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

Ege Yazgan () and Serda Selin Ozturk ()
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Serda Selin Ozturk: Istanbul Bilgi University

Open Economies Review, 2019, vol. 30, issue 2, No 6, 343-373

Abstract: 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.

Keywords: Competitive devaluation; Marshall-Lerner condition; J-Curve; Panel data; Panel data cointegration; CCE estimator (search for similar items in EconPapers)
JEL-codes: C23 F10 F30 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11079-018-9510-3

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