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Testing the J-Curve Hypothesis: A Case of Nepal

Author

Listed:
  • Mahesh Kumar Chaulagai, Ph.D.

    (Nepal Rastra Bank)

Abstract

This paper attempts to explore the J-curve phenomenon in the case of Nepalese foreign trade sector in order to examine whether devaluation2 of Nepalese currency can be taken as a policy tool for improving Nepalese trade imbalance with the rest of the world economies. Johansen's cointegration test, vector autoregression (VAR) model, impulse response function as well as autoregressive distributed lag (ARDL) bounds testing cointegration approach has been employed in order to see the relationships between the nominal effective exchange rate index (NEER) and trade balance (TB) as well as the real effective exchange rate index (REER) and trade balance (TB) of Nepal. The study found no evidence of "J-curve" in the case of Nepalese trade. On the contrary to the "J-curve" phenomenon as explained by the classical text books, the findings of the study suggest that depreciation of Nepalese exchange rate rather produces a flatter "L-curve" phenomenon indicating that there is no room for improving Nepalese trade imbalance through a currency devaluation process.

Suggested Citation

  • Mahesh Kumar Chaulagai, Ph.D., 2015. "Testing the J-Curve Hypothesis: A Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 27(1), pages 17-36, April.
    • Handle: RePEc:nrb:journl:v:27:y:2015:i:1:p:17
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    References listed on IDEAS

    as
    1. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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    4. Mahesh K. Chaulagai, Ph.D., 2014. "Indo-Nepal Trade Relation: The Phenomenon of Black Hole Effect," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 26(1), pages 44-57, April.
    5. Mohsen Bahmani-Oskooee & Tatchawan Kantipong, 2001. "Bilateral J-Curve Between Thailand and Her Trading Partners," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(2), pages 107-117, December.
    6. Jaleel Ahmad & Jing Yang, 2004. "Estimation of the J-Curve in China," Economics Study Area Working Papers 67, East-West Center, Economics Study Area.
    7. Pavle Petrović & Mirjana Gligorić, 2010. "Exchange Rate and Trade Balance: J-curve Effect," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(1), pages 23-41, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Trade Balance; Exchange Rate; Devaluation; J-Curve;
    All these keywords.

    JEL classification:

    • 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
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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