S-CURVE AT THE COMMODITY

S-CURVE AT THE COMMODITY

LEVEL:Evidence

from US-India Trade

Mohsen Bahmani-Oskooee University of Wisconsin-Milwaukee,Milwaukee,Wisconsin,USA

Artatrana Ratha St.Cloud State University,St.Cloud,Minnesota,USA

The short-run response of the trade balance to changes in the terms of trade or the real exchange rate comes under the heading of the‘‘J-Curve’’or the‘‘S-Curve.’’While the J-Curve is mostly investigated through regression analysis,the S-Curve is based on the cross-correlation function between the terms of trade and the trade balance.Previous research has shown that in a country where support for any of the two curves is weak,disaggregation of the trade data helps discover more evidence of either curve.This article adds to the literature by considering the experience of India.We demonstrate that once the trade data between India and the United States is disaggregated by commodity,there is evidence of the S-curve in most industries that trade between the two countries.Out of total of27industries that constitute about 70%of trade,there are15that support the S-Curve.

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Correspondence should be addressed to Mohsen Bahmani-Oskooee, Department of Economics and The Center for Research on International Economics,University of Wisconsin-Milwaukee,P.O. Box413,Milwaukee,WI53201,USA.E-mail:bahmani@ THE INTERNATIONAL TRADE JOURNAL,Volume24,No.1,January{March201084

ISSN:0885-3908print/1521-0545online.DOI:10.1080/08853900903442939

Bahmani-Oskooee and Ratha:S-Curve at the (85)

I.INTRODUCTION

Devaluation of a currency is said to improve the trade balance by increasing exports and by decreasing imports.However,due to adjustment lags such as recognition lags,production lags,delivery lags,etc.,it is possible for the trade balance to worsen before it improves,hence the phenomenon known as the J-Curve pattern may emerge.While Bahmani-Oskooee and Ratha(2004)provide a comprehensive review of the general literature,a specific and brief review pertaining to India which is the country under concentra-tion in this article is essential.

India was one of four countries considered in introducing a method of testing the J-curve by Bahmani-Oskooee(1985).In the trade balance model,a measure of the trade balance was related to two scale variables(domestic income and income of the rest of the world),domestic and world money supplies and the real effective exchange rate.By imposing a lag structure on the real effective exchange rate,the J-curve hypothesis was tested.No support for the J-curve was found in the case of India.Similar results were obtained by Bahmani-Oskooee and Malixi(1992)when they used a unit-free measure of the trade balance.However,Himarios (1989)showed that measurement units play an important role. When he measured the trade balance in terms of foreign currency, i.e.,the U.S.dollar,the results showed that,indeed,depreciation of the rupee has positive effect on Indian trade balance.

Given the unit root evidence in most macro time-series vari-ables,the findings of above studies could be considered spurious. For that reason most recent studies rely upon cointegration and error-correction modeling approach.Several studies have,again, included India in their analysis.India was one of30developing countries considered by Rose(1990)who found no cointegration among the variables of the trade balance model,hence,no relation between Indian trade balance and her exchange rate.The same was found by Bahmani-Oskooee(1991)who considered the trade