J-curve Effect Research Articles

Investigating The Validity of The Marshall-Lerner Principle and J-Curve Theory in Relation to Real Exchange Rates and Trade Imbalances: An Empirical Study of China's Economic Dynamics

According to traditional macroeconomic theory, meeting the Marshall-Lerner condition suggests that currency devaluation could positively impact the long-term trade balance. This implies that despite initial import cost increases, enhanced export competitiveness from a weaker currency eventually leads to trade balance improvements. However, short-term negative effects, known as the J-curve effect, may occur due to trade volume adjustments lagging currency devaluations. This study aims to assess the validity of the Marshall-Lerner condition in China's economy from 1995: Q1 to 2023: Q4 and evaluate the short-term J-curve effect's magnitude. Analyzing economic indicators and exchange rate fluctuations, the research confirms the validity of the Marshall-Lerner condition and supports the existence of the J-curve effect. These findings highlight the importance of nuanced currency policymaking for sustainable economic growth and stability, considering both short-term adjustments and long-term objectives. Key Words: Marshall-Lerner Condition, J Hypothesis, Foreign Trade.

New insights into Korea's trade relations: A comprehensive FNARDL analysis with 18 global partners

This study applied the Fourier nonlinear autoregressive distributed lag (FNARDL) model to investigate the bilateral J-curve effect between Korea and 18 trading partners. As a result, negative asymmetric effects of changes in the real exchange rate were detected in some cases in the short run. However, in other cases, these effects were positive or exhibited both positive and negative trends. This variation stemmed from the heterogeneity of import and export products and the diverse reactions of exporters to exchange rate fluctuations. By contrast, positive asymmetric effects were evident in most cases in the long run. Through the Fourier function, the FNARDL model better captured the J-curve effect compared to the standard NARDL model. Furthermore, by using bilateral trade data, this study mitigated the problem of aggregate misalignment, compared to using a country's gross trade data with the rest of the world. Therefore, the hidden effects of the real exchange rate were unveiled. This study's findings will enhance policymakers' awareness of formulating exchange rate management strategies.

Is There a J-Curve Effect in the Korean Service Trade?

ABSTRACT In this article, we test the asymmetric J-curve hypothesis using data from 10 Korean service industries. When we tested for a symmetric J-curve using the linear autoregressive distributed lag (ARDL) approach, we found support for the J-curve in one industry and the inverse J-curve in two industries. However, when we tested the asymmetric J-curve using the nonlinear ARDL approach, we found support for the asymmetric J-curve in four industries and the asymmetric inverse J-curve in four more industries. The increase from three to eight cases is attributed to the nonlinear adjustment of the real effective exchange rate of the won.

Modeling Asymmetric Effects of Exchange Rate Fluctuations on Agricultural Trade Balance: Evidence from Iran and Iraq

The exchange rate plays a crucial role in foreign trade and has asymmetric effects. This study examines the asymmetric effects of exchange rate volatility on the trade balance in the agricultural sector between Iran and Iraq, using the non-linear ARDL model from 1998 to 2020. The results show that Iraq's GDP and oil price fluctuations positively affect the trade balance. In contrast, Iran's GDP and the U.S. economic sanctions against Iran have negative and significant effects on the trade balance of Iran with Iraq in the agriculture sector. The results do not confirm the existence of the J-curve effect in the trade relations between Iran and Iraq, because an increase in the bilateral exchange rate, in both the long-run and short-run, improves the trade balance of Iran with Iraq in the agriculture sector. Furthermore, the positive and negative fluctuations of the bilateral exchange rate have different effects on the trade balance. While the devaluation of the national currency does not cause a downward trend in the short run, the exchange rate policy can improve the trade balance from the beginning.

Causality Analysis Between Exchange Rate, Current Balance Sheet, Inflation, and Gross Domestic Product in ASEAN-5 1980-2022

This research investigates the causality between exchange rate, current balance sheet, inflation, and gross domestic product in ASEAN 5 from 1980 to 2022. The method employs the Granger causality test. This research finds weak evidence of a J-curve effect on the current account balance in Indonesia because empirical results with several tests and models reject the J-curve hypothesis and do not find evidence of an influence of the rupiah exchange rate on Indonesia's current account balance in the long term so that it can the conclusion is drawn that: (1) There is no causal relationship between the current account balance and the exchange rate in Indonesia from 1996-2022; (2) Changes in exchange rates affect changes in the current account balance in the short and long term; (3) The mechanism for changes in the current account deficit does not affect changes in the exchange rate

ASYMMETRIC J CURVE RELATION BETWEEN TÜRKİYE AND HER EUROPEAN TRADE PARTNERS: A NARDL METHOD

This research delves into the asymmetrical impacts, both short and long term, of the real strengthening or weakening of Türkiye’s currency against that of the 28 European Union member countries, on its bilateral trade balance. The study aims to uncover potential asymmetries in the relationship between Türkiye’s currency depreciation and its trade balance with the EU 28 countries, while also considering the possibility of a J-curve effect. By utilizing the Non-Linear Autoregressive Distributed Lag Model (NARDL) introduced by Shin et al. (2013), which accounts for asymmetric relationships, the analysis examines whether Türkiye’s trade balance with her EU 28 partners reacts differently to currency appreciation and depreciation. The findings from the non-linear ARDL analysis conducted in this study lend support to the hypothesis of an asymmetrical relationship, both in the short and long term, between the real appreciation of foreign exchange rates and Türkiye’s bilateral trade balance with the EU 28 countries, potentially indicating the presence of a J-curve effect.

Bilateral J-Curve Between Türkiye and Its Major Non-EU Trading Partners: Evidence from Both Linear and Non-Linear Approach

This research analysed the bilateral J-curve phenomenon in the Turkish economy. For this purpose, we applied both the linear and non-linear Autoregressive Distributed Lag (NARDL) co-integration methods, in addition to the asymmetric Toda-Yamamoto causality test, to examine whether the impact of Turkish lira appreciations differs from that of lira depreciation. The findings from the linear model indicate statistically significant coefficients for the long term, and J-curve effects were observed in the case of two countries: Russia and the UAE. This suggests that when the Turkish lira depreciates, it positively affects Turkey's trade balance with these partners; however, lira appreciations have a negative impact. In contrast, the non-linear model provides more evidence, with the results revealing that asymmetry cannot be ignored, as the positive and negative variables exhibit differences in signs, magnitudes, and levels of significance. We found the J-curve effect for only three countries (India, USA, and UAE) out of seven partners in this model. Third, the lira evaluation between the short and long run affected the external balance. Furthermore, the long-run error correction mechanisms converge to steady-state equilibrium faster. Lastly, there is a unidirectional or bilateral linkage between the FX rate and the external deficit for these four partners. Therefore, exchange rate policies are a determinant that should be considered in relationships with certain trading partners.

The J-curve effect in agricultural commodity trade: an empirical study of South East Asian economies

PurposeIn this paper we examine the validity of the J-curve hypothesis in four Southeast Asian economies (Indonesia, Malaysia, the Philippines and Thailand) over the 1980–2017 period.Design/methodology/approachWe employ the linear autoregressive distributed lags (ARDL) model that captures the dynamic relationships between the variables and additionally use the nonlinear ARDL model that considers the asymmetric effects of the real exchange rate changes.FindingsThe estimated models were diagnostically sound, and the variables were found to be cointegrated. However, with the exception of Malaysia, the short- and long-run relationships did not attest to the presence of the J-curve effect. The trade flows were affected asymmetrically in Malaysia and the Philippines, suggesting the appropriateness of nonlinear ARDL in these countries.Originality/valueThe previous research tended to examine the effects of the real exchange rate changes on the agricultural trade balance and specifically the J-curve effect (deterioration of the trade balance followed by its improvement) in the developed economies and rarely in the developing ones. In this paper, we address this omission.

Exchange rates and trade balance dynamics: a quantile regression analysis

ABSTRACT This paper investigates how trade balances respond to fluctuations in exchange rates among the industrialized G10 and emerging BRICS countries, applying a nonlinear quantile regression methodology. By examining the entire conditional quantile process, we reveal diverse impacts of exchange rate dynamics on trade balances across its distribution. Specifically, our analysis highlights distinct effects: advanced economies experience short-term J-curve effects, while emerging markets display price and quantity effects. Furthermore, our study emphasizes the importance of differentiating between bilateral and effective exchange rates. We observe that effective exchange rates do not offer superior insights compared to bilateral rates, particularly evident in BRICS economies due to the dominance of the US dollar in global trade denomination. Our findings underscore crucial policy implications. Reducing reliance on the US dollar emerges as a pivotal strategy, particularly for developing nations. Conversely, for advanced economies, recognizing and leveraging the indirect yet substantial impact of exchange rates, specifically J-curve effects, could offer strategic advantages within policymaking.

Exchange Rate Movements and China-East Africa Trade Balance: A New Perspective From RMB

This study estimates the long-term impact of Chinese RMB exchange rate movements on the trade balance between China and the Eastern African Belt and Road Initiative countries. The Pedroni cointegration analysis and the fully modified and dynamic OLS techniques are applied to the dataset from UNComtrade and China Statistical Yearbook 2019. Some specification novelties are the use of imports and exports as independent variables. By so doing, the paper proposes an alternative measure of the trade balance. We find that the RMB exchange rate movements are stable during the sample period and slightly affect the trade balance between China and the Eastern African BRI countries. Additionally, the study does not find evidence supporting the J-curve effect in China-East Africa trade balance. The empirical results suggest that the Eastern African BRI countries would gain much more trading collectively with China than individually. Therefore, the study strongly recommends that the East African Community accelerate its integration process and establish Export Quotas for trade outside the bloc.

Foreign Exchange Market Pressure, Exchange Rate and Trade Balance in Nigeria: Is There Evidence of the J-Curve Effect?

The paper examined the relationship between the pressure in the exchange market, exchange rate, and trade balance in Nigeria to ascertain whether or not the J-Curve effects exist. The investigation was anchored on the Marshal-Lerner and the J-Curve theories using annual time series data from 1986 to 2021. The Structural Vector Autoregressive (SVAR) technique was employed, and the findings revealed that the pressure in the exchange market exerts a strong contemporaneous positive effect on the exchange rate in the country. Also, the findings showed that the exchange rate has a strong contemporaneous negative effect on the trade balance. Furthermore, the long-run results indicated that the exchange rate has a positive but weak effect on the country’s trade balance. Based on these findings, it was concluded that the relationship that exists among foreign exchange market pressure, exchange rate, and balance of trade suggests the potentiality of the J-Curve effects in the economy. The study recommended that local production of goods and services in Nigeria should be strengthened so that the depreciation of the naira would improve the trade balance. In the event of naira depreciation, domestic consumers could redirect their demand to the consumption of locally produced goods and services. Also, local production, especially in manufacturing and agricultural processing, should be encouraged, and the quality of the products be enhanced for competitive exportation to improve the trade balance in the country. The policy implication is that policymakers can leverage naira depreciation as a policy tool to enhance Nigeria’s balance of trade.

Drivers of Service Exports from Kenya

ABSTRACT This study investigates the drivers of traditional (transport, travel, and government services), modern (financial and insurance, and communication), and composite (total, traditional, and modern) service exports in Kenya. Eight autoregressive and distributed lag (ARDL) models, for each above-mentioned service, are estimated using time series data ranging from 1975 to 2017. Results reveal that total service exports are determined by world demand, goods exports, Real Exchange Rate, human capital, institutions, financial development, and infrastructure. The authors make five major insights at the disaggregated level. First, exports of goods improve exports of all services in the long-run. Second, world demand, which signals external shocks, has a positive effect on traditional services. As for modern services, the effect is positive in the short-run but not in the long-run. Third, the J-curve effect is evident in travel, transport, insurance and financial, and communication services. Fourth, institutions are a short-run phenomenon. Fifth, human capital, financial development, and infrastructure improve most services in the long-run but the effect is negative in the short-run. For purposes of policy, we recommend the promotion of merchandise exports as it improves exports of all services. Other policy instruments vary across services. Therefore, policies should be formulated per service.

Revisiting the J-Curve of Indonesia-China bilateral trade

The examination of the J-curve effect has been grown primarily for the case of aggregate trade level in some countries. Most studies assume that the exchange rate affects the dynamics of aggregate trade balance symmetrically. To fill the gap of the empirical studies, this manuscript attempt to revisit the presence of J-curve and analyze the effect of Indonesian Rupiah vis-à-vis Chinese Yuan on bilateral trade balance between Indonesia and China, whether symmetric or asymmetric. We employ autoregressive distributed lag (ARDL) and its partial sum concept of nonlinear manner to estimate quarterly data from 2002:I to 2017:IV. The result shows evidence of the asymmetric effect of the exchange rate on the trade balance, and the nonlinear approach provides more support to discover the presence of the J-curve impact of bilateral trade between Indonesia and China.

Empirical Analysis of the Trade Balance and its Determinants in Sri Lanka

Every economy has experienced an expansion in international trade in recent years, and some developing countries frequently experience persistent trade deficits. The investigation of the short-term and long-term relationships between trade balance and its macroeconomic determinants is the main goal of this study. In particular, the study explores the impact of the real exchange rate, foreign direct investment, inflation, budget deficit, private consumption, real money supply, and gross domestic product on the trade balance. For this purpose, the paper employed an autoregressive distributed lag (ARDL) bounds test co-integration model that covered the period from 1980 to 2020. The data were mainly gathered from the annual reports of the Central Bank of Sri Lanka, the World Development Indicators, and the UNCTAD database. The findings show a co-integration between the trade balance and selected macroeconomic variables. The study found that real exchange rate and foreign direct investment have a statistically significant and positive association with trade balance, indicating these two determinants will improve the trade balance in the long run. The real exchange rate balances the trade deficit following currency devaluation through expansion in real exports and collapse in real imports. The real exchange rate, however, is insignificant, with positive signs in the short run indicating that Sri Lanka has no J-curve effect. Further, the results demonstrate that in the long run, the budget deficit, private consumption expenditure, and real money supply have a negative impact on the trade balance. However, there is no evidence that inflation and trade balance are related over the short and long term. The results of this analysis suggest that the government should focus on exchange rate policy, followed by monetary and fiscal policies, in order to improve Sri Lanka's trade balance.

Dynamic Changes in US Financial Market under Fed's Rate Hike: Past, Present and Prospect

In March 2022, the Federal Reserve began a new round of interest rate hike. Until February 2023, Jerome Hayden Powell, the incumbent chairman of Fed, still indicated that the continuation of the interest rate hike policy is still appropriate. Many significant changes have occurred in the financial markets over the past year, however, limited information is currently available to analyze the impact of the new round of Fed rate hike policy. This paper analyzes data of the U.S. dollar index, the Nasdaq 100 index and multiple secondary sources, applies economic principles such as the J-curve effect, cites examples from Japan, Sri Lanka and China, and finds that the U.S. financial market is in an overall sustained tightening state under the interest rate hike policy, and the international financial market will have to cope with more debt and trade challenges. This papers analysis is of great reference value to the investment decisions of the government, banks, enterprises and individuals.

The exchange rate, income, trade openness and the trade balance: longitudinal panel analysis for selected SSA countries

Purpose Motivated by recent rapid exchange rate depreciations, shrank economic growth, high inflation, and persistent trade deficits, this study examines the trade balance (TB) in the face of the recent dynamics of the stated macroeconomic factors, which are also important determinants of the TB. The symmetric test of the J-curve phenomenon for the selected Sub-Saharan African (SSA) countries is revisited in this regard. The study uses panel data from 1970 to 2020 for ten of these countries for the longitudinal panel analysis with the TB as the dependent variable and the real exchange rate, foreign and domestic national incomes, and trade openness as the set of independent variables.Design/methodology/approach Because the underlying data set involves a heterogeneous panel of relatively short N and long T, the pooled mean group (PMG) and mean group (MG) heterogeneous panel models are employed based on the Hausman test for parameter consistency in heterogeneous panels.Findings The findings largely support the domestic income growth– TB worsening and the foreign income growth– TB improvement hypotheses. Trade openness is found to mostly augment the TB performance of the countries. The results also validated the J-curve effect for only 3/10 and 2/10 countries in the PMG and MG models, respectively. The divergence for most of the countries is attributed to possible import compression and institutional structure of SSA countries.Practical implications Given the favorable effects of trade openness on the TB performance of SSA countries, it is recommended that SSA countries place much emphasis on import-substitution industrialization and value addition to their natural resources as well as investment-driven growth policies to improve the competitiveness of their exports and reverse the chronic deficits in their TBs.Originality/value This paper is unique for invoking heterogeneous panel models to analyze the TB in light of recent dynamics of its determinants, as well as providing an update on the symmetric test of the J-curve phenomenon for the selected SSA countries.

The US State-Level Wood Product-Based Bilateral Trade Balances with Canada Under the Protectionist US Trade Policy, COVID-19, and Economic Policy Uncertainty

ABSTRACT The US-Canada wood product trade is a longstanding dispute due to protectionist high-tariff policies, further exacerbated by COVID-19 restrictions on US production and exports. This study investigates the J-curve effect at the US state level, revealing that only 11 US states support the asymmetric J-curve for wood products, whereas 10 US states support the asymmetric inverse J-curve (shown in Appendix 2 online). Furthermore, high tariffs imposed by the US improved trade balances for only three states, implying that the high-tariff policy did not enhance the US wood-based trade balance with Canada.

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

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.

Exchange Rate Changes and the J-curve Effect: Asymmetric Evidence from a Panel of Five Emerging Market Economies

Using the symmetric and asymmetric specifications of the pooled mean group estimator, we attempted to scrutinise the possibility of the J-curve effect in the case of Brazil, Russia, India, China and South Africa. In addition to both real effective exchange rate changes and nominal effective exchange rate changes, the possible impact of domestic and foreign demand pressures on the trade balance is also estimated. Incorporating a quarterly data set spanning from 2000Q1 to 2020Q2, the results based on the symmetric and asymmetric model establish no evidence of the J-curve phenomenon. However, when asymmetric possibilities are considered, appreciation is found to deteriorate the trade balance relatively by a greater magnitude whereas the impact of currency depreciation is insignificant. In addition, no asymmetric evidence has been reported concerning the effect of domestic and foreign demand. However, a hike in the former deteriorated the trade balance whereas an increase in the latter improved it in both linear and non-linear frameworks. JEL Codes: F4, F41, F42

External Debt Sustainability and Economic Growth in Sri Lanka

Researchers have shown an increased interest in the nexus between economic growth and foreign borrowing. This study explores the effect of external debt sustainability on Sri Lanka’s economic growth by applying a non-linear auto regressive distributed lag (NARDL) model, which allows us to decompose the effect of the debt variables into positive and negative effects, based on the annual data covering the period 1980 – 2021. The estimated NARDL model shows that external debt stock and foreign debt service payments had a robust short term and long-term effect on economic growth in Sri Lanka. The asymmetric cointegration results provide strong evidence for a long-run integration that exists between economic growth and external debt sustainability. The study discovered a strong and negative relationship between the decline in the external debt stock and economic growth, suggesting that lowering the stock of debt may boost economic growth. The study further discovered an asymmetric relationship between economic growth and debt service payments. Accordingly, an increase in debt service payments would lead to a decrease in growth, while a downward change in that would lead to an increase in growth. Concerning control variables, trade openness has a negative relationship with growth, whilst the real exchange rate indicates a positive nexus. The study also found that short-run findings are almost likely to be those in the long-run. In light of these findings, the low level of economic wellbeing in Sri Lanka can be attributed to debt overhang and the crowding out effect which discourages investment. As per the results, the real exchange rate is positive and not a significant determinant of trade balance in the short run, indicating the J-curve effect as not being valid for the case of Sri Lanka. In this context, a proper debt management mechanism should be implemented to maintain a sustainable external debt level in Sri Lanka.