Title: Dynamics of the trade balance: In search of the J-curve using a structural gravity approach
Authors: Harald Badinger - Vienna University of Economics and Business (Austria)
Aurelien Fichet de Clairfontaine - Vienna University of Economics and Business (Austria) [presenting]
Abstract: In theory, the depreciation of a country's currency is supposed to lead to a negative short-run effect on the trade balance due to increased import prices, and to positive medium-run effects, triggered by subsequent responses to changes in relative prices of imports and exports (i.e., the quantity effect). A quantity effect that is large enough to offset the negative short-run price effects results in a (net) improvement of the trade balance after a depreciation: this relationship is dubbed as J-curve effect. A structural gravity approach is used, specifying currency movements as component of trade costs, in order to derive an empirical trade balance model, which incorporates multilateral resistance terms and accounts for the cross-country variation in the magnitude of the exchange rate pass-through into import (export) price. The model then is estimated using monthly bilateral trade flows between 39 OECD countries, disaggregated into ninety-seven commodity sectors, over the period 2010M1-2015M12. The results support the existence of a pooled J-curve across countries and commodity sectors; at the same time they point to considerable heterogeneity in the effects across countries and industries below the surface of aggregate data.