The J-Curve Effect in Services Trade: A Disaggregated Analysis

This article examines the relationship between the real exchange rate and the services trade balance in the UK using the quarterly data for the 2005Q1-2019Q4 period. We consider the aggregate as well as disaggregated trade across five services categories. We employ linear and non-linear autoregressive distributed lag (ARDL) models. The non-linear model, in particular, allows consideration of asymmetric response of the trade balance to depreciations as opposed to appreciations. The findings indicate little evidence of a long-term improvement in the trade balance following depreciation, and suggest the absence of J-curve effect. The effects of domestic, 'rest of the world' GDP and monetary base on the trade balance were respectively negative, positive and mixed. JEL: F14, F31, C22