Analysis on the J-Curve Effect by Industry on Bilateral Trade with the US and Japan

Abstract

Purpose The purpose of this study was to examine the effect of exchange rates on short- run and long-run trade balances using the industry data of trading partners (US, Japan) since the 2000s. Design/Methodology/Approach This study used the ARDL-ECM model of Pesaran, Shin and Smith (2001). Previous research allowed for adding the relative money supply variable to the empirical analysis model. Findings In the short-run, the trade balances of 5 industries in the US were affected by exchange rate changes, but this was true for only 3 industries in Japan. However, the short-run effects became favorable in the long-run for only 3 industries in the US and 2 industries in Japan. The effect of the relative money supply on the long-run trade balance was relatively larger in Japan than in the United States. However, in this study, the direct route was not analyzed, so further review is needed. Research Implications This study is different in that it analyzed the effect of exchange rates on long-run and short-run trade balances by industry in trading countries, and identified the existence of the J-curve effect. The empirical analysis results of this study provide implications that can prevent the setting of identical exchange rate policies in different industries.