Exchange rates and trade balance dynamics: a quantile regression analysis

This paper investigates how trade balances respond to fluctuations in exchange rates among the industrialized G10 and emerging BRICS countries, applying a nonlinear quantile regression methodology. By examining the entire conditional quantile process, we reveal diverse impacts of exchange rate dynamics on trade balances across its distribution. Specifically, our analysis highlights distinct effects: advanced economies experience short-term J-curve effects, while emerging markets display price and quantity effects. Furthermore, our study emphasizes the importance of differentiating between bilateral and effective exchange rates. We observe that effective exchange rates do not offer superior insights compared to bilateral rates, particularly evident in BRICS economies due to the dominance of the US dollar in global trade denomination. Our findings underscore crucial policy implications. Reducing reliance on the US dollar emerges as a pivotal strategy, particularly for developing nations. Conversely, for advanced economies, recognizing and leveraging the indirect yet substantial impact of exchange rates, specifically J-curve effects, could offer strategic advantages within policymaking.