Bilateral J-Curve between Slovakia and its major trading partners

The primary purpose of this paper is to analyse the impact of exchange rate on bilateral trade flows between Slovakia and its seven major trading partners. Devaluation or depreciation of a currency worsens the trade balance before improving it, resulting in a J-curve pattern. This paper investigates J-curve phenomenon using quarterly time series data over the period 1997:1 to 2010:4. In this paper is applied the Johansen cointegration test to analyse the long run relationship between exchange rate and trade balance. Short term effects and the related J-curve effect is explored by estimating error correction model and by assessing the impulse response function of the trade balance on the exchange rate shock. The results reveal that the trade balance between Slovakia and its trading partners does not support the J-curve phenomenon in all cases. The J-curve phenomenon was revealed in case of Hungary and partially in Czech Republic, in case of Austria S-curve pattern was found, in other cases, the coefficient estimates follow any specific pattern in response to currency depreciation.