Nonlinear Effect of Exchange Rates on Trade Balance: A Recommendation for Emerging Countries’ Exchange Rate Policy

Mon-Li Lin () and Tze-Wei Fu
Additional contact information
Mon-Li Lin: Associate Professor, Department of International Trade, Takming University of Science and Technology, Taipei, Taiwan (R.O.C)
Tze-Wei Fu: Associate Professor, Department of Financial Management, National Defense University, Taipei, Taiwan (R.O.C)

International Journal of Economics and Financial Research, 2015, vol. 1, issue 6, 90-96

Abstract: Purpose: Considering the mixed results of previous empirical studies with regard to how the real exchange rates affect bilateral trade balance, this study intends to test the presence of not only the nonlinear relationship but also the J-curve effect and Korea data from January 1985 through December 2013 is adopted. The findings are helpful for emerging countries to evaluate their exchange policy. Methodology: Unit root test, cointegration analysis and Vector Autoregressive Error Correction Model are adopted in this study. Findings: The results indicate that there is a co-integration relationship between real exchange rates and bilateral trade balance in both linear and nonlinear models and Korea-U.S. bilateral trade balance exhibited no J-curve effect when the Korean won depreciated against U.S. dollar. A performance evaluation proves nonlinear model is better than linear model. Recommendation: The findings help us to realize that depreciation has a limited effect on promoting trade balance. Sharp currency depreciation will hurt country’s trade balance.

Keywords: Exchange rate; Trade balance; Non-linear model; Co-integration. (search for similar items in EconPapers)
JEL-codes: F19 F31 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.arpgweb.com/pdf-files/IJEFR1(6)90-96.pdf (application/pdf)
http://www.arpgweb.com/?ic=journal&journal=5&month=09-2015&issue=6&volume=1 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arp:ijefrr:2015:p:90-96

Access Statistics for this article

International Journal of Economics and Financial Research is currently edited by Dr. Abu Hassan Bin Md Isa

More articles in International Journal of Economics and Financial Research from Academic Research Publishing Group Rahim Yar Khan 64200, Punjab, Pakistan.
Bibliographic data for series maintained by Managing Editor ().