The bilateral J‐curve: Canada versus her 20 trading partners

What is it about?

3486 (online) Original Article 2008 Taylor & Francis 221000000January 2008 MohsenBahmani-Oskooee bahmani@uwm.edu There is a common belief that currency depreciation worsens the trade balance in the short run and improves it in the long run resulting in the so called J-curve phenomenon. Early studies employed aggregate data and provided mixed results. Recent studies, however, have employed disaggregated data to remove any aggregation bias from their analysis. In this article we consider the Canadian experience and test the phenomenon between Canada and her 20 major trading partners. Using quarterly data and the bounds testing approach to cointegration, and error-correction modelling we were able to provide support for the J-curve in 11 out of 20 cases.

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Why is it important?

Recent studies that investigate the short-run as well as the long-run effects of currency depreciation on the trade balance employed disaggregate data and estimated their model between one country and her major trading partners. Marwah and Klein (1996) explored the effectiveness of real depreciation of the Canadian dollar in improving her trade balance with France, Germany, Japan, the UK and the USA. In this article we reconsider the short-run (the J-curve) and the longrun effects of real depreciation of the Canadian dollar on her trade balance with 20 trading partners. In doing so we employ quarterly data over the period 1973Q1–200Q2, and a bounds testing approach to cointegration and error-correction modelling. Prescribing to a new concept of the Jcurve, that is, short-run deterioration combined with long-run improvement, the results from the bounds testing approach provide support for the J-curve phenomenon in 11 out of 20 countries.