Modelling the Australian J-Curve : An ARDL Cointegration Approach

This study analyses the existence of the J-curve phenomenon in Australia using quarterly data over the period 1970-2016. The Autoregressive Distributed Lag (ARDL) cointegration and error correction methodology are used to examine the short-run and long-run impact of real exchange rate on Australia's trade balance. The empirical findings support the J-curve effect in which real currency depreciations exert a negative effect on trade balance in the long-run. In addition, domestic income plays an important role in improving trade balance in the long-run. This result is also robust to alternative cointegration methods. Furthermore, we segment currency appreciations and depreciations to determine whether any asymmetries are present in the real exchange rate by utilising the non-linear version of the ARDL approach. While this method still supports the J-curve effect, no asymmetric responses are found in the real exchange rate in the long-run. However, asymmetries are present in the short-run in which real depreciations improve Australia's trade balance