Asymmetric cointegration, Non‐linear ARDL, and the J‐curve: A bilateral analysis of Pakistan and its trading partners

Abstract

Abstract Earlier studies that investigated the response of the trade balance to exchange rate changes relied on the assumption that appreciations and depreciation behaves in symmetric way and have used the linear ARDL approach for empirical estimates. The empirical results are supposed to have masked by restricted assumption of symmetry between exchange rate and trade balance. In this study, we investigate the J‐curve at the bilateral level between Pakistan and her major eight trading partners. We find significant evidence that non‐linear Autoregressive Distributive lag (ARDL) Model performs better as compared to linear ARDL. In case of linear ARDL, there is no evidence of the J‐curve at bilateral level, however, when we used non‐linear ARDL, we found the support of the J‐curve in the case of Malaysia, China, and the United States.