Abstract
Previous studies that have investigated the J-curve phenomenon between the UK and its largest trading partner from the European Union (EU), Germany, used aggregate bilateral trade data and found no support for the phenomenon. In this paper, we disaggregate the trade data by industry and investigate the symmetric as well as asymmetric J-curve hypothesis for each of the 95 2-digit industries that trade between the two countries. We found support for the symmetric J-curve effect in 12 industries, but support for the asymmetric J-curve effect 21 industries. Since the asymmetric approach required separating pound depreciation from appreciation, the approach also allowed us to identify industries that could benefit or be hurt from pound depreciation and those that could be hurt or benefit from pound appreciation.
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Notes
For a review article see Bahmani-Oskooee and Ratha (2004).
Note that estimates of α2 and α3 could also be positive and negative, respectively if increased economic activity is due to an increase in the production of import-substitute goods (Bahmani-Oskooee 1986).
Note that by lagging the dependent and independent variables in (1) by one period and including the outcome for lagged error term, we see that indeed, lagged error term is the same as linear combination of lagged level variables.
Note that once normalization takes place, we have \(\hat{\alpha }_{1} = {\raise0.7ex\hbox{${\hat{\eta }_{1} }$} \!\mathord{\left/ {\vphantom {{\hat{\eta }_{1} } { - \hat{\eta }_{0} }}}\right.\kern-\nulldelimiterspace} \!\lower0.7ex\hbox{${ - \hat{\eta }_{0} }$}}\); \(\hat{\alpha }_{2} = {\raise0.7ex\hbox{${\hat{\eta }_{2} }$} \!\mathord{\left/ {\vphantom {{\hat{\eta }_{2} } { - \hat{\eta }_{0} }}}\right.\kern-\nulldelimiterspace} \!\lower0.7ex\hbox{${ - \hat{\eta }_{0} }$}}\); and \(\hat{\alpha }_{3} = {\raise0.7ex\hbox{${\hat{\eta }_{3} }$} \!\mathord{\left/ {\vphantom {{\hat{\eta }_{3} } { - \hat{\eta }_{0} }}}\right.\kern-\nulldelimiterspace} \!\lower0.7ex\hbox{${ - \hat{\eta }_{0} }$}}\).
Indeed, by applying the ADF test we had to confirm that there are no I(2) variable in any of the models.
Shin et al. (2014, p. 291).
For some other application of these models see Apergis and Miller (2006), Halicioglu (2007), Verheyen (2013), Hajilee and Al-Nasser (2014), Gogas and Pragidis (2015), Durmaz (2015), Baghestani and Kherfi (2015), Al-Shayeb and Hatemi (2016), Lima et al. (2016), Nusair (2017), Aftab et al. (2017), Arize et al. (2017), Gregoriou (2017), Lucarelli et al. (2018), Hatemi et al. (2018), Istiak and Alam (2019), Hajilee and Niroomand (2019), Olaniyi (2019), and Bahmani-Oskooee and Nasir (2020).
Our long-run results did not change when we considered other lag selection criteria. However, short-run results were somewhat different in terms of number of lags selected.
Exact name of each industry and their trade shares appear in Table 2.
From the long run estimates, it appears that the trade balance of industries coded 18, 23, 34, 39, 81, 86, and 93 will be hurt by pound depreciation since the estimate attached to the exchange rate is negative. This could be due to inelastic import demands in either country.
The real exchange rate carries an insignificant coefficient using aggregate trade data (see last row of Table 2).
Note that in industry coded 89 in Table 7, estimate of b is greater than one. This implies that since data are monthly, little over 50% of adjustment takes place in two weeks.
In all industries in all four groups, asymmetric cointegration was supported either by the F or the t-test. Industries in which either partial sum variable carries a significant coefficient by asymmetric cointegration was not supported, are excluded from the list.
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Appendices
Appendix
Data definition and source
Monthly data over the period January 1999–September 2019 are used in the empirical analysis. The data come from the following sources:
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A.
Eurostat – International Trade (https://ec.europa.eu/eurostat/)
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B.
International Financial statistics (IFS).
2.1 Variables
TBi = UK trade balance with the Germany defined as UK exports (dispatch) to the Germany divided by UK imports (Arrival) from the Germany in ith industry (Source: A).
YUK = United Kingdom’s aggregate output as measured by an index of industrial production since this is the only measure available at monthly frequency. (Source: B).
YGR = The Germany’s aggregate output as measured by an index of industrial production. (Source: B).
REX = The real bilateral exchange rate of the EURO against Pound Sterling. It is defined as REX = (PGR. NEX/PUK) where NEX is the nominal exchange rate defined as number of Pound per Euro. Thus, a decline in REX reflects a real appreciation of the Pound. Both price levels are measured by CPI. All data come from source B.
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Bahmani-Oskooee, M., Karamelikli, H. Asymmetric J-curve: evidence from UK-German commodity trade. Empirica 48, 1029–1081 (2021). https://doi.org/10.1007/s10663-021-09502-z
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DOI: https://doi.org/10.1007/s10663-021-09502-z