterioration combined with long-run improvement of the trade balance due to currency depreciation. Standard methods such as ARDL approach of Pesaran et al. (2001) assume that adjustment of variables follow a linear path. It is now recognized that the adjustment process could be nonlinear. Application of Non-linear ARDL approach of Shin et al. (2013) provides more evidence of the J-curve supporting non-linear adjustment of variables as well as asymmetric effects of exchange rate changes on the trade balance, using bilateral trade balance models of the U.S. with each of her six largest trading partners.
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Notes
Rose and Yellen (1989, p. 67).
These are the same partners that were considered by Rose and Yellen (1989).
Note that expected sign of normalized coefficient estimates of POS and NEG variables in model (4) are the same as that of REX in model (2). Therefore, if exchange rate changes are to have symmetric favorable effects on the trade balance, we expect the POS and NEG variables in (4) to carry significantly normalized positive coefficients that are the same in size.
This critical value is at the usual 5 % significance level and when there are three exogenous variables. It comes from Pesaran et al. (2001, Table CI-Case III, p. 300).
Note that in these two cases (i.e., the US-Italy and the US-UK) effects of exchange rate changes are asymmetric since the POS and NEG variables carry coefficients that are different in size and significance..
In all models cointegration is supported at least by F test or by ECMt-1. The RESET statistic is insignificant in all 12 models and the LM statistic is significant in four out of 12 models. To reduce the LM statistic to an insignificant level, we added additional lags of the dependent variable. There were no significant changes in the results. These results are available upon request.
Note that instruction to download the data from the Federal Reserve Bank of St. Louis hints that “All OECD data should be cited as follows: OECD (2010), ”Main Economic Indicators - complete database“, Main Economic Indicators (database), http://dx.doi.org/10.1787/data-00052-en (Accessed on date)”
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Valuable comments of two anonymous referees are greatly appreciated. Remaining errors, however, are ours.
Appendix
Appendix
1.1 Data Definition and Sources
Quarterly data over the period 1971I-2013III are used to carry out the empirical analysis. They come from the following sources:
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a.
Direction of Trade Statistics by the IMF.
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b.
Federal Reserve Bank of St. Louis.Footnote 8
1.2 Variables
TBi = U.S. trade balance with partner i is defined as the U.S. imports from partner i over her exports to partner i. The data come from source a.
YUS = Measure of United States income. It is proxied by index of real GDP. The data come from source b.
Yi = Trading partner i’s income. This is also proxied by the index of real GDP in country ii and the data come from source b.
REXi = The real bilateral exchange rate of the U.S. dollar against the currency of partner i. It is defined as REXi = (PUS.NEXi/ Pi) where NEXi is the nominal exchange rate defined as number of units of partner i’s currency per U.S. dollar, PUS is the price level in the U.S. (measured by CPI) and Pi is the price level in country i (also measured by CPI). Thus, a decline in REX reflects a real depreciation of the U.S. dollar. All nominal exchange rates and price levels data come from source b.
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Bahmani-Oskooee, M., Fariditavana, H. Nonlinear ARDL Approach and the J-Curve Phenomenon. Open Econ Rev 27, 51–70 (2016). https://doi.org/10.1007/s11079-015-9369-5
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DOI: https://doi.org/10.1007/s11079-015-9369-5