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Trade Balance and Exchange Rate: The J-Curve

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  • Ioannis N. Kallianiotis

Abstract

The objective of this paper is to test empirically the effect of a devaluation of a currency on the trade account of the country, the J-curve effect, by using the trade between the U.S. and six countries (Euro-zone, Canada, United Kingdom, Switzerland, Japan, and Australia). A devaluation (depreciation) of the U.S. dollar is increasing the spot exchange rate ($/FC) and increases the price of imports and reduces the price of exports. Then, imports are falling and exports are increasing and the trade account is improved in the long-run. In the short-run, the trade account is deteriorated because imports are pre-arranged and continue to increase with the higher spot rate. This J-curve hypothesis is tested by using a regression and a VAR model, where the volatility of the real exchange rate (TOT) is specified with a GARCH-M process. The empirical results mostly are supporting the J-curve effect. Â JEL classification numbers: E4, F31, F32, F47, G14, G15.

Suggested Citation

  • Ioannis N. Kallianiotis, 2022. "Trade Balance and Exchange Rate: The J-Curve," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(2), pages 1-3.
    • Handle: RePEc:spt:apfiba:v:12:y:2022:i:2:f:12_2_3
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    Cited by:

    1. Serdar Ongan & Ismet Gocer & Huseyin Karamelikli, 2023. "The US State-Level Geographic J-curve Hypothesis Mapping with Canada," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 43(2), pages 203-240, August.

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    More about this item

    Keywords

    Demand for Money and Exchange Rate; Foreign Exchange; Current Account Adjustment; Forecasting and Simulation; Information and Market Efficiency; International Financial Markets.;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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