Is there J-Curve effect in Africa?

The J-Curve is a term used to describe the post-devaluation behavior of the trade balance, i.e., initial deterioration followed by an improvement. Previous research has tested the phenomenon for many developed and developing countries. However, African nations have not received any attention on this regard. In this paper, we test the hypothesis for nine African countries of Burundi, Egypt, Kenya, Mauritius, Morocco, Nigeria, Sierra Leone, South Africa, and Tanzania for which quarterly trade data were available. After using the bounds testing approach to cointegration and error-correction modeling, we were unable to find any support for the J-Curve.     

Asymmetric effects of exchange rate changes on the demand for money in China

In order to account for currency substitution, the majority of recent studies relating to the specification of the demand for money include the exchange rate as another determinant of the demand for money. However, those who have estimated the demand for money in China have been unable to find any significant effects of exchange rate changes on the demand for money by the Chinese. We show that this is due to the assumption that exchange rate changes have symmetric effects. Once depreciations are separated from appreciations of the yuan, those exchange rate changes are shown to have significant effects on the demand for money in China, but in an asymmetric manner.     

Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.     

Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries?

In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates.     

Asymmetric Cointegration,Nonlinear ARDL,and the J-Curve: A Bilateral Analysis of China and Its 21 Trading Partners

This article follows the nonlinear Autoregressive Distributed Lag (ARDL) error-correction methodology to explore nonlinearity in the relationship between the trade balances and the real exchange rates for China and its 21 partners. We find evidence for short-run asymmetric effects of exchange rate in cases of 18 partners, short-run adjustment asymmetry in cases of 11 partners, short-run cumulative asymmetry in cases of seven partners, and a significant long-run asymmetric effect cases of five partners. We find support for the “J-curve” that is only due to appreciation or depreciation of the Yuan in cases of five partners, including the U.S.     

A disaggregated approach to test the J-Curve phenomenon: Japan versus her major trading partners

A limited number of studies have tested the J-Curve phenomenon using bilateral trade data between the United States and its major trading partners. In this paper, we test the J-Curve hypothesis by using quarterly bilateral data over the 1973–98 period between Japan and its nine major trading partners. We demonstrate that when aggregate data are used, there is no evidence of the J-Curve in the short run or any significant relation between trade balance and effective exchange rate in the long run. However, when bilateral data are employed, we find evidence of the J-Curve between Japan and Germany as well as between Japan and Italy. We also find that real depreciation of the yen has favorable long-run effects in the cases of Canada, the United Kingdom, and the United States.     

Exchange Rate Risk and Commodity Trade Between the U.S. and India

Floating exchange rates are said to introduce volatility into the foreign exchange market that could deter trade flows. Previous research employed aggregate import and export trade data and provided mixed results. In this paper we disaggregate the trade data between the U.S. and the emerging economy of India and use the bounds testing approach to cointegration and error-correction modeling to show that in 40 industries that trade between the two countries, exchange rate volatility has negative and positive effects in 40% of industries, in the short run. These short-run effects, however, do not last into the long run in many cases.

Relative Responsiveness of Trade Flows to a Change in Prices and Exchange Rate

A country can restrict her imports by imposing tariffs and stimulating her exports by providing subsidies. The same goal could be achieved through devaluation. One policy question that we face is the time it takes for either policy to affect the trade flows. We investigate here the relative responsiveness of the trade flows to a change in relative prices versus to a change in exchange rate. After estimating an error-correction version of import and export demand functions for nine industrial countries, unlike earlier studies that employed non-stationary data, our findings indicate that there is no specific answer and trade flows of different countries react differently.