Is There J-Curve Phenomenon and Asymmetric Effects of Exchange Rate on Trade Balance in East Java?
Abstract
This study aims to analyze the effect of exchange rate asymmetry on the trade balance between East Java Province and the largest trading partner countries (China, Japan, and the United States) in the short-run and long-run and to detect the J-Curve phenomenon. This study uses the Nonlinear Autoregressive Distributed-Lag (NARDL) method with 2010Q1 - 2023Q1 time-series data. The results of the study show that in the short-run, both the appreciation (NEG) and depreciation (POS) of the exchange rate have no effect on East Java's trade balance in all models. However, in the long-run, exchange rate appreciation and depreciation have a significant negative effect on East Java's trade balance across all models. Based on the estimation results, it can be concluded that there is no J-Curve phenomenon in East Java's trade balance with trading partner countries. Because in the asymmetry model, the J-Curve phenomenon can occur if depreciation or appreciation has a significant positive effect and is cointegrated in the long-run, regardless of the short-run coefficient being positive or negative and significant or not significant. From these conditions, it can be concluded that the trade industry in East Java is called inelastic. That is, price changes do not affect demand for export and import volumes. Therefore, the policy of depreciating the Rupiah exchange rate is not the best strategy to be implemented as an export promotion for East Java because only a few sectors benefit.
References
Adiningsih, H., Siregar, H., & Hasanah, H. (2013). Does the J-Curve phenomenon exist in Indonesia’s bilateral trade balances with major trading countries? ASEAN Journal of Economics, Management and Accounting, 1(1), 13–22.
Adiningsih, H., Siregar, H., & Hasanah, H. (2013). Does the J-Curve phenomenon exist in Indonesia’s bilateral trade balances with major trading countries? ASEAN Journal of Economics, Management and Accounting, 1(1), 13–22
Alleyne, A., Zhang, Z., & Mu, Y. (2020). Sustaining international trade with China: Does ACFTA improve ASEAN export efficiency? Sustainability, 12(15), 6159. https://doi.org/10.3390/su12156159
Ari, A., Cergibozan, R., & Cevik, E. (2019). J-curve in Turkish bilateral trade: A nonlinear approach. International Trade Journal, 33(1), 31–53. https://doi.org/10.1080/08853908.2018.1521316
Avivi, Y., & Siagian, M. (2020). Kepentingan Indonesia Dalam Kerja Sama Bilateral Dengan Jepang Studi Kasus: Indonesia-Japan Economic Partnership Agreement (Ijepa). Paradigma POLISTAAT: Jurnal Ilmu Sosial Dan Ilmu Politik, 3(1), 49-61.
Badan Pusat Statistik. (2023). Laporan Perekonomian Indonesia 2022. Jakarta: Badan Pusat Statistik.
Bahmani-Oskooee, M. (1985). Devaluation and the J-curve: Some evidence from LDCs. The Review of Economics and Statistics, 67(3), 500–504. https://www.jstor.org/stable/1925980
Bahmani-Oskooee, M. (1991). Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs? Economics Letters, 36(4), 403–407. https://doi.org/10.1016/0165-1765(91)90206-Z
Bahmani-Oskooee, M., & Aftab, M. (2018). Asymmetric effects of exchange rate changes on the Malaysia-China commodity trade. Economic Systems, 42(3), 470–486. https://doi.org/10.1016/j.ecosys.2017.11.004
Bahmani-Oskooee, M., & Alse, J. (1994). Short-run versus long-run effects of devaluation: Error- correction modeling and cointegration. Eastern Economic Journal, 20(4), 453–464.
Bahmani-Oskooee, M., & Brooks, T. J. (1999). Bilateral J-curve between U.S. and her trading partners. Weltwirtschaftliches Archiv, 135 (1), 156–165. http://www.jstor.org/stable/40440680
Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the J-curve phenomenon. Open Economies Review, 27(1), 51–70. https://doi.org/10.1007/s11079- 015-9369-5
Bahmani-Oskooee, M., & Hajilee, M. (2009). The J-Curve at industry level: Evidence from Sweden-US trade. Economic Systems, 33(1), 83–92. https://doi.org/10.1016/j.ecosys.2008.09.001
Bahmani-Oskooee, M., & Harvey, H. (2017). The J-curve and bilateral trade balances of Indonesia with its major partners: are there asymmetric effects? New Zealand Economic Papers, 53(1), 63–76. https://doi.org/10.1080/00779954.2017.1371207
Bahmani-Oskooee, M., & Karamelikli, H. (2018). Japan-U.S. trade balance at commodity level and asymmetric effects of Yen-Dollar rate. Japan and the World Economy, 48, 1–10. https://doi.org/10.1016/j.japwor.2018.06.002
Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson Education, Inc.
Cambazoglu, B., & Günes, S. (2016). Marshall-Lerner condition analysis: Turkey case. Economics, Management and Financial Markets, 11(1), 272–283.
Fang, W., Lai, Y., & Miller, S. M. (2009). Does exchange rate risk affect exports asymmetrically? Asian evidence. Journal of International money and Finance, 28(2), 215-239.
Greenwood-Nimmo, M., & Shin, Y. (2013). Taxation and the asymmetric adjustment of selected retail energy prices in the UK. Economics Letters, 121(3), 411-416.
Guo, G. (2020). Estimating the Marshall-Lerner condition of China. Journal of Economics and International Finance, 12(2), 48–56. https://doi.org/10.5897/jeif2019.1008
Halicioglu, F. (2007). The J-curve dynamics of Turkish bilateral trade: A cointegration approach. Journal of Economic Studies, 34(2), 103–119. https://doi.org/10.1108/01443580710745362
Harvey, H. (2018). Bilateral J-curve between Philippines and trading partners: Linear and non-linear approach. Asian Economic and Financial Review, 8(2), 131–144. https://doi.org/10.18488/journal.aefr.2018.82.131.144
Ibrahim, Permata, M. I., & Wibowo, W. A. (2010). The impact of ACFTA implementation on international trade of Indonesia. Bulletin of Monetary, 13(1), 23–56.
Indriyani. (2016). The effect of the ASEAN-China Free Trade Area (ACFTA) on Indonesia exports. Etikonomi, 15(2), 125–138. https://doi.org/10.15408/etk.v15i2.3331
Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson Education Limited.
Lal, A. K., & Lowinger, T. C. (2002). The J-curve: Evidence from East Asia. Journal of Economic Integration, 17(2), 397–415. https://doi.org/10.11130/jei.2002.17.2.397
Magee, S. P. (1973). Currency contracts, pass-through , and devaluation. Brookings Papers on Economic Activity, 1973(1), 303–325. https://www.jstor.org/stable/2534091
Nasir, M. A., Huynh, T. L. D., & Vo, X. V. (2020). Exchange rate pass-through & management of inflation expectation in a small open inflation targeting economy. International Review of Economics & Finance, forthcoming.
Noland, M. (1989). Japanese trade elasticities and the J-curve. The Review of Economics and Statistics, 71(1), 175–179. https://www.jstor.org/stable/1928067
Panda, B., & Reddy, D. R. K. (2016). Dynamics of India-China trade relations: Testing for the validity of Marshall-Lerner condition and J-curve hypothesis. IUP Journal of Applied Economics, 15(1), 7.
Pesaran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the existence of a long run relationship. DAE Working Papers 9622, Department of Applied Economics, University of Cambridge.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to analysis of long run relationships. Journal of Applied Econometrics, 16(3), 289–326.
Pham, T. A. T., Nguyen, T. T., Nasir, M. A., & Huynh T. L. D. (2020). Exchange rate pass-through: A comparative analysis of inflation targeting & non targeting ASEAN-5 countries. The Quarterly Review of Economics and Finance, https://doi.org/10.1016/j.qref.2020.07.010
Prawoto, R. B. (2007). Cointegration analysis on trading behavior in four selected ASEAN countries before the monetary crisis. Gadjah Mada International Journal of Business, 9(2), 273–290. https://doi.org/10.22146/gamaijb.5595
Rose, A. K. (1990). Exchange rates and the trade balance. Some evidence from developing countries. Economics Letters, 34(2), 271–275. https://doi.org/10.1016/0165-1765(90)90130-S
Rose, A. K., & Yellen, J. L. (1989). Is there a J-curve? Journal of Monetary Economics, 24(1), 53–68. https://doi.org/10.1016/0304-3932(89)90016-0
Salvatore, D. (2013). International Economics (11th ed.). John Wiley & Sons, Inc.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. Festschrift in honor of Peter Schmidt: Econometric methods and applications, 281-314.
Widarjono, A. (2007). Ekonometrika: Teori dan dan Aplikasi untuk Ekonomi dan Bisnis [Econometrics: Theory and Applications to Economics and Business]. Ekonisia, Kampus Fakultas Ekonomi UII.
