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Is there J-Curve effect in the commodity trade between Korea and rest of the world?

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Abstract

Previous studies that investigated the short-run and long-run effects of depreciation of the Korean won on the Korean trade balance with the rest of the world have not been able to discover significant effects. Suspecting that these studies suffer from aggregation bias, we disaggregate Korean trade flows with the rest of the world by commodity and consider the response of trade balances of 148 industries to changes in the real effective exchange rate of the won. We find that in the short run the trade balance of 91 industries are affected by exchange rate changes. However, the short-run effects last into favorable long-run only in 26 industries, a unique finding that is absent from the literature.

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Notes

  1. For an estimate of import and export demand functions for some other countries see Du and Zhu (2001), Love and Chandra (2005), Agbola and Damoense (2005), Narayan and Narayan (2005), and Ibarra (2011).

  2. Note that Bahmani-Oskooee and Alse (1994) is another study that included Korea. However, since Korean trade balance and its real effective exchange rate were integrated of different order, cointegration technique could not be applied.

  3. Note that the main reason for using the ratio is to be able to express the model in log linear form.

  4. For some other applications of this approach see Bahmani-Oskooee et al. (2005), Bahmani-Oskooee and Hegerty (2007), Halicioglu (2007), Narayan et al. (2007), Tang (2007), Mohammadi et al. (2008), Wong and Tang (2008), De Vita and Kyaw (2008), and Payne (2008) and for some other determinants of the current account see Brissimis et al. (2012, 2013).

  5. Note that most of these 26 industries are small, as measured by their trade shares reported next to the name of each industry in Table 2. Only two relatively large industries seem to benefit from real depreciation the won in the long run. They are 599 (Chemical materials and products) with 1.12 % of the market share and 735 (Ships and boats) with 5.26 % of the market share.

  6. For more on this issue see Bahmani-Oskooee (1986).

  7. Note that in industries such as 71 (Coffee) in which the coefficient is -1.62, almost 80 % of the adjustment takes place in six months since the data are annual.

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Authors and Affiliations

  1. The Center for Research on International Economics, The Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI, 53201, USA

    Mohsen Bahmani-Oskooee & Ruixin Zhang

Authors
  1. Mohsen Bahmani-Oskooee
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  2. Ruixin Zhang
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Correspondence to Mohsen Bahmani-Oskooee.

Appendix: Data definition and sources

Appendix: Data definition and sources

Annual data over the period 1971–2011 are used d to carry out the empirical analysis. They l come from the following sources:

  1. 1.

    The World Bank.

  2. 2.

    International Financial Statistics of the IMF.

  3. 3.

    Bank for International Settlements.

Variables:

Mi = Korean imports of commodity i from rest of the world in US dollars. Source (1).

Xi = Korean exports of commodity ii to the rest of the world in US dollars. Source (2).

YKOR = Index of Korean real GDP (2005 = 100), source (2).

YWOR = Index of Industrial production in advanced economies (2005 = 100), source (2).

REER = The Real Effective Exchange Rate of Korean won. Source (3). A decline reflects a real depreciation of the won.

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Bahmani-Oskooee, M., Zhang, R. Is there J-Curve effect in the commodity trade between Korea and rest of the world?. Econ Change Restruct 47, 227–250 (2014). https://doi.org/10.1007/s10644-013-9148-5

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  • DOI: https://doi.org/10.1007/s10644-013-9148-5

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