Meloche, Yumiko, A sensitivity test of the bilateral trade balance to exchange rates: a review of the Australian bilateral trade balance with Japan between 1988 and 2007, Department of Economics, University of Wollongong, 2009.
This paper examines the relationship of the bilateral trade balance and exchange rates between Australia and Japan in the period from 1988 to 2007. This study provides the short-run and long-run, relationship of trade balance and real exchange rates, and the potential existence of a “J-curve” using quarterly time series data in that period. The minimum Lagrange Multiplier unit root tests (Lee and Strazicich: 2003, 2004) have been applied to determine endogenously potential structural break(s) for each series of data. Then, using the autoregressive distributed lag (ARDL) model, the cointegration is estimated.
Recently the relationship of Australian bilateral total trade balance and exchange rates with Japan in the same period was investigated (Meloche 2009), and the results showed that there is a stable long run relationship among the trade balance, national income of both countries and real exchange rates. However, the existence of J-curve in that period was not detected. A failure to detect a J-curve could be due to an aggregation bias. This study disaggregated trade balances into 10 trade sections (Standard International Trade Classification 1-digit level) and then analysis was carried out. The empirical results showed that there is a stable long run relationship among trade balance, national incomes and real exchange rates in three trade sections. Those trade sections are beverages and tobacco (TB1), crude materials, inedible, except fuels (TB2) and animal and vegetable oils, fats and waxes (TB4). The results also support that the existence of a J-curve in the above three trade sections.