Industry-Level Evidence of J-Curve Effects in the SACU Region

Abstract

Our study examines the cointegration relationship between exchange rate movements and trade balances for the five Southern African Customs Union (SACU) countries between 1995 and 2020. We disaggregate trade activity at an industry-level for 19 trade products and then determine whether industries benefit or are at a disadvantage during periods of currency depreciations over the short- and long-run. Applying pooled mean group (PMG) estimators to panel regression specifications of the industry-level J-curve, we find that exchange rate depreciations would be beneficial in 8 out of the 19 trade industries in the SACU region whilst harming theremaining 11 industries. In the strict, theoretical sense we only find J-curve effects in 6 of the 19 industries in which exchange depreciation initially hurt trade balances and then ‘adjust’ towards positive long-run effects. Altogether, we advise policymakers in SACU countries to consider devising (i) export-oriented policies for industries whose trade balance is strengthened by currency depreciations and (ii) import substitution industrialization policies and currency-risk mitigation strategies for industries whose trade balance is weakened by currency depreciations.