Is There J-Curve Effect in the Services Trade in Canada? A Panel Data Analysis

Abstract The effects of real exchange rate changes on the sectoral trade balance have received limited consideration in the empirical literature. We examine services trade and the dynamics of Canada’s bilateral trade balance in services with its 53 major trading partners during 1990-2018. We demonstrate a short-run deterioration and a long-term improvement of the services trade balance following depreciation in an aggregate panel as well as sub-panels, hence supporting the J-curve effect hypothesis and satisfying the Marshall-Lerner condition. At the level of individual cross-sections, the evidence was mixed: a number of economies experienced long-term improvement of the trade balance, albeit without short-term deterioration. JEL classification number: F14, F32, C23. Keywords: J-curve, Panel data, Trade balance, Exchange rate, Services.