THE J- CURVE DYNAMICS OF SOUTH AFRICAN TRADE: EVIDENCE FROM THE ARDL APPROACH

Abstract

This paper assesses the behaviour of South Africa’s trade balance following a depreciation of the real effective exchange rate (the J-curve phenomenon) using aggregate trade data for the period 1975 to 2011. It uses the bounds test approach to cointegration developed by Pesaran et al. (2001) to analyze the long-run relationship among the variables. The empirical results indicate thatthere is cointegration between the trade balance and the real effective exchange rate, and domestic and foreign income. Our long-run results indicate that the real effective exchange rate carries a negative sign but is statistically insignificant.Although our short-run result shows evidence for negative values in earlier quarters followed by positive values later as the lag length increases, most of the coefficients are insignificant. Therefore we do not find support for the J-curve phenomenon.