Bilateral J-curve between Sri Lanka and its major trading partners
Mrs. W T K Perera is a Senior Assistant Director attached to the Statistics Department of the Central Bank of Sri Lanka. She received a B.Sc. Degree in Mathematics, Statistics and Physics, and a Postgraduate Diploma in Social Statistics from the University of Sri Jayewardenepura, Sri Lanka and M.Sc. in Economics from the Australian National University, Australia. Her research interests are mainly in the areas of International Trade, Fiscal Policy and Econometric modeling.
It is widely believed that the short run effect of exchange rate depreciation on trade balance is different from the long run. In the short run, first, the trade balance deteriorates before resulting in an improvement, suggesting a J-curve pattern. Most of the empirical studies have employed aggregate trade data, while recent studies have used bilateral trade data. These studies are mostly between industrial countries, a few developing countries, but none so far for Sri Lanka. Hence, in this study, the impact of real depreciation of Sri Lankan Rupee (SLR) on the trade balance in the short run and the long run has been examined, employing bilateral trade data between Sri Lanka and its six major trading partners using the autoregressive distributed lagged (ARDL) model. The results reveal that the trade balance between Sri Lanka and its trading partners does not support the J-curve phenomenon, and also it does not have any specific pattern in response to depreciation of real exchange rate.