Abstract
Several studies have tested the J‐curve phenomenon for Australia using non‐stationary aggregate trade data and have provided mixed results. They not only suffer from the ‘aggregation bias problem’ but also from the ‘spurious regression problem’. To overcome these problems, in this paper we investigate the short‐run and the long‐run effects of real depreciation of the Australian dollar on the trade balance between Australia and each of her 23 trading partners using quarterly data over the 1973–2001 period and recent advances in cointegration analysis. The results from the bound testing approach for cointegration and error‐correction modeling does not provide much support for the J‐curve phenomenon.
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