Munich Personal RePEc Archive

Real Exchange Rate and the Dynamics of Services Trade Balance in the UK: A Linear and Non-linear ARDL Analysis

Trofimov, Ivan D. (2020): Real Exchange Rate and the Dynamics of Services Trade Balance in the UK: A Linear and Non-linear ARDL Analysis.

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Abstract

The study of the services trade balance dynamics following depreciation is a novel topic in international finance literature, with limited empirical research conducted (principally in the US context). This paper examines the relationship between the real exchange rate and the services trade balance in the UK using the quarterly data for the 2005Q1 - 2019Q4 period. We consider the aggregate as well as disaggregated trade across five services categories and employ linear and non-linear autoregressive distributed lag (ARDL) models. The findings indicate little evidence of a long-term improvement in the trade balance following depreciation, and suggest the absence of J-curve effect. The effects of domestic, ‘rest of the world’ GDP and monetary base on the trade balance were respectively negative, positive, and mixed.

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