Real Exchange Rates and the Balance of Trade: Does the J-curve Effect Really Hold?
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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.
KeywordsCompetitive devaluation Marshall-Lerner condition J-Curve Panel data Panel data cointegration CCE estimator
JEL ClassificationC23 F10 F30
The authors would like to thank the Editor and two anonymous referees for their helpful comments and suggestions. The usual disclaimer applies.
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