Asymmetric Effects of Exchange Rate Changes on British Bilateral Trade Balances

BAHMANI-OSKOOEE, Mohsen and HALICIOGLU, Ferda and GHODSI, Seyed Hesam (2016): Asymmetric Effects of Exchange Rate Changes on British Bilateral Trade Balances.

Abstract

This research presents first empirical time series evidence of the asymmetric impact of exchange rate changes on Britain’s trade balances with her 8 trading partners. Recent advances in time series and cointegration analysis have allowed for the estimation of the nonlinear effects of currency depreciations on countries’ trade balances. To this extent, we employ the nonlinear version of the Autoregressive Distributed Lag (ARDL) approach to cointegration and error correction methodologies to examine whether pound appreciations affect trade differently than do pound depreciations. We use monthly trade data which runs from 1998M1 to 2015M11 to capture more robustly the asymmetric impacts of exchange rate changes on trade balances. Econometric results from the non-ARDL procedures reveal that there exist long-run relationships in the case of UK-Canada, UK-Germany, UK-Italy, UK-Japan, UK-Korea, and UK-US trade balance models. Nevertheless, we did not find any long-run relationship in the case of UK-Spain and UK-Norway trade balance models. We also present empirical evidence for the existence of long-run asymmetries of exchange rates in the case of UK-Germany, UK-Italy, UK-Korea, and UK-Japan trade balance models. This paper also discusses policy implications of the empirical results as well as offering policy recommendations.

• Item Type: MPRA Paper
• Language: English
• Keywords: International trade, Exchange rates, Asymmetry, Nonlinear Cointegration
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Altinanahtar, A., and Halicioglu, F. (2009) “A Dynamic Econometric Study of Suicides in Turkey”, The Journal of Socio-Economics, Vol.38, No.6, pp.903-907.

Apergis, N., and Miller, S. (2006) “Consumption Asymmetry and the Stock Market: Empirical Evidence” Economics Letters, Vol.93, 337-342.

Bahmani-Oskooee, M. (1985) “Devaluation and the J-Curve: Some Evidence from LDCs”, The Review of Economics and Statistics,Vol. 67, 500-504.

Bahmani-Oskooee, M. (1986) “Determinants of International Trade Flows: the Case of Developing Countries”, Journal of Development Economics, Vol.20, 107-123.

Bahmani-Oskooee, M. and Alse, J. (1994) “Short-Run Versus Long-Run Effects of Devaluation: Error Correction Modelling and Cointegration”, Eastern Economic Journal, Vol.20, 453-464.

Bahmani-Oskooee, M. and Brooks, T. J. (1999) “Bilateral J-Curve between U.S. and her Trading Partners”, Weltwirtschatflitches Archiv, Vol.135, 156-165.

Bahmani-Oskooee, M. and Kovyryalova, M. (2008) “The J-Curve: Evidence from Industry Trade Data between US and UK”, Economic Issues, Vol.13, 25-44.

Bahmani-Oskooee, M. and Hegerty, S.W. (2010) “The J- and S-Curves: A Survey of the Recent Literature”, Journal of Economic Studies 37(6), 580-596.

Bahmani-Oskooee, M. and Hegerty, S.W. (2011), “The J-Curve and NAFTA: Evidence from Commodity Trade between the U.S. and Mexico” Applied Economics 43, 1579-1593.

Bahmani-Oskooee, M. and Fariditavana, H. (2015) “Nonlinear ARDL Approach, Asymmetric Effects and the J-Curve,” Journal of Economic Studies, 43(3), 519-530.

Bahmani-Oskooee, M. and Fariditavana, H. (2016) “Nonlinear ARDL Approach and the J-Curve Phenomenon,” Open Economies Review, 27, 51-70.

Bahmani-Oskooee, M. and Halicioglu, F. (2016) “Asymmetric Effects of Exchange Rate Changes on Turkish Bilateral Trade Balances”, Economic Systems (Forthcoming).

Chen, Shyh-Wei and Tzu-Chun Chen, (2012) “Untangling the Non-Linear Causal Nexus between Exchange Rates and Stock Prices: New Evidence from the OECD Countries”, Journal of Economic Studies, 39, 231-259.

Cushman, D.O. (1987) “U.S. Bilateral Trade Balances and the Dollar”, Economics Letters, Vol.24, 363-367.

Banerjee, A., Dolado, J. and Mestre, R. (1998) “Error-Correction Mechanism Tests in a Single Equation Framework,” Journal of Time Series Analysis, 19, 267–85.

Boyd, D., Caporale, G.M., and Smith, R. (2001) “Real Exchange Rate Effects on the Balance of Trade: Cointegration and Marshall-Lerner Condition”, International Journal of Finance and Economics, Vol.6, 187-200.

De Vita, G. and Kyaw, K.S. (2008) “Determinants of Capital Flows to Developing Countries: A Structural VAR Analysis”, Journal of Economic Studies, 35(3/4), 304-322

Dell’Anno, R. and Halicioglu, F. (2010) “An ARDL Model of Recorded and Unrecorded Economies in Turkey”, Journal of Economic Studies, 37, 627-646.

Delatte, Anne-Laure and Lopez-Villavicencio, A. (2012), “Asymmetry Exchange Rate Pass-Through: Evidence from Major Countries,” Journal of Macroeconomics, 34, 833-844.

Engle, R. F., and Granger, C.W.J. (1987) “Cointegration and Error Correction Representation, Estimation, and Testing,” Econometrica, 55, 251-76.

Halicioglu, F., (2007) “The J-Curve Dynamics of Turkish Bilateral Trade: A Cointegration Approach,” Journal of Economic Studies, 34, 103-119.

Halicioglu, F. (2008a) “The J-Curve Dynamics of Turkey: An Application of ARDL Model,” Applied Economics, 40, 2423-2429.

Halicioglu, F. (2008b) “The Bilateral J-Curve: Turkey versus 13 Trading Partners,” Journal of Asian Economics, 19, 236-243.

Halicioglu, F. (2013) “Dynamics of Obesity in Finland”, Journal of Economic Studies, Vol.40, No.5, pp.644-657.

Himarrios, D. (1985) “The Effects of Devaluation on the Trade Balance: A Critical View and Reexamination of Miles’s (New Results)”, Journal of International Money and Finance, Vol.4, 553-563.

Houthakker, H. S. and Magee, S. P. (1969) “Income and Price Elasticities in World Trade,” Review of Economics and Statistics 51, 111-25.

Johansen, S. (1988) "Statistical Analysis of Cointegration Vectors," Journal of Economic Dynamics and Control, 12, 231-254.

Magee, S. P. (1973) “Currency Contracts, Pass-Through, and Devaluation,” Brookings Papers on Economic Activity, No. 1, pp. 303-325.

Miles, M.A. (1979) “The Effects of Devalution on the Trade Balance and Balance of Payments: Some New Results”, Journal of Political Economy, Vol.87, 600-619.

Pesaran, M. H., Y. Shin, and Smith, R. J. (2001) “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, 16, 289-326.

Rose, A. K. (1991) “The Role of Exchange Rates in a Popular Model of International Trade: Does the Marshall-Lerner Condition Hold?” Journal of International Economics, 30, 301-316.

Rose, A.K., and Yellen, J.L. (1989), “Is There a J-Curve?” Journal of Monetary Economics, 24(1), 53-68.

Shin, Y, Yu, B., and Greenwood-Nimmo, M. (2014) “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework” Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, eds. by R. Sickels and W. Horrace: Springer, 281-314.

Tang, T.C., (2007) “Money Demand Function for Southeast Asian Countries: An Empirical View from Expenditure Components”, Journal of Economic Studies, 34, 476-496.

Tayebi, S. K., and Yazdani, M. (2014) “Financial Crisis, Oil Shock and Trade in Asia”, Journal of Economic Studies, 41, 601-614.

Wong, K. N.. and Tang, T.C. (2008) “The Effects of Exchange Rate Variablity on Malaysia’s Disaggregated Electrical Exports”, Journal of Economic Studies, 35, 154-169.

Wong, H.T. (2013) “Real Exchange Rate Misalignment and Economic Growth in Malaysia”, Journal of Economics Studies, 40, 298-313.

Verheyen, F. (2013) “Interest Rate Pass-Through in the EMU: New Evidence Using Nonlinear ARDL Framework,” Economics Bulletin, 33, 729-739.