Exchange Rate and Trade Balance: J-curve Effect

  • Pavle Petrović University of Belgrade, Faculty of Economics, Serbia
  • Mirjana Gligorić University of Belgrade, Faculty of Economics, Serbia

Abstract

This paper shows that exchange rate depreciation in Serbia improves trade balance in the long run, while giving rise to a J-curve effect in the short run. These results add to the already existent empirical evidence for a diverse set of other economies. Both Johansen’s and autoregressive distributed lag approach are respectively used giving similar long-run estimates showing that real depreciation improves trade balance. Corresponding error correction models as well as impulse response functions indicate that, following currency depreciation, trade balance first deteriorates before it later improves, i.e. exhibiting the J-curve pattern. These results are relevant for policy making both in Serbia and in a number of other emerging Europe countries as they face major current account adjustments after BoP crises of 2009.


Key words: Exchange rate and trade balance, J-curve, Cointegration, Autoregressive distributed lag approach.
JEL: F31, F32, F40.

How to Cite
Petrović P., & Gligorić M. (2010). Exchange Rate and Trade Balance: J-curve Effect. Panoeconomicus, 57(1), 23-41. doi:10.2298/PAN1001023P
Section
Original scientific paper