J-curve disparity between the goods sector and the services sector: evidence from Australia

Abstract

The J-curve effect phenomenon suggests that the currency devaluation would worsen the trade balance in the short run, but improve it in the long run. This article uses quarterly Australian data over the period 1988 to 2011 to examine whether J-curve effects are different between the two main components of the trade account: the goods sector and the services sector. Using the bound testing approach to cointegration and error correction modelling, we find some evidence to support the J-curve phenomenon, but the impact of real exchange rate on the trade account seems complex. While the services sector displays a J-curve effect, the goods sector response is quite the opposite: it has a positive response in the short run, but a weak negative response in the long run.