Exchange rate and trade balance in east asia: is there a J-curve?

Abstract

This paper examines the short run and long run effects of real exchange rate changes on the real trade balance of three ASEAN countries in their bilateral trade to the US and Japan within a cointegrating vector error correction model (VECM). Generalized impulse response funtions are estimated to investigate the response to shocks. VECM estimates suggest one long-run steady-state cointegrating relationship among real trade balance, real exchange rate, real domestic and foreign income in each country. Although considerable variations exist in the results, overall the generalized impulse response functions suggest that the Marshall-Lerner condition holds in the long-run with varying degree of J-curve effects in the short-run.ASEAN Countries