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Real Exchange Rates and the Balance of Trade: Does the J-curve Effect Really Hold?

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  • M. Ege Yazgan

    (Istanbul Bilgi University)

  • Serda Selin Ozturk

    (Istanbul Bilgi University)

Abstract

In this paper, we re-examine the relationship between trade flows, real effective exchange rates, and incomes by using the bilateral trade flows of 33 countries that form more than two-thirds of total world trade. For each country, we consider the bilateral trade flows of the country under consideration vis-à-vis all other countries. The analysis reveals the fact that for most of the countries, a real depreciation of the home currency has favorable effects on the home country’s trade balance in the long run. This long-run effect manifests itself in the short run for a small number of countries, indicating the fact that satisfying the Marshall-Lerner condition in the short run is more difficult. However, there is no evidence for the J-curve phenomenon, which suggests an initial deterioration in the trade balance in the short run following a depreciation.

Suggested Citation

  • M. Ege Yazgan & Serda Selin Ozturk, 2019. "Real Exchange Rates and the Balance of Trade: Does the J-curve Effect Really Hold?," Open Economies Review, Springer, vol. 30(2), pages 343-373, April.
    • Handle: RePEc:kap:openec:v:30:y:2019:i:2:d:10.1007_s11079-018-9510-3
    DOI: 10.1007/s11079-018-9510-3
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    2. Elham Shubaita & Muhammad Mar’i & Mehdi Seraj, 2020. "Investigating in the J-curve phenomenon in Tunisia- ARDL bound test approach," Journal of Economics and Behavioral Studies, AMH International, vol. 12(5), pages 23-32.
    3. Ho Hoang Gia Bao & Hoang Phong Le, 2022. "The Roles of Vehicle Currency and Real Effective Exchange Rates in the Trade of Every ASEAN Member With the EU-28," SAGE Open, , vol. 12(2), pages 21582440221, April.
    4. Lal, Madan & Kumar, Satish & Pandey, Dharen Kumar & Rai, Varun Kumar & Lim, Weng Marc, 2023. "Exchange rate volatility and international trade," Journal of Business Research, Elsevier, vol. 167(C).
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    7. Mohammad Naim Azimi & Mohammad Musa Shafiq, 2022. "The J-curve phenomenon in Afghanistan and its major trading partners: evidence from a non-linear ARDL approach," SN Business & Economics, Springer, vol. 2(7), pages 1-28, July.

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    More about this item

    Keywords

    Competitive devaluation; Marshall-Lerner condition; J-Curve; Panel data; Panel data cointegration; CCE estimator;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General

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