Exchange Rate Changes and the J-curve Effect: Asymmetric Evidence from a Panel of Five Emerging Market Economies

Published date01 November 2023
AuthorWaseem Ahmad Parray,Javed Ahmad Bhat,Effat Yasmin,Sajad Ahmad Bhat
Date01 November 2023
Subject MatterArticles
Exchange Rate Changes
and the J-curve Effect:
Asymmetric Evidence
from a Panel of
Five Emerging
Market Economies
Waseem Ahmad Parray1, Javed Ahmad Bhat2,
Effat Yasmin1 and Sajad Ahmad Bhat1
Using the symmetric and asymmetric specifications of the pooled mean group
estimator, we attempted to scrutinise the possibility of the J-curve effect in the
case of Brazil, Russia, India, China and South Africa. In addition to both real
effective exchange rate changes and nominal effective exchange rate changes, the
possible impact of domestic and foreign demand pressures on the trade balance
is also estimated. Incorporating a quarterly data set spanning from 2000Q1 to
2020Q2, the results based on the symmetric and asymmetric model establish no
evidence of the J-curve phenomenon. However, when asymmetric possibilities
are considered, appreciation is found to deteriorate the trade balance relatively
by a greater magnitude whereas the impact of currency depreciation is insig-
nificant. In addition, no asymmetric evidence has been reported concerning the
effect of domestic and foreign demand. However, a hike in the former deterio-
rated the trade balance whereas an increase in the latter improved it in both
linear and non-linear frameworks.
JEL Codes: F4, F41, F42
Exchange rate, trade balance, asymmetry, BRICS, PNARDL
Foreign Trade Review
58(4) 524–543, 2023
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
DOI: 10.1177/00157325221145432
1 Department of Economics, University of Kashmir, Srinagar, Jammu & Kashmir, India
2 Economics and Trade Policy, Indian Institute of Foreign Trade, Jawaharlal Nehru Technological
University (JNTUK), Kakinada Campus, Kakinada, Andhra Pradesh, India
Corresponding author:
Javed Ahmad Bhat, Economics and Trade Policy, Indian Institute of Foreign Trade, Jawaharlal Nehru
Technological University (JNTUK), Kakinada Campus, Kakinada, Andhra Pradesh 533003, India.
Parray et al. 525
Exchange rate fluctuations qualify as a potential candidate that affect the macro-
economic dynamics of a particular country or countries at large. However, the
subject has received appreciable consideration with the onset of the floating
exchange rate regime. Fluctuations in the exchange rate affect both exports and
imports of a country and hence its trade balance. According to standard trade theo-
ries, currency devaluation or depreciation would make imports expensive and
exports cheaper, thus improving the country’s trade balance when the currency
has lost its value. If the prices of imports are quoted in foreign currency and
exports are priced in local currency, certain rigidities prevent the immediate
improvement in the country’s trade balance. Although prior contracts or earlier
purchase orders remain fixed, the price changes have an immediate effect follow-
ing a depreciation. As a result, a decline in the value of net export earnings leads
to a worsening trade balance in the short run. However, once the necessary price
and quantity adjustments are made in the long run, an improvement in the trade
balance of the depreciated currency country is observed. This immediate worsen-
ing of the trade balance followed by a long-run improvement resulting from a
country’s currency depreciation/devaluation is commonly referred to as the
‘J-curve’ effect in economics literature.
Initially, the Marshall learner (ML) condition connotes the theoretical route
through which currency depreciation or devaluation influences the trade balance. If
the summation of demand elasticity for imports and exports exceeds unity, depreci-
ation/devaluation will improve the trade balance. Otherwise, the trade balance will
remain unchanged if the sum equals 1. If the sum is lower than 1, the ML condition
does not hold and depreciation (devaluation) will worsen the trade balance. Most
researchers found this condition appreciably satisfied and it stated that devaluation
would improve the long-term trade balance (Warner & Kreinin, 1983).
Instead of estimating the demand–price elasticity, scholars have attempted
to directly establish a link between exchange rate changes and trade balance by
using numerous later measures. Several standard cointegration approaches have
been incorporated to ascertain the possibility of any long-run association between
exchange rate and trade balance; however, the evidence reported lacks unanimity.1
Studies by Bahmani-Oskooee (1991, 2001), Singh (2002), Aziz (2008) and Sun
and Chiu (2010) documented a direct association. However, Hatemi and Irandoust
(2005), Liew et al. (2000), Rose (1990) and Wilson and Tat (2001) reported neu-
trality. Even some studies like Tandon (2014) and Korkmaz and Bilman (2016)
documented the evidence of an S-shaped trade balance response to exchange rate
fluctuations by using firm-level data in the case of Turkey.
A common drawback of most of these studies is that the impact of exchange
rate fluctuations on the trade balance was assumed to be symmetric. Subsequently,
scholars have questioned the validity of the symmetry assumption and have out-
lined the possibility of incorrect policy prescriptions guided by such an investiga-
tion.2 As a result, theoretically motivated asymmetric analytical frameworks have
recently been adopted to examine the trade balance and exchange rate nexus.
Arize et al. (2017), Bahmani-Oskooee and Baek (2016), Bahmani-Oskooee and

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