Exchange rate effects on trade in services

Purpose The purpose of this paper is to use disaggregated data on US‐UK trade to investigate the effects of exchange rate depreciation on trade in services both in the short‐ and long‐run. Design/methodology/approach The paper focuses on the three traditional categories of internationally traded services – travel, passenger fares and other transportation services – and employs the “bounds” testing procedure advanced by Pesaran, Shin and Smith to investigate the J‐curve effect. Findings The results reveal that the real exchange rate has a statistically significant effect on trade in services in at least one of the time periods. The results also provide some support for the J‐curve effect. Practical implications Empirical evidence on the J‐curve provides policymakers with valuable information about the effects of currency depreciation on the trade balance. Originality/value To the best of the author's knowledge this is the first paper to investigate the J‐curve effect using data on trade in services.