Abstract
All previous studies that have assessed the J-curve phenomenon for Pakistan have relied upon methods that assume that the adjustment of the exchange rate follows a linear path. In this paper, we consider the trade balance of 41 industries that trade between Pakistan and one of its major partners, the US, and extend the literature by assuming that the exchange rate adjusts in a nonlinear manner. When we estimated a linear ARDL model for each industry, we found support for the J-curve only in 10 industries. However, when we estimated a nonlinear ARDL model, we found support for the asymmetric J-curve in 19 industries. In 8 industries, the support was due to favorable effects of rupee depreciation, and in 11 industries, it was due to unfavorable effects of rupee appreciation.
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