Is there a J‐curve in China‐U.S. trade?

Kamal Upadhyaya, Franklin Mixon and Rabindra Bhandari

International Journal of Finance & Economics, 2022, vol. 27, issue 1, 61-67

Abstract: A recent series of empirical studies of the impact of real currency devaluations on a country's trade balance has produced mixed result regarding the J‐curve hypothesis. Thus, in an effort to extend the literature by shedding additional light on the validity of the J‐curve hypothesis, this study revisits the J‐curve hypothesis using data on bilateral trade involving China and the U.S. Results from error correction estimation show that an increase in domestic as well as foreign income significantly improves China's trade balance with U.S., while the monetary variables (both domestic and foreign) have no effect on that trade balance. The key finding is that a depreciation of China's currency initially worsens its trade balance, but, over time, its trade balance improves. This pattern supports the J‐curve hypothesis that is tested in prior studies with mixed results.

Date: 2022
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