US Bilateral Trade with Euro Area Members: An Asymmetry Analysis of the J-Curve Effect

Abstract

Recent application of nonlinear asymmetry error-correction modeling and cointegration has revealed more support for the J-curve phenomenon compared to symmetric and linear ARDL approach. We add to this literature by considering the bilateral trade balance of the US with each of the 12 original members of the euro area. While the linear approach supported the J-curve effect only for the US trade balance with three countries (Greece, Italy, and Luxembourg), the nonlinear approach supports it for the US trade balance with five partners (Finland, Greece, Italy, Luxembourg, and Portugal). Clearly, introducing nonlinear adjustment of the real exchange rate yields more support for the J-curve effect.