The J-Curve: Evidence from commodity trade between Canada and the U.S.

Several studies in the literature have tried to assess the impact of real depreciation of the Canadian dollar on the Canadian trade balance. They have either relied on the trade data between Canada and the rest of the world or between Canada and her major trading partners. In this paper we consider the trade between Canada and her major trading partner, the U.S. However, unlike previous research, we disaggregate the trade data between the two countries by commodity. We use export and import data over the period 1962-2004 from 152 commodities and the bounds testing approach to cointegration and error-correction modeling and show that real depreciation of the Canadian dollar has short-run effects on the trade balance of two-thirds of the industries. However, only in 50% of the industries, the short-run effects translate into the long-run favorable effects. © Springer Science + Business Media, LLC 2007.