Modelling the Australian J‐Curve: An ARDL Cointegration Approach

This study tests for the existence of the J‐curve phenomenon in Australia using quarterly data over the period 1970–2016. The autoregressive distributed lag (ARDL) cointegration and error correction methodologies are used to examine the short‐run and long‐run impacts of the real effective exchange rate on Australia's trade balance. Baseline ARDL estimates do not lend support for the J‐curve phenomenon. Sensitivity analyses also support this finding even after controlling for the Global Financial Crisis and asymmetries in exchange rate movements. However, separately investigating the non‐resource trade balance, we find evidence of the J‐curve effect, highlighting the importance of Australia's resource sector for global export activity.