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The J-Curve: Evidence from Industry Trade Data between US and UK

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  • M Bahmani-Oskooee
  • M Kovyryalova

Abstract

Previous research seeking to assess the short-run and long-run effects of currency depreciation on the UK trade balance has employed either aggregate trade data between U.K. and the rest of the world or bilateral trade data between U.K. and one of its major trading partners, the US. Neither group of studies was able to discover any significant relation beween the two variables. In this paper we disaggregate the trade data between the US and UK at the commodity level and try to assess the impact of changes in the real dollar-pound bilateral rate on the trade balance of each industry. Using the bounds-testing approach to cointegration and error-correction modeling we show that 107 of 177 industries' trade balance respond to a real depreciation in the British pound in the short-run. The short-run effects last into the long-run only in 66 industries, supporting a new definition of the J-Curve.

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Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 13 (2008)
Issue (Month): 1 (March)
Pages: 25-44

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Handle: RePEc:eis:articl:108bahmani

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  1. Kanta Marwah & Lawrence R. Klein, 1996. "Estimation of J-Curves: United States and Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 523-39, August.
  2. Mahdavi, Saeid & Sohrabian, Ahmad, 1993. "The exchange value of the dollar and the U.S. trade balance: An empirical investigation based on cointegradon and Granger causality tests," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(4), pages 343-358.
  3. Felmingham, Bruce S, 1988. "Where Is the Australian J-Curve?," Bulletin of Economic Research, Wiley Blackwell, vol. 40(1), pages 43-56, January.
  4. Noland, Marcus, 1989. "Japanese Trade Elasticities and the J-Curve," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 175-79, February.
  5. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
  6. Himarios, Daniel, 1989. "Do Devaluations Improve the Trade Balance? The Evidence Revisited," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 143-68, January.
  7. Gerlach, Stefan, 1989. "Intertemporal speculation, devaluation, and the J-curve," Journal of International Economics, Elsevier, vol. 27(3-4), pages 335-345, November.
  8. Burda, Michael C & Gerlach, Stefan, 1992. "Intertemporal Prices and the U.S. Trade Balance," American Economic Review, American Economic Association, vol. 82(5), pages 1234-53, December.
  9. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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