Asymmetric J-curve: evidence from industry trade between U.S. and U.K.

ABSTRACT

Previous research that assessed the impact of exchange rate changes on the trade balance between the U.S. and U.K. assumed the effects are symmetric. In this paper, we add to the literature on the asymmetric J-curve phenomenon by considering the trade balance of 68 two-digit industries that trade between the two countries. We find short-run asymmetric effects of the real dollar-pound rate in almost all industries. However, short-run asymmetric effects were translated into significant long-run asymmetric effects in 25 industries. Indeed, the asymmetric J-curve hypothesis was supported in 18 industries.

KEYWORDS:

• J-Curve
• the U.S.
• U. K.
• 68 Industries
• asymmetry analysis

JEL CLASSIFICATION:

• F31
• F30

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Bahmani-Oskooee and Hegerty (2010) is the latest review article on the subject.

² Note that if economic growth is due to an increase in production of import-substitute goods, it is possible for an estimate of b to be negative and that of c to be positive since imports will decline as each economy grows (Bahmani-Oskooee 1986).

³ Note that partial sum of positive (negative) changes is the same as cumulative sum where negative (positive) values are replaced by zeros.

⁴ Shin, Yu, and Greenwood-Nimmo (2014, 291) argue that the two partial sum variables should be treated as a single variable so that the critical values of the F test could stay at conservative high level when we move from the linear to nonlinear model.

⁵ For some other application of these and other nonlinear models see Delatte and Lopez-Villavicencio (2012), Bussiere (2013), Wimanda (2014), McFarlane, Das, and Chowdhury (2014), Gogas and Pragidis (2015), Durmaz (2015), Baghestani and Kherfi (2015), Al-Shayeb and Hatemi-J. (2016), Lima et al. (2016), Aftab, Syed, and Katper (2017), Gregoriou (2017), Nusair (2017), Olaniyi (2019), and Istiak and Alam (2019).

⁶ Note that the 13 industries in which the real bilateral exchange rate carries a negative coefficient are industries for which the import demands are inelastic (Bahmani-Oskooee and Aftab 2017, endnote 11).

⁷ This test originally was introduced by Banerjee, Dolado, and Mestre (1998) within the Engle-Granger error-correction modelling framework. Pesaran, Shin, and Smith (2001) have incorporated the concept into the ARDL approach, and since we have a combination of I(0) and I(1) variables, as with the F test, they have tabulated new critical values for this t-test which we use in this paper. For cointegration, the calculated t-ratio must be greater than the upper-bound critical values.

⁸ Note that other diagnostic statistics are similar to those of the linear models and no need to review them again.