Does the S-curve demonstrate an asymmetrical response to fluctuations in exchange rates?

Abstract

PurposeThis study aims to examine the asymmetric S-curve between the trade balances of Pakistan and China at the commodity level using disaggregated data.Design/methodology/approachThis study focuses on Pakistan and China bilateral trade based on commodity-level data. This study delves into the S-curve phenomena by examining time series data from 1980 to 2023 across 32 three-digit industries/commodities.FindingsThe findings show significant evidence in favor of the “asymmetric S-curve” in 27 out of the 32 industries studied. This study confirms that the devaluation of home currency is not a viable solution always to improve trade balance.Research limitations/implicationsThis study considers 32 three-digit industries limiting the generalizability of findings. Due to data unavailability, the authors fail to consider other industries. In the absence of quarterly data on industry-level trade between Pakistan and China, annual data from 1980 to 2023 were used in generating the cross-correlation functions. Previous literature frequently resorted to the general consumer price index with its inherent aggregation issues, whereas this study has opted for commodity price indices to overcome the shortcomings in the estimation of S-curves at the commodity level.Practical implicationsThe findings have practical relevance in guiding policy decisions regarding commodity trade, whereas the industry-wise analysis enriches the understanding of the short-term effects of currency depreciation on trade balance dynamics.Originality/valueThe S-curve hypothesis predicts a negative cross-correlation between a country's current exchange rate and its past trade balance and a positive cross-correlation between the current exchange rate and its future trade balance. Previous empirical S-curve studies had the limitation of assuming symmetry in cross-correlation with both current and future trade balance values.