Estimating a bilateral J‐curve between the UK and the Euro area: An asymmetric analysis

Abstract

AbstractThe J‐curve outlines the path of movement in the trade balance after a currency is devalued or depreciated, deteriorating in the short run but improving in the long run. One study in this journal investigated the concept between the UK and each of its 10 large partners from the EU. The study found support for the J‐curve effect in the UK trade balance with Belgium, Germany, France, Italy and Netherlands. However, the findings were based on sign misinterpretation. If correctly interpreted, the findings actually support the inverse J‐curve, i.e., long‐run deterioration in the bilateral trade balances. The results were based on using the linear ARDL approach. We revisit the issue and use the Nonlinear ARDL approach. We find support for the asymmetric J‐curve effect in the bilateral trade balance between the UK and France, Greece, Portugal and Spain and an asymmetric inverse J‐curve in the case of Finland.