Is there J‐curve effect in the US Service Trade? Evidence from asymmetric analysis

Abstract

AbstractThe J‐curve hypothesis asserts that a depreciation could worsen the trade balance in the short run but improves it in the long run. In testing the hypothesis, almost all previous studies used trade data in goods only. We add to this literature by considering the US trade in insurance and financial services with each of its nine trading partners. Using quarterly data over the period 2003Q1–2019Q4, when we estimated a linear model, we found limited support for the J‐curve effect. However, when we estimated a nonlinear model to assess the possibility of asymmetric response of a service trade to exchange rate changes, we found much more support for the hypothesis. Precisely, we found support for the asymmetric J‐curve in the US insurance (finance) trade with Australia, Belgium, France, and Korea (Australia, Germany) and asymmetric inverse J‐curve in the US insurance (finance) trade with Germany, Italy, and United Kingdom (Belgium, Canada).