ASYMMETRIC IMPACT OF EXCHANGE RATE CHANGES ON THE TRADE BALANCE: DOES GLOBAL FINANCIAL CRISIS MATTER?

Recent studies have been mainly focusing on whether exchange rate changes have a symmetric or asymmetric effect on the trade balance. We revisit this question in the context of US and further extend previous studies by determining whether the relationship between these underlying variables change as a result of the global financial crisis. We use both linear autoregressive distributed lag (ARDL) and non-linear ARDL models for the whole sample period as well as in the pre- and post-crisis periods. Findings suggest that exchange rate changes have an asymmetric effect on the trade balance; however, the asymmetric behavior of the underlying variables change as a result of the financial crisis. In the short run, exchange rate asymmetrically affects trade balance in the post-crisis period only. In the long run, there is an asymmetric effect for all sample periods, where only the devaluation of currency significantly affects the trade balance when the whole sample period is selected. On the other hand, in pre- and post-crisis periods, only appreciation of currency significantly affects the trade balance. This study indicates that determining the asymmetric relationship without considering the global financial crisis may lead to spurious results.