Dynamics of the Trade Balance and the Terms of Trade: The J-Curve Revisited

Backus, David; Kehoe, Patrick J.; Kydland, Finn E.

doi:10.21034/dp.65

Cited by 309 publications

(576 citation statements)

References 10 publications

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“…4 We follow the assumption in Lane and Milesi-Ferretti (2004) that the domestic aggregate demand conditions matter more for the non-traded sector than the traded sector. 5 Many (Senhadji, 1998 andBackus et al ., 1994) have modelled terms-of-trade as an endogenous variable. However, by studying Granger-Sims statistical causality, Mendoza (1995) finds that except for the USA and a few major fuel exporters, the null hypothesis of exogeneity of terms-of-trade for small open economies cannot be rejected.…”

Section: The Modelmentioning

confidence: 99%

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

Chia

Alba

2006

Economic Record

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We examine the impact of terms‐of‐trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.

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Section: The Modelmentioning

confidence: 99%

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

Chia

Alba

2006

Economic Record

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“…In general, the short-run exchange rate and trade dynamics that track the time path of the effect of exchange rate on trade balance has been a topic of much interest among researchers and policymakers. Empirically, this short-run dynamics is examined using the traditional J-curve framework and more recently, also through the S-curve, an approach that was first proposed by Backus et al (1994). The presence of the J-curve is investigated using primarily a regression analysis of a reduced form trade balance model while the testing of the S-curve is conducted using a cross-correlation analysis of the past and future values of trade balance and the exchange rate changes.…”

Section: Literature Surveymentioning

confidence: 99%

“…Only a limited number of studies have examined the S-curve effect (e.g. Backus et al, 1994;Bahmani-Oskooee & Ratha, 2007, 2011Ghosh, 2012;Bahmani-Oskooee & Zhang, 2013, 2014Bahmani-Oskooee & Fariditavana, 2014;Bahmani-Oskooee & Xi, 2015;Korkmaz & Bilman, 2017). These empirical studies have primarily employed either a country's global trade or its bilateral trade with trade partners.…”

Section: Literature Surveymentioning

confidence: 99%

“…(Magee, 1973;Bahmani-Oskooee & Wang, 2008;Bahmani-Oskooee & Ratha, 2010;Wang et al, 2012;Jamilov, 2013;Ali et al, 2014;Bahmani-Oskooee & Xi, 2015). The short-run relationship between trade and exchange rates has been examined empirically through the presence of J-and S-curves by numerous studies, including a literature survey by Bahmani-Oskooee and Hegerty (2010) as well as work by Ahmad and Yang (2004), Backus et al (1994), Bahmani-Oskooee et al (2016a,b), Fariditavana (2014, 2015), Bahmani-Oskooee and Ratha (2004, 2011), Bahmani-Oskooee and Xi (2015 and Bahmani-Oskooee and , among others.…”

Section: Introductionmentioning

confidence: 99%

“…A unique feature of this paper is also that it considers the likely impact of structural breaks in the relationship, specifically the break stemming from the 2007-2008 Great Recession which had followed the collapse of the U.S. housing market. In addition, it investigates the presence of the S-curve using the cross-correlation coefficient that was first proposed by Backus et al (1994), as well as examining simultaneously the existence of the J-curve in both short-and long-run for the period covering 1985 to 2014. The J-curve phenomenon is examined through an autoregressive distributed lag (ARDL) model that was developed by Pesaran et al (2001).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

An Investigation of China‐U.S. Bilateral Trade and Exchange Rate Changes Using the Autoregressive Distributed Lag Model

Hurley

Papanikolaou

2018

J of App Econs and Policy

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This paper examines how China's bilateral trade with the U.S. responds to exchange rate changes of the real Chinese yuan against the U.S. dollar using annual data covering the period 1985 to 2014. The short‐run dynamics of the China‐U.S. trade balance vs. the yuan's depreciation is examined through the S‐curve and J‐curve effects, and the long‐run relationship is established using the autoregressive distributed lag model. The paper found evidence of the S‐curve but not of the J‐curve in the short‐run although the J‐curve effect is found to be present in the long‐run. China's bilateral ratio of exports to imports with the U.S. is found to have an inelastic response to the yuan's exchange rate change against the U.S. dollar in the short‐run, but in the long‐run, it has the expected elastic response. Compared with the influence of the Yuan‐U.S. dollar exchange rate change and China's real income, U.S. real GDP has the largest impact on China‐U.S. bilateral trade relations in the long‐run. Additionally, the structural break in the data series in 2008 from the Great Recession had a small but significant short‐term effect on the bilateral trade between the two nations. Following an exchange rate shock, the deviation of China's trade ratio from its long‐run level takes less than 2 years to converge.

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Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

Chen

Hsu

2009

Southern Economic Journal

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In this paper, we use the Blanchard‐type uncertain lifetime overlapping generations framework to develop a three‐good open economy to examine the effects of demand changes on the economic performance of small open economies with sectoral adjustment costs. Our simulation results reveal a discernible Harberger‐Laursen‐Metzler effect on both temporary and permanent terms‐of‐trade shocks. The inclusion of sectoral adjustment costs generates persistent deviations of the real exchange rate from its long‐run equilibrium in response to terms‐of‐trade shocks, with the degree of sectoral adjustment costs having an effect on the subsequent dynamic transition of the economy. We also find that an increase in the mortality rate leads to a lowering of the current account.

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Dynamics of the Trade Balance and the Terms of Trade: The J-Curve Revisited

Cited by 309 publications

References 10 publications

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

An Investigation of China‐U.S. Bilateral Trade and Exchange Rate Changes Using the Autoregressive Distributed Lag Model

Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

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