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 balancethe 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 Jcurve. 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.

Asymmetric impact of exchange rate on trade between Vietnam and each of EU-27 countries and the UK: evidence from nonlinear ARDL and the role of vehicle currency

“…Likewise, Iyke and Ho (2017) detected J-curve effect for the case of Ghana when employing NARDL method on aggregate-level data during 1986Q1–2016Q3, which is not found when symmetric assumption and ARDL approach are used. Also, Iyke and Ho (2018) inspected the bilateral trade of South Africa with respect to China, Germany, India, Japan, the UK and the USA from 1998Q1 to 2016Q2. They applied both ARDL and NARDL methods: while the former helped identify J-curve effect associated with India and the UK, the latter was able to disclose J-curve effect connected with all trading partners.…”

“…Since the introduction of J-curve effect, much more attention has been given to investigating the short-run and long-run impacts of exchange rate on trade balance ( Bahmani-Oskooee and Mitra, 2010 ). Nonetheless, many research report insignificant results, and the existing literature has identified 2 main culprits: aggregation bias and linear assumption ( Bahmani-Oskooee et al., 2016 ; Bahmani-Oskooee and Aftab, 2018 ; Iyke and Ho, 2018 ). First, although analyzing the impact of real effective exchange rate on the trade balance of a country with the rest of the world at aggregate level can be very convenient and present valuable information about her international trade as a whole, the findings may suffer from bias ( Rose and Yellen, 1989 ; Bahmani-Oskooee and Brooks, 1999 ; Phong et al., 2018 ).…”

“…Attempting to reduce the aggregation bias and search for more evidences of exchange rate's impacts on trade balance, researchers utilize data at bilateral and commodity levels in the trade between a country and each of her partners (e.g., Bahmani-Oskooee and Ratha, 2007 ; Bahmani-Oskooee and Hajilee, 2009 ). Second, even though disaggregating data can reduce aggregation bias, linear assumption (i.e., 1% depreciation and 1% appreciation of domestic currency have the same effect on trade balance) is another reason why a large number of studies could not detect cointegration and significant results ( Bahmani-Oskooee and Fariditavana, 2016 , 2020 ; Iyke and Ho, 2018 ). Therefore, recent papers well recognized the importance of asymmetric impacts of exchange rate on trade balance ( Nusair, 2017 ; Iyke and Ho, 2017 , 2018 ; Bahmani-Oskooee and Harvey, 2019 ; Bahmani-Oskooee and Kanitpong, 2019 ; Bahmani-Oskooee and Nasir, 2019 ; Hunter, 2019 ; Bahmani-Oskooee and Karamelikli, 2021 ; Bhat and Bhat, 2021 ).…”

“…Second, even though disaggregating data can reduce aggregation bias, linear assumption (i.e., 1% depreciation and 1% appreciation of domestic currency have the same effect on trade balance) is another reason why a large number of studies could not detect cointegration and significant results ( Bahmani-Oskooee and Fariditavana, 2016 , 2020 ; Iyke and Ho, 2018 ). Therefore, recent papers well recognized the importance of asymmetric impacts of exchange rate on trade balance ( Nusair, 2017 ; Iyke and Ho, 2017 , 2018 ; Bahmani-Oskooee and Harvey, 2019 ; Bahmani-Oskooee and Kanitpong, 2019 ; Bahmani-Oskooee and Nasir, 2019 ; Hunter, 2019 ; Bahmani-Oskooee and Karamelikli, 2021 ; Bhat and Bhat, 2021 ). Nonetheless, besides the aforementioned culprits, in this paper we suspect that there may be still another culprit contributing to the insignificant findings of plentiful studies: the neglection of vehicle currency, i.e., the currency of the third country in the trade between the exporter and importer ( Magee and Rao, 1980 ).…”

Real Output and Oil Price Uncertainty in an Oil Producing Country

“…where , α 1 , and β 1 are parameters of the model. We compute increases (positive changes) and decreases (negative changes) in oil price uncertainty by decomposing oil price uncertainty into positive and negative partial sums as follows (see Iyke and Ho, 2018b) (4)…”