Sectoral j-curve effects

The J-curve effect phenomenon suggests that currency devaluation would worsen the trade balance in the short run, but improve it in the long run. This paper examines whether J-curve effects are different between the two main components of the trade account: the goods sector trade balance and the service sector trade balance. We use quarterly Australian data over 1988- 2011 period to investigate this question. 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.