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An alternative consideration for the testing procedure of the S-curve hypothesis

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  • Abdurrahman Korkmaz
  • Sabiha Korkmaz

Abstract

Backus et al. (Am Econ Rev 84:84–103, 1994 ) introduced a new theoretical interpretation of the short-run relationship between the terms of trade and the trade balance: movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. There have been several papers aimed at testing the S-curve hypothesis in the related literature. The most common empirical approach used in those papers is the cross-correlation analysis. This paper highlights several deficiencies of the cross-correlation analysis when being used directly to test for the validity of the mentioned hypothesis. The purpose of this paper is to offer an alternative approach so as to combine the causality theory in econometrics with the testing procedure of the S-curve hypothesis via the cross-correlations. The paper’s empirical results reveal that disaggregated bilateral trade data between the United States and China almost never support the S-curve hypothesis, contrarily to a previous paper employing the same data, but utilizing the conventional cross-correlation analysis. Why this difference may have appeared is also discussed. Copyright Springer-Verlag 2013

Suggested Citation

  • Abdurrahman Korkmaz & Sabiha Korkmaz, 2013. "An alternative consideration for the testing procedure of the S-curve hypothesis," Empirical Economics, Springer, vol. 45(1), pages 627-634, August.
    • Handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:627-634
    DOI: 10.1007/s00181-012-0606-0
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    References listed on IDEAS

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    1. Bahmani-Oskooee, Mohsen & Ratha, Artarana, 2007. "Bilateral S-curve between Japan and her trading partners," Japan and the World Economy, Elsevier, vol. 19(4), pages 483-489, December.
    2. repec:fth:nystbu:92-6 is not listed on IDEAS
    3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    5. Bahmani-Oskooee, Mohsen & Ratha, Artatrana, 2010. "S-Curve dynamics of trade between U.S. and China," China Economic Review, Elsevier, vol. 21(2), pages 212-223, June.
    6. Mohsen Bahmani-Oskooee & Artatrana Ratha, 2008. "S-Curve at the industry level: evidence from US–UK commodity trade," Empirical Economics, Springer, vol. 35(1), pages 141-152, August.
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    Cited by:

    1. Abdurrahman Korkmaz & Mustafa Erhan Bilman, 2017. "The S-curve Behaviour of the Trade Balance," Foreign Trade Review, , vol. 52(1), pages 1-14, February.

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    More about this item

    Keywords

    S-curve; causality; Cross-correlation; Pierce–Haugh methodology; C18; C22; F14;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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