Bilateral J-curve between the UK vis-à-vis her major trading partners

What is it about?

Currency depreciation is said to worsen the trade balance first before resulting in an improvement, yielding a short-run pattern labelled the J-curve phenomenon. While early studies tested the J-curve by using aggregate trade data, a few recent studies have employed bilateral data, mostly between the US and her major trading partners. In this paper we extend the literature by considering the experience of the UK. We test the phenomenon between the UK and her twenty major trading partners by employing data over 1973Q1–2001Q3 period. In most instances, we find no support for the J-curve in the short-run. In the long run, only in five cases has the exchange rate had significant impact on the bilateral trade balance.

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Why is it important?

Since the publication of Magee’s paper (1973), many studies test the J-curve hypothesis on aggregate basis first and on disaggregated basis next. The disaggregated approach that uses bilateral data to solve the aggregation bias has gained momentum in recent years. Limited number of studies that use disaggregated data provide as mixed results as numerous studies that use aggregate data. In this paper, we test the bilateral J-curve phenomenon between the UK and her twenty major trading partners (the highest number of countries covered so far) using quarterly data over the 1973Q1–2001Q3 period. The result from the ARDL approach for cointegration were mixed in that only for two countries we find support for the J-curve phenomenon. The long-run results were slightly better in that only in six countries we find significant relation between exchange rate and the trade balance. These findings are in line with other studies for other countries.