Nonlinear Effects of Exchange Rate Changes on the South African Bilateral Trade Balance

Njindan Iyke, Bernard and Ho, Sin-Yu (2016): Nonlinear Effects of Exchange Rate Changes on the South African Bilateral Trade Balance.

Abstract

In testing for the J-curve, previous studies have shown that the trade balance model is better fitted using cointegration and error correction mechanisms. These mechanisms are able to incorporate the short-term deterioration and the long-term improvement of the trade balance – the definition of the J-curve. However, the drawback of the established cointegration and error correction frameworks is that they assume symmetry in the equilibrium adjustment process. Incidentally, studies which have used the linear frameworks have found little support for the J-curve. Since the adjustment process could be nonlinear, a fresh investigation of the J-curve using nonlinear approaches could provide competing evidence. This paper retested the J-curve by using quarterly data for South Africa and her key trade partners (China, Germany, India, Japan, the UK and the US) and found the linear specification to support the J-curve phenomenon in only two cases (India and the US) under relaxed conditions. In contrast, the nonlinear specification supported the J-curve phenomenon in all cases at no cost of serial correlation and functional misspecification. We also found the real exchange rate changes to have significant nonlinear effects on the South African trade balance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bilateral Trade Balance; J-Curve; Real Exchange Rates; South Africa
• Subjects: 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 > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

Bahmani-Oskooee, M. (1985). Devaluation and the J-Curve: some evidence from LDCs. Review of Economics and Statistics, 67:500–504.

Bahmani-Oskooee, M. and Bahmani, S. (2015). Nonlinear ARDL approach and the demand for money in Iran. Economics Bulletin, 37(1), 381-391.

Bahmani-Oskooee, M., and Fariditavana, H. (2016). Nonlinear ARDL Approach and the J-Curve Phenomenon. Open Economies Review, 27(1), 51-70.

Bahmani-Oskooee, M., and Fariditavana, H. (2015). Nonlinear ARDL Approach, Asymmetric Effects and the J-curve. Journal of Economic Studies, 42(3): 519-530.

Bahmani-Oskooee, M., and Hegerty S.W. (2010). The J- and S-Curves: a survey of the recent literature. Journal of Economic Studies 37:580–596.

Brown, R.L., Durbin, J. and Evans, J.M. (1975). Techniques for testing the constancy of regression relations over time”, Journal of the Royal Statistical Society, Series B, Vol. 37, pp. 149-163.

Breusch, T. S. (1978). Testing for Autocorrelation in Dynamic Linear Models. Australian Economic Papers. 17: 334–355.

Cassim, R., Onyango, D., & Van Seventer, D. E. (2004). The state of trade policy in South Africa. Trade and Industrial Policy Strategies (TIPS).

Delatte, A.-L. and Lopez-Villavicencio, A. (2012). Asymmetry exchange rate pass-through: evidence from major countries. Journal of Macroeconomics, Vol. 34 No. 3, pp. 833-844.

Department of Trade and Industry of South Africa (DTI). (2014). South Africa’s trade and investment policy. <https://www.thedti.gov.za/parliament/2015/SA_Trade_Investment_Policy.pdf> accessed on 24 August 2017.

Edwards, L., & Lawrence, R. (2008). South African trade policy matters Trade performance and trade policy. Economics of Transition, 16(4), 585-608.

Godfrey, L. G. (1978). Testing Against General Autoregressive and Moving Average Error Models when the Regressors Include Lagged Dependent Variables. Econometrica. 46: 1293–1301.

International Financial Statistics. (2017). International Monetary Fund, Washington DC. < http://www.easydata.co.za/selections/2278/frequency/A/#>, accessed on 24 August 2017.

Iyke, B. N. (2017). Exchange rate undervaluation and sectoral performance of the South African economy. Journal of Economic Studies, 44(4), 636-649.

Iyke, B. N., & Ho, S. Y. (2017). The Real Exchange Rate, the Ghanaian Trade Balance, and the J-curve. Journal of African Business, 18(3), 380-392.

Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, No. 1, pp. 303–325.

Pesaran, M.H., Shin, Y., and Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16(3):289–326.

Ramsey, J. B. (1969). Tests for Specification Errors in Classical Linear Least Squares Regression Analysis. Journal of the Royal Statistical Society Series B. 31 (2): 350–371.

Rose, A.K., and Yellen, J.L. (1989). Is there a J-curve? Journal of Monetary Economics 24:53–68.

Shin, Y., Yu, B.C. and Greenwood-Nimmo, M. (2014). “Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ardl framework”, in Sickels, R. and Horrace, W. (Eds), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, Springer, New York, NY, pp. 281-314.

Verheyen, F. (2013). Interest rate pass-through in the emu: new evidence using nonlinear ARDL framework. Economics Bulletin 33:729–739.