Is There a J-Curve Effect in the Services Trade in Canada? A Panel Data Analysis

Trofimov, Ivan D. (2020): Is There a J-Curve Effect in the Services Trade in Canada? A Panel Data Analysis.

Abstract

The effects of the real exchange rate changes on the sectoral trade balance (as opposed to the balance of aggregate trade) have received limited consideration in the empirical studies. In this paper we focus on services trade and examine the dynamics of Canada’s bilateral trade balance in services with its 53 major trading partners during 1990-2018. To account for slope heterogeneity and cross-sectional dependence we apply mean group (MG), pooled mean group (PMG), common correlated effects mean group (CCEMG), augmented mean group (AMG) estimators to the trade balance equation, alongside the dynamic fixed effects (DFE) estimator. The results provide strong evidence of a short-run deterioration and a long-term improvement of the services trade balance following depreciation in an aggregate panel as well as sub-panels, hence supporting the J-curve effect hypothesis and satisfying Marshall-Lerner condition. At the level of individual cross-sections, the evidence was mixed: a number of economies experienced long-term improvement of the trade balance, albeit without short-term deterioration.

• Item Type: MPRA Paper
• Language: English
• Keywords: J-curve; panel data; trade balance; exchange rate; services
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

References

Akbostanci E (2004) Dynamics of trade Balance: the Turkish J-curve. Emerging Markets Finance and Trade, 40 (5): 57-73.

Arize A (1987) The supply and demand for imports and exports in a simultaneous model. App Econ, 19 (9): 1233-1247.

Asteriou D, Pilbeam K, Pratiwi C (2020) Public debt and economic growth: panel data evidence for Asian countries. J Econ Fin, 44: 1-18.

Bahmani-Oskooee M, Alse J (1994) Short-run versus long-run effects of devaluation: error-correction modeling and cointegration. Eastern Econ J, 20 (4): 453-464.

Bahmani-Oskooee M, Brooks TJ (1999) Bilateral J-curve between US and her trading partners. Weltwirtschaftliches Archiv, 135 (1): 156-165.

Bahmani-Oskooee M, Ratha A (2004a) The J-curve: a literature review. App Econ, 36 (13): 1377-1398.

Bahmani-Oskooe M, Ratha A (2004b) The J-curve dynamics of US bilateral trade. J Econ Fin, 28 (1): 32-38.

Bahmani-Oskooee M, Wang Y (2007) The J-curve at the industry level: evidence from trade between US and Australia. Austral Econ Pap, 46 (4): 315-328.

Bahmani-Oskooee M, Bolhasani M (2008). The J-curve: evidence from commodity trade between Canada and the US. J Econ Fin, 32 (3): 207-225.

Bahmani-Oskooee M, Goswami G, Talukdar B (2008) The bilateral J-curve: Canada versus her 20 trading partners. Int Rev App Econ, 22 (1): 93-104.

Bahmani-Oskooee M, Harvey H (2017) The asymmetric effects of exchange rate changes on the trade balance of Singapore. Glob Econ J, 17 (4): 1-11.

Bahmani-Oskooee M, Fariditavana H (2019) Asymmetric cointegration and the J-curve: new evidence from commodity trade between the US and Canada. Int Econ Econ Pol, 17 (2), pp. 427-482.

Barras R (1990) Interactive innovation in financial and business services: The vanguard of the services revolution. Res Pol, 19 (3), pp. 215-237.

Baumol, W. (1967) Macroeconomics of unbalanced economic growth: the anatomy of the urban crisis. Amer Econ Rev, 57 (3): 415-426.

Brada JC, Kutan AM, Zhou S (1997) The exchange rate and the balance of trade: the Turkish experience. J Dev Stud, 33 (5): 675-692.

Breitung J (2000) The local power of some unit root tests for panel data. In Baltagi B (ed) Nonstationary panels, panel cointegration, and dynamic panels, Advances in econometrics, Vol. 15. Amsterdam: JAI, pp 161-178.

Cheng K (2020) Currency devaluation and trade balance: Evidence from the US services trade. J Pol Model, 42 (1): 20-37.

Choi I (2001) Unit root tests for panel data. J Int Money Fin, 20 (2): 249-272.

Chrystal KA, Wood GE (1988) Are trade deficits a problem? Fed Reserve Bank of St. Louis Rev, 70 (1): 3-11.

Chudik A, Pesaran MH (2013) Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. CESifo Working Paper No. 4232.

De Hoyos RE, Sarafidis V (2006) Testing for cross-sectional dependence in panel data models. The Stata J, 6 (4): 482-496.

Demirden T, Pastine I (1995) Flexible exchange rates and the J-curve: an alternative approach. Econ Let, 48 (3-4): 373-377.

Eberhardt M (2012) Estimating panel time-series models with heterogeneous slopes. The Stata J, 12 (1): 61-71.

Eberhardt M, Teal F (2010) Productivity analysis in global manufacturing production. University of Oxford Department of Economics Discussion Paper No. 515.

Feldstein M (1986) The budget deficit and the dollar. In Fisher S (ed) NBER macroeconomics annual. Cambridge: MIT Press.

Fourastié J (1952) Le grand espoir du XXe siècle. Paris: Presses Universitaire de France.

Guptar-Kapoor A, Ramakrishnan U (1999) Is there a J-curve: a new estimation for Japan. Int Econ J, 13 (4): 71-79.

Gylfason T, Schmid M (1983) Does devaluation cause stagflation? Can J Econ, 16 (4): 641-654.

Gylfason T, Risager O (1984) Does devaluation improve the current account? Eur Econ Rev, 25 (1): 37-64.

Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econometrics, 115 (1): 53-74.

Jamilov R (2013) J-curve dynamics and the Marshall-Lerner condition: evidence from Azerbaijan. Transit Stud Rev, 19 (3): 313-323.

Jones R, Kierzkowski H (2001) A framework for fragmentation. In Arndt S., Kierzkowski H (eds) Fragmentation: new production patterns in the world economy. New York: Oxford University Press.

Junz HB, Rhomberg RR (1973) Price competitiveness and export trade among industrial countries. Amer Econ Rev, Papers and Proceedings, 63 (2): 412-418.

Kao C (1999) Spurious regression and residual-based tests for cointegration in panel data. J Econometrics, 90 (1), pp. 1-44.

Kapetanios, G., Pesaran, M. H., Yamagata, T. (2011) Panels with non-stationary multifactor error structures. J Econometrics, 160 (2): 326-348.

Kaya AI (2021) Real exchange rate and trade balance in Turkey: evidence from heterogeneous panel data. Panoeconom, Forthcoming: 1-23.

Kremers J, Ericson N, Dolado J (1992) The power of cointegration tests. Oxf Bull Econ Stat, 54 (3): 325-347.

Krugman P, Baldwin R (1987) The persistence of the US trade deficit. Brook Pap Econ Activ, 18 (1): 1-56.

Kuznets S (1971) Economic growth of nations - total output and production structure. Cambridge: Harvard University Press.

Lal AK, Lowinger TC (2002) The J-curve: evidence from East Asia. J Econ Integr, 17 (2): 397-415.

Lee J, Chinn M (2006) Current account and real exchange rate dynamics in the G7 countries. J Int Mon Fin, 25 (2): 257-274.

Levin A, Lin CF, Chu C (2002) Unit root tests in panel data: asymptotic and finite-sample properties. J Econometrics, 108 (1): 1-24.

Maddala GS, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxf Bull Econ Stat, 61 (S1): 631-652.

Magee SP (1973) Currency contracts, pass-through, and devaluation. Brook Pap Econ Activ, 1: 303-325.

Marquez J (1990) Bilateral trade elasticities. The Rev Econ Stat, 72 (1): 70-77.

Marwah K, Klein L (1996) Estimation of J-curves: United States and Canada. The Can J EcoN, 71 (1): 523-539.

Miroudot S (2017) The restrictiveness of Canada’s services trade policy in an international context. In Tapp S, Assche A, Wolfe R (eds) Redesigning Canadian trade policies for new global realities, Vol. 6. Montreal: Institute for Research on Public Policy.

Moffett MH (1989) The J-curve revisited: an empirical examination for the United States. J Int Money Fin, 8 (3): 425-444.

Niskanen W (1988) The uneasy relation between the budget and trade deficits. Cato J, 8 (2): 507-532.

Nordas H, Rouzet D (2015) The impact of services trade restrictiveness on trade flows: first estimates. OECD Trade Policy Paper No. 178. Paris: OECD Publishing.

OECD (2018) Trade in value added: Canada. OECD Country Notes. Paris: OECD Publishing.

Pitaridis D, Tsoulfidis L (2012) The growth of unproductive activities, the rate of profit, and the phase-change of the US economy. Rev Radical Polit Econ, 44 (2), pp. 213-233.

Pedroni P (2004) Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Th, 20 (3): 597-625.

Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. University of Cambridge, Faculty of Economics Working Paper no. 0435.

Pesaran MH (2006) Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74 (4): 967-1012.

Pesaran MH (2007) A simple panel unit root test in the presence of cross section dependence. J App Econometrics, 22 (2): 265-312.

Pesaran MH (2015) Testing weak cross-sectional dependence in large panels. Econometric Reviews, 34 (6-10): 1089-1117.

Pesaran MH, Smith RP (1995) Estimating long-run relationships from dynamic heterogeneous panels. J Econometrics, 68 (1): 79-113.

Pesaran MH, Shin Y, Smith RP (1999) Pooled mean group estimation of dynamic heterogeneous panels. J of the Amer Stat Assoc, 94 (446): 621-634.

Petrovic P, Gligoric M (2010) Exchange rate and trade balance: J-curve effect. Panoeconom, 57 (1): 23-41.

Prakash K, Maiti D (2016) Does devaluation improve trade balance in small island economies? The Case of Fiji. Econ Model, 55 (C): 382-393.

Reis Gomes FA, Senne Paz L (2005) Can real exchange rate devaluation improve the trade balance? The 1990-1998 Brazilian case. App Econ Letters, 12 (9): 525-528.

Rose AK (1991) The role of exchange rates in a popular model of international trade: does the Marshall-Lerner’s condition hold? J Int Econ, 30 (3-4): 301-316.

Rose AK, Yellen JL (1989) Is there a J-curve? J Monet Econ, 24 (1): 53-68.

Saez S, Taglioni D, Van Der Mare, E, Hollweg C, Zavacka V. (2015) Valuing services in trade: a toolkit for competitiveness. Washington: World Bank.

Van Der Marel E (2017) The potential to enhance Canada’s services trade in CETA, TPP and TiSA. In Tapp S, Assche A, Wolfe R (eds) Redesigning Canadian trade policies for new global realities, Vol. 6. Montreal: Institute for Research on Public Policy.

Westerlund J (2007) Testing for error correction in panel data. Oxf Bull Econ Stat, 69 (6): 709-748.

Wijeweera A, Dollery B (2013) J-curve disparity between the goods sector and the service sector: Evidence from Australia. App Econ Lett, 20 (5): 452-456.