Arnoldshain Seminar XV
“The EU and Latin America Facing Globalization”
September 4 – 6, 2017

Fichet de Clairfontaine, Aurélien, Wirtschaftsuniversitaet Wien, Dynamics of the trade balance: In search of the J-curve with a structural gravity equation.
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. The present paper uses a structural gravity approach, modelling currency movements as component of trade costs, in order to derive an empirical trade balance model. It incorporates multilateral resistance terms, which turns out to be important to obtain robust estimates of short- and long-run exchange rate elasticity estimates. Moreover, it accounting for the cross-country variation in the speed and magnitude of the exchange rate pass-through into import (export) prices, which has often been neglected in previous studies. The model then is estimated using monthly trade flows between 39 OECD countries, disaggregated into sixteen sectors, as well as with data on their respective 1,482 bilateral exchange rate for the 2010M1-2015M12 period. The results support the existence of a pooled J-curve; at the same time they point to considerable heterogeneity in the effects across countries and industries below the surface of aggregate data.