Artatrana Ratha

The J-Curve: a literature review

Due to lag structure, currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter J, hence the J-Curve phenomenon. Since its introduction by Magee in 1973 (Brooking Papers on Economic Activity, 1, pp. 303–25), a large number of studies have attempted to test the phenomenon using different techniques and different model specifications. The results are at best ambiguous and deserve to be collected together for the future generation of researchers and graduate students. This paper fills such a vacuum in the literature by reviewing the J-Curve related empirical papers.

The S-Curve Dynamics of US Bilateral Trade

A few studies in dynamic general-equilibrium setting have argued that the trade balance is negatively correlated with current and future movements in the terms of trade but positively correlated with past movements, hence the S-curve phenomenon. Using aggregate trade data and the terms of trade has not provided strong empirical counterpart. However, in this paper, when we disaggregate the trade data between the US and her trading partners we find stronger results in support of the S-curve.

Dynamics of the U.S. Trade With Developing Countries

Earlier studies that investigated the J-Curve phenomenon employed aggregate trade data. Due to the aggregation bias problem, a few recent studies have shifted their emphasis toward using disaggregated data at bilateral level. However, studies related to the U.S., have investigated the phenomenon between the U.S. and her six largest trading partners. Given that developing countries constitute almost half of the U.S. trade, in this paper we test the short-run and the long-run effects of depreciation of the dollar on the bilateral trade balance between the U.S. and 13 developing countries.

S-Curve at the Commodity Level: Evidence from US-India Trade

The short-run response of the trade balance to changes in the terms of trade or the real exchange rate comes under the heading of the “J-Curve” or the “S-Curve.” While the J-Curve is mostly investigated through regression analysis, the S-Curve is based on the cross-correlation function between the terms of trade and the trade balance. Previous research has shown that in a country where support for any of the two curves is weak, disaggregation of the trade data helps discover more evidence of either curve. This article adds to the literature by considering the experience of India. We demonstrate that once the trade data between India and the United States is disaggregated by commodity, there is evidence of the S-curve in most industries that trade between the two countries. Out of total of 27 industries that constitute about 70% of trade, there are 15 that support the S-Curve.