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

Author

Listed:
  • 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))

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.

Suggested Citation

  • Mon-Li Lin & Tze-Wei Fu, 2015. "Nonlinear Effect of Exchange Rates on Trade Balance: A Recommendation for Emerging Countries’ Exchange Rate Policy," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 1(6), pages 90-96, 09-2015.
    • Handle: RePEc:arp:ijefrr:2015:p:90-96
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    Citations

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    Cited by:

    1. Qayyum, Abdul & Nazir, Sidra & Jawad, Muhammad, 2016. "Nonlinearity between RER and Trade Balance: A Case Study of Pakistan," MPRA Paper 72589, University Library of Munich, Germany.

    More about this item

    Keywords

    Exchange rate; Trade balance; Non-linear model; Co-integration.;
    All these keywords.

    JEL classification:

    • F19 - International Economics - - Trade - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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