DE GRUYTER Global Economy Journal.

2017; 20170055

Mohsen Bahmani–Oskooee1 / Hanafiah Harvey2

The Asymmetric E昀fects of Exchange Rate

Changes on the Trade Balance of Singapore
1
Department of Economics, University of Wisconsin-Milwaukee, Milwaukee, WI53201, USA, E-mail: bahmani@uwm.edu
2
Department of Economics, Penn State University, Mont Alto, PA17237, USA, E-mail: hhh10@psu.edu

Abstract:
Previous studies that tested the short-run and long-run effects of exchange rate changes on trade balances
assumed that the effects are symmetric. The more recent research direction has now changed to investigating
the possibility of asymmetric effects. In this paper, we assess the short-run and long-run effects of exchange
rate changes on the bilateral trade balances of Singapore with her 11 partners. By applying the nonlinear ARDL
approach, which separates appreciations from depreciations, we find that exchange rate changes have short-run
asymmetric effects in most models. The short-run effects, however, lasted into the long run in a few models.
In the long run, while depreciation improves Singapore’s trade balance with the U.S., it hurts it with Malaysia
and China. These three partners account for almost 50 % of Singapore’s trade.
Keywords: asymmetry analysis, J-curve, Singapore, nonlinear ARDL approach
JEL classification: F31
DOI: 10.1515/gej-2017-0055

1 Introduction
The relation between currency depreciation and the trade balance keep attracting a renewed interest by re-
searchers. Specifically, when a new method is introduced, researchers are excited to apply the new method
in hope of discovering some new and interesting hidden facts and results. Two review articles by Bahmani-
Oskooee and Ratha (2004) and Bahmani-Oskooee and Hegerty (2010) reveal that today researchers rely upon
error-correction modeling technique to assess the short-run effects of exchange rate changes on the trade bal-
ance and cointegration technique to estimate the long-run effects. The literature is so vast that each country
now has its own literature and our country of concern, Singapore, is no exception.
After the introduction of the Engle and Granger (1987) error-correction and cointegration approaches,
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Bahmani-Oskooee and Alse (1994) employed these methods to test the short-run and long-run effects of cur-
rency depreciation on the aggregate trade balance of 41 countries, including Singapore. No significant link was
reported. However, when Johansen’s technique was applied by Lal and Lowinger (2002) to examine the aggre-
gate trade balance of several Asian countries including Singapore, some support for the J-curve effect in the
case of Singapore was presented.1
Suspecting that the above studies do suffer from aggregation bias by using the aggregate trade flows of
Singapore with the rest of the world, following the recommendation of Rose and Yellen (1989) and Wilson (2001)
concentrated on the bilateral trade flows between Singapore and Japan in one model and between Singapore and
the U.S. in another model. No significant relation between the bilateral exchange rate and bilateral trade balance
was reported in either models. In search of significant link between the two variables, Bahmani-Oskooee and
Harvey (2012) applied yet another new method, i. e., Pesaran, Shin, and Smith (2001) the ARDL bounds testing
approach to bilaeral models between Singapore and each of her 13 trading partners. What is unique about
this method is that the variables could be a combination of integrated of order zero, I(0), and order one, I(1).
Furthermore, under this method short-run and long-run effects are estimated in one step. Using quarterly data
over the period 1973–2009, Bahmani-Oskooee and Harvey (2012) supported the new definition of the J-curve
due to Rose and Yellen (1989), i. e., short-run deterioration combined with long run improvement, in the trade
balance between Singapore and Canada, the Philippines, Saudi Arabia and the USA.
The studies reviewed above do have a common feature in that they have assumed that the effects of ex-
change rate changes on the trade balance are symmetric. However Bahmani-Oskooee and Fariditavana (2016)
questioned this assumption when they raised the same concern against Rose and Yellen (1989). They argued that
since traders’ expectations could be different to currency depreciation as compared to appreciation, exchange

Mohsen Bahmani–Oskooee is the corresponding author.

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rate changes could have asymmetric effects on the trade balance. Furthermore, if import and export prices react
to exchange rate changes in an asymmetric manner as demonstrated by Bussiere (2013), so should the exports
and imports themselves, hence the trade balance.2 Since testing for asymmetric effects amounts to using non-
linear models, we wonder if using the nonlinear ARDL approach of Shin, Yu, and Greenwood-Nimmo (2014)
can shed additional light to the response of the Singapore bilateral trade balances with her major partners to
exchange rate changes. To that end, we outline the models and estimation methods in Section 2. The results are
presented in Section 3 with a summary in Section 4. Data definition and sources are discussed in an Appendix.

2 The Models and Methods

As mentioned in the previous section, since the methodology is based on error-correction and cointegration
approaches, we need to begin with a reduced form trade balance model.3 We therefore adopt the specification
by Rose and Yellen (1989) and Bahmani-Oskooee and Fariditavana (2016), who included the level of economic
activity at home and in the foreign country as well as the real bilateral exchange rate as determinants of the
bilateral trade balance model, as outlined by eq. (1):

𝐿𝑛𝑇𝐵𝑖, 𝑡 = 𝑎 + 𝑏 𝐿𝑛𝑌u�u�,u� , +𝑐 𝐿𝑛𝑌u�,u� + 𝑑 𝐿𝑛 𝑅𝐸𝑋 i,t + 𝜀u� (1)

Where TBi is a measure of the trade balance between Singapore and its trading partner i defined as Sin-
gapore’s imports from partner i over her exports to partner i.4 Singapore’s economic activity is measured by
its real GDP, denoted by YSG , and if Singapore is to import more as its economy grows, we expect an estimate
of b to be positive. The trading partner’s economic activity is also measured by its real GDP, denoted by Yi
and since Singapore is expected to export more as its partner’s economy grows, an estimate of c is expected
to be negative. Finally, as the Appendix shows, the real bilateral exchange rate, REXi is defined in a way that
a decline reflects a real depreciation of the Singapore dollar and if a real depreciation is to lower Singapore’s
imports from partner i and increase her exports to partner i, we expect an estimate of d to be positive.
The next step in building our models is to incorporate the short-run adjustment process into (1) so that we
can assess the short-run effects of currency depreciation on the trade balance. Normally, this is done by relying
upon an error-correction model. Here, we follow Pesaran, Shin, and Smith (2001) ARDL approach as outlined
by eq. (2):
u� u� u�
Δ𝐿𝑛𝑇𝐵u�,u� = 𝛼 + ∑ 𝛽u�−u� Δ𝐿𝑛𝑇𝐵u�,u�−u� + ∑ 𝛿u�−u� Δ𝐿𝑛𝑌u�u�,u�−u� + ∑ 𝛾u�−u� Δ𝐿𝑛𝑌u�,u�−u� +
u�=1 u�=0 u�=0
u�
(2)
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∑ 𝜋u�−u� Δ𝐿𝑛𝑅𝐸𝑋u�,u�−u� + 𝜆1 𝐿𝑛𝑇𝐵u�,u�−1 + 𝜆2 𝐿𝑛𝑌u�u�,u�−1 + 𝜆3 𝐿𝑛𝑌u�,u�−1 +

u�=0
𝜆4 𝐿𝑛𝑅𝐸𝑋u�,u�−1 + 𝜇u�

In (2) the short-run effects of exchange rate changes are judged by the estimates of πt-k and the long-run
effects by the estimate of λ4 normalized on λ1 . The same is true of all the other variables. However, to validate
the long-run estimates, we must establish cointegration. Pesaran, Shin, and Smith (2001) recommend applying
the F test to establish joint significance of lagged level variables as an indication of cointegration. However,
they also argue that the F test in this context has new critical values that they tabulate. Since the critical values
account for the integrating properties of the variables, there is no need for pre unit root testing of the variables
and indeed, we can have a combination of I(0) and I(1) variables.
The next step in our model building process is to introduce asymmetric analysis into (2). Since our main
interest is asymmetric effects of exchange rate changes, we first form ΔLn REX which includes positive changes
(appreciations) and negative changes (depreciations). We then construct two new time-series variables, one
reflecting only the appreciation of Singapore’s dollar and one reflecting depreciations. Denoting these two new
variables as POSt and NEGt we measure them as the partial sum of positive changes in the real exchange rate
and the partial sum of negative changes, respectively, as outlined below:
u� u�
𝑃𝑂𝑆u� = ∑ Δ𝐿𝑛𝑅𝐸𝑋u�+ = ∑ max(Δ𝐿𝑛𝑅𝐸𝑋u� , 0),
u�−1
u�
u�−1
u� (3)
𝑁𝐸𝐺u� = ∑ Δ𝐿𝑛𝑅𝐸𝑋u�− = ∑ min(Δ𝐿𝑛𝑅𝐸𝑋u� , 0)
u�−1 u�−1

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The next step is to go back to the error-correction model (2) and replace Ln REX variable by POS and NEG
variables. We then arrive at:
u�1 u�2 u�3
Δ𝐿𝑛𝑇𝐵u�,u� = 𝑎′ + ∑ 𝑏′u� Δ𝐿𝑛𝑇𝐵u�,u�−u� + ∑ 𝑐′u� Δ𝐿𝑛𝑌u�u�,u�−u� + ∑ 𝑑′u� Δ𝐿𝑛𝑌u�,u�−u�
u�=1 u�=0 u�=0
(4)
u�4 u�5
+ ∑ 𝑒′u� Δ𝑃𝑂𝑆u�−u� + ∑ 𝑓 ′u� Δ𝑁𝐸𝐺u�−u� + 𝜃0 𝐿𝑛𝑇𝐵u�,u�−1 + 𝜃1 𝐿𝑛𝑌u�u�,u�−1
u�=0 u�=0
+𝜃2 𝐿𝑛𝑌u�,u�−1 + 𝜃3 𝑃𝑂𝑆u�−1 + 𝜃4 𝑁𝐸𝐺u�−1 + 𝜉u�

Shin, Yu, and Greenwood-Nimmo (2014) then demonstrate that Pesaran, Shin, and Smith (2001) approach could
equally be applied to error-correction model (4). Indeed, they argue that in (4) we should treat POS and NEG as
one variable and should not change the critical values of the F test when we shift from (2) to (4), though (4) has
one more variable than (2).5 Due to the method of constructing the two variables POS and NEG, Shin, Yu, and
Greenwood-Nimmo (2014) call models like (4) a nonlinear ARDL model whereas, (2) is labeled as a linear ARDL
model. Once (4) is estimated and cointegration is established, a few assumptions with regards to asymmetry
effects are tested. First, short-run adjustment asymmetry is observed if ΔPOS and ΔNEG take different lag
orders. Second, exchange rate changes are said to have short-run asymmetric effects on the trade balance if size
or sign of e’k is different than size or sign of f’k for each k. Third, short-run cumulative asymmetry is established
if ∑ 𝑒′ ≠ ∑ 𝑓 ′ . Finally, the long-run asymmetric effects are established if the normalized long-run estimates
attached to POS and NEG are different, i. e., if 𝜃3 / − 𝜃0 ≠ 𝜃4 / − 𝜃0 . Both short-run cumulative asymmetry
and long-run asymmetry are tested by applying the Wald test, which is distributed as χ2 with one degree of
freedom.6

3 The Results
We are now in a position to estimate both the linear ARDL model (2) and the nonlinear model (4) using bi-
lateral trade data between Singapore and each of her 11 trading partners. The list of partners and their trade
shares are reported in a table in the Appendix and clearly shows that China is the largest partner. Both mod-
els are estimated using quarterly data, mostly over the period of 1975QI-2015QII. Exceptions are noted in the
Appendix. Following the literature, we impose a maximum of eight lags on each first-differenced variable and
use Akaike’s Information Criterion (AIC) to select an optimum model in each case. We then report the results
in Table 1. To follow the results with ease, we identify an estimate or a statistic by * (**) if it is significant at the
10 % (5 %) level.
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Table 1: Full-information estimates of both linear ARDL (L-ARDL) and nonlinear ARDL (NL-ARDL) models.
i = Australia i = China, Mainland i=Hong Kong i = Indonesia
L– NL – L – ARDL NL – L– NL – L – ARDL NL –
ARDL# ARDL# ARDL ARDL# ARDL# ARDL
Panel A: Short–Run Estimates
ΔlnTB,i,t-1 0.32(2.33)* 0.66(4.34)* −0.38(4.44)* −0.42(3.82)*
ΔlnTB,i,t-2 −0.01(0.06) 0.48(3.27)* −0.24(2.66)* −0.23(2.28)*
ΔlnTB,i,t-3 0.28(2.46)* 0.48(3.71)* −0.18(2.19)* −0.19(2.25)*
ΔlnTB,i,t-4 0.27(2.37)* 0.48(4.15)*
ΔlnTB,i,t-5 0.19(1.63)
ΔlnTB,i,t-6
ΔlnTB,i,t-7
ΔlnY SG,t 0.11(0.92) 0.11(0.86) −0.33(1.11) −0.65(2.39)* 0.43(1.26) 0.55(1.55) −0.04(0.17) 0.07(0.23)
ΔlnY SG,t-1 0.33(1.41) −1.22(3.01)* −0.68(2.21)*
ΔlnY SG,t-2 −0.95(3.99)* −1.89(5.51)*
ΔlnY SG,t-3 −1.40(4.37)*
ΔlnY SG,t-4 −0.71(2.17)*
ΔlnY SG,t-5 −0.86(3.03)*
ΔlnY SG,t-6 −0.67(2.47)*
ΔlnY SG,t-7 −0.39(1.55)
ΔlnY i,t −0.51(1.85)* −0.48(1.17) −0.14(2.19)* −0.85(1.87)* 0.01(0.64) 0.03(0.16) −0.27(1.79)* −0.77(2.94)*
ΔlnY i,t-1 0.42(0.66)
ΔlnY i,t-2 -0.002(0.002)
ΔlnY i,t-3 −1.39(1.97)*

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ΔlnY i,t-4 −0.95(1.62)

ΔlnY i,t-5 −1.17(2.23)*
ΔlnY i,t-6 −1.09(2.52)*
ΔlnY i,t-7
ΔlnREXi,t 0.43(2.72)* −0.24(0.71) −0.68(1.64)* −0.21(1.85)*
ΔlnREXi,t-1 0.93(2.82)* 0.83(2.08)*
ΔlnREXi,t-2 0.76(2.03)*
ΔlnREXi,t-3 0.06(0.17)
ΔlnREXi,t-4 −0.65(2.06)*
ΔlnREXi,t-5 −0.67(2.11)*
ΔPOSt 0.96(2.38)* −2.34(1.71)* −1.47(2.19)* 0.61(1.92)*
ΔPOSt-1
ΔPOSt-2
ΔPOSt-3
ΔPOSt-4
ΔPOSt-5
ΔPOSt-6
ΔPOSt-7
ΔNEGt 1.02(2.19)* 0.43(0.36) −1.92(1.35) 0.22(0.22)
ΔNEGt-1 5.69(4.39)* 3.56(2.49)* −2.86(2.62)*
ΔNEGt-2 5.53(4.55)* 1.29(0.86) −3.58(3.25)*
ΔNEGt-3 2.98(2.36)* −2.83(1.83)
ΔNEGt-4 4.20(3.74)* −2.21(1.47)
ΔNEGt-5
ΔNEGt-6
ΔNEGt-7
Panel B: Long–Run Estimates
ln Y SG 0.22(0.94) 0.25(0.87) 0.26(0.98) 1.13(5.31)* −0.97(2.87) −0.85(1.72)* −0.05(0.17) −0.07(0.36)
ln Yi −1.11(1.97)* −1.02(1.20) −0.41(3.48)* −0.98(4.96)* 0.34(0.65) 0.11(0.16) −0.37(1.88)* −0.73(3.22)*
ln REXi 0.92(2.86)* −1.08(2.12)* −2.49(9.52) −0.29(1.86)*
POS 2.07(2.48)* −1.57(1.83)* −5.46(7.58)* 0.57(1.95)*
NEG 2.20(2.24)* −2.73(5.72)* −5.52(2.80)* −1.77(2.29)*
Constant 18.86(2.44)* 16.57(0.94) 5.75(1.08) −12.49(4.47)* 14.67(2.50) 13.22(0.96) 9.08(2.07)* 21.09(3.09)*
Panel C: Diagnostic Statistics
F 12.04* 9.61* 5.26* 10.64* 5.25* 3.26 6.56* 10.60*
ECMt-1 −0.46(6.99)* −0.46(6.96)* −0.60(4.03)* −1.49(6.84)* −0.29(4.44)* −0.27(2.59) −0.73(5.05)* −1.06(8.38)*
LM 13.80* 13.90* 3.81 17.46* 1.06 3.16 5.79 4.83
RESET 8.72* 10.88* 1.69 0.55 1.19 6.85* 0.99 2.18
AdjustedR2 0.04 0.03 0.42 0.53 0.17 0.24 0.08 0.56
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CS (CS2 ) S(US) S(US) S(S) S(S) S(S) S(S) S(S) S(S)

WALD – S 0.77 9.91* 0.53 15.46*
WALD – L 0.49 0.81 0.24 1.05
i=Japan i=Malaysia i =Philippines i = South Korea
L – ARDL NL – L – ARDL NL – L– NL – L– NL –
ARDL# ARDL ARDL# ARDL# ARDL# ARDL#
Panel A: Short–Run Estimates
ΔlnTB,i,t-1 −0.33(3.80)* −0.22(2.51)* −0.005(0.05) 0.01(0.13) −0.16(1.41)
ΔlnTB,i,t-2 −0.19(2.26)* −0.12(1.35) −0.01(0.07) 0.002(0.02) −0.12(0.97)
ΔlnTB,i,t-3 −0.24(2.97)* −0.21(2.64)* 0.15(1.67)* 0.16(1.74)* 0.06(0.52)
ΔlnTB,i,t-4 0.29(3.15) 0.27(3.03)* −0.19(2.08)*
ΔlnTB,i,t-5
ΔlnTB,i,t-6
ΔlnTB,i,t-7
ΔlnY SG,t 0.69(2.73)* 0.13(1.18) −0.19(1.22) −0.17(1.09) 1.50(1.55) 1.36(1.60) 0.13(0.89) 0.11(0.55)
ΔlnY SG,t-1 0.34(1.30) −2.13(2.22)* −1.91(2.12)*
ΔlnY SG,t-2 0.57(2.29)* 2.18(2.10)* 2.19(2.45)*
ΔlnY SG,t-3 0.64(2.54)* 1.25(1.38) 1.21(1.37)
ΔlnY SG,t-4 −2.21(2.45)* −2.41(2.62)*
ΔlnY SG,t-5 1.63(1.82)*
ΔlnY SG,t-6
ΔlnY i,t 0.45(2.47)* 0.24(1.36) −0.27(1.44) −0.36(1.84)* −3.34(2.89)* −1.48(1.42) 0.01(0.08) 0.02(0.14)
ΔlnY i,t-1 0.34(2.15)* 0.39(2.48)* 1.14(0.98) 1.18(1.18)
ΔlnY i,t-2 −1.91(2.29)* −0.52(0.64)
ΔlnY i,t-3 −1.58(1.91)* 0.003(0.004)
ΔlnY i,t-4 2.66(2.44)* 2.02(2.02)*

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ΔlnY i,t-5 −2.26(2.09)* −1.48(1.48)

ΔlnY i,t-6
ΔlnY i,t-7
ΔlnREXi,t −0.33(1.76)* −0.13(1.14) −0.81(1.27) 0.08(0.61)
ΔlnREXi,t-1 −0.25(1.23) 0.48(0.68)
ΔlnREXi,t-2 −0.65(3.25)* −0.58(0.84)
ΔlnREXi,t-3 −0.19(0.94) 0.35(0.51)
ΔlnREXi,t-4 0.09(0.44) 1.17(1.76)*
ΔlnREXi,t-5 0.37(1.91)* 0.63(0.96)
ΔlnREXi,t-6 −1.24(1.96)*
ΔlnREXi,t-7 1.08(1.69)*
ΔPOSt −2.66(3.20)* −0.28(1.07) 2.29(0.98) 0.20(0.64)
ΔPOSt-1 −0.55(0.66) −3.18(1.29)
ΔPOSt-2 −0.01(0.01) 4.72(1.85)*
ΔPOSt-3 −0.59(0.75) −0.52(0.22)
ΔPOSt-4 0.20(0.26) 5.65(2.33)*
ΔPOSt-5 1.56(1.95)* 6.32(2.57)*
ΔPOSt-6 0.88(1.09) −4.74(2.09)*
ΔPOSt-7 2.07(2.57)*
ΔNEGt 0.78(1.12) −0.78(1.92)* −7.19(2.42)* 0.15(0.42)
ΔNEGt-1 0.07(0.10) 5.36(1.86)*
ΔNEGt-2 −2.43(3.51)* −9.52(3.28)*
ΔNEGt-3 −1.01(0.36)
ΔNEGt-4 −0.13(0.05)
ΔNEGt-5 −10.47(4.12)*
ΔNEGt-6
Panel B: Long–Run Estimates
ln Y SG −0.74(4.69)* 0.39(1.24) −0.50(1.27) −0.41(1.12) 0.09(0.23) −0.95(1.14) 0.35(0.89) 0.28(0.55)
ln Yi 2.45(3.00)* 0.77(1.52) 0.32(1.04) 0.01(0.04) −0.31(0.56) −0.03(0.06) 0.03(0.08) 0.05(0.14)
ln REXi 0.74(1.39) −0.34(1.21) 0.30(0.22) 0.21(0.62)
POS −1.64(2.43)* −0.66(1.12) −0.06(0.02) 0.54(0.64)
NEG −0.02(0.04) −1.82(2.14)* −3.00(0.62) 0.40(0.42)
Constant −59.48(2.59)* −27.86(2.27)* 3.56(1.81)* 7.62(2.47)* 3.74(0.38) 16.42(0.67) −6.69(1.53)
Panel C: Diagnostic Statistics
F 3.45 3.32 6.93* 6.13* 2.85 6.36* 8.13* 6.49*
ECMt-1 −0.18(3.19) −0.32(4.06)* −0.39(5.01)* −0.43(5.29)* −0.33(3.15) −0.41(5.43)* −0.37(5.81)* −0.38(5.79)*
LM 10.93* 0.83 0.87 1.98 6.21 11.41* 17.39* 17.98*
RESET 1.29 3.78* 0.03 0.17 1.36 0.01 0.39 0.30
AdjustedR2 0.17 0.20 0.27 0.27 0.33 0.42 0.09 0.08
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CS (CS2 ) S(S) S(US) S(US) S(US) S(US) S(S) S(US) S(US)

WALD – S 0.86 0.68 11.35* 0.43
WALD – L 5.25* 0.79 1.72 0.56
i = Thailand i = United Kingdom i = United States of
America
L – ARDL NL – L – ARDL NL – L– NL –
ARDL ARDL ARDL# ARDL#
Panel A: Short–Run Estimates
ΔlnTB,i,t-1 −0.36(2.77)* 0.26(2.07)* −0.19(2.15)* −0.15(1.72)* −0.49(6.33)* −0.46(5.07)*
ΔlnTB,i,t-2 −0.27(2.45)* −0.20(1.94)* −0.17(2.07)* −0.15(1.79)* −0.34(4.17)* −0.36(3.96)*
ΔlnTB,i,t-3 −0.18(2.39)* −0.16(1.92)*
ΔlnTB,i,t-4
ΔlnTB,i,t-5
ΔlnY SG,t −0.49(1.29) −0.30(0.76) 0.14(1.00) −0.08(0.50) −0.60(2.46)* −0.49(1.55)
ΔlnY SG,t-1 0.49(1.28) 0.22(0.54) 0.46(1.43)
ΔlnY SG,t-2 −1.04(2.74)* −1.42(3.50)* 0.26(0.81)
ΔlnY SG,t-3 0.06(0.19) 0.20(0.54) −0.11(0.35)
ΔlnY SG,t-4 0.39(1.14) 0.03(0.09) 0.67(2.24)*
ΔlnY SG,t-5 −0.29(0.81) −0.45(1.25) 0.19(0.62)
ΔlnY SG,t-6 0.73(1.99)* 0.64(1.79)* 0.63(1.99)*
ΔlnY SG,t-7 −1.01(2.72)* −1.25(3.42)* 0.59(1.86)*
ΔlnY i,t −0.52(1.86)* −0.46(1.66)* −0.48(1.12) −1.07(2.14) −1.18(1.28) −0.74(0.77)
ΔlnY i,t-1 −0.29(0.98) 0.01(0.04) −2.55(2.68)* −2.89(3.03)*
ΔlnY i,t-2 −0.29(0.99) −0.02(0.07) −3.48(3.63)* −3.65(3.77)*
ΔlnY i,t-3 0.02(0.08) 0.21(0.72) −2.86(2.87)* −2.69(2.66)*
ΔlnY i,t-4 −0.15(0.49) 0.03(0.09)

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ΔlnY i,t-5 −0.15(0.48) −0.03(0.09)

ΔlnY i,t-6 0.07(0.23) 0.26(0.86)
ΔlnY i,t-7 0.75((2.54)* 0.85(3.06)*
ΔlnREXi,t −0.18(0.63) 0.09(0.71) −0.35(0.95)
ΔlnREXi,t-1 0.79(2.67)* 0.76(2.11)*
ΔlnREXi,t-2 0.12(0.33)
ΔlnREXi,t-3 1.04(2.82)*
ΔlnREXi,t-4 0.24(0.64)
ΔlnREXi,t-5 0.46(1.26)
ΔlnREXi,t-6 1.07(2.91)*
ΔlnREXi,t-7
ΔPOSt −1.39(1.47) 0.47(1.49) −1.62(0.95)
ΔPOSt-1 3.32(2.90)* −5.31(3.16)*
ΔPOSt-2 −1.59(1.39) −3.33(1.95)*
ΔPOSt-3 −3.03(2.01)*
ΔPOSt-4 0.15(0.09)
ΔPOSt-5 1.52(1.01)
ΔPOSt-6 3.78(2.44)*
ΔPOSt-7
ΔNEGt −0.22(0.25) −0.48(1.12) −1.12(0.66)
ΔNEGt-1 −2.29(1.42)
ΔNEGt-2 2.94(1.79)*
ΔNEGt-3
ΔNEGt-4
ΔNEGt-5
Panel B: Long–Run Estimates
ln Y SG −0.22(0.48) 1.00(1.12) 0.93(0.99) −0.38(0.51) −0.66(2.06)* −1.01(2.62)*
ln Yi −0.68(1.19) −1.38(2.11) −3.22(1.15) −4.84(2.37)* 1.29(1.28) 2.31(1.29)
ln REXi −1.64(1.81)* 0.62(0.74) 0.96(2.81)*
POS −2.43(1.25) 2.11(1.62) 2.61(2.44)*
NEG −0.69(0.25) −2.17(1.13) 2.05(1.52)
Constant 25.72(3.62)* 13.88(2.04) 52.64(1.23) 109.96(2.85)* −19.45(0.99) −39.53(0.99)
Panel C: Diagnostic Statistics
F 3.51 2.78 2.04 2.28 8.93* 6.77*
ECMt-1 −0.27(2.27) −0.32(2.51) −0.15(2.51) −0.22(3.31) −0.25(5.16)* −0.23(3.55)
LM 0.52 1.47 2.07 2.76 7.86* 2.49
RESET 0.09 1.13 0.11 0.24 0.45 3.30*
AdjustedR2 0.45 0.51 0.09 0.08 0.33 0.40
CS (CS2 ) S(S) S(S) S(US) S(US) S(S) S(S)
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WALD – S 0.003 0.75 1.50

WALD – L 0.79 4.91* 1.12
∗
Notes:a Numbers inside the parentheses next to coefficient estimates are absolute value of t-ratios. *, ** indicate significance at the 10 %
and 5 % levels respectively.
b
The upper bound critical value of the F-test for cointegration when there are three exogenous variables is 3.77 (4.35) at the 10 % (5 %)
level of significance. These come from Pesaran, Shin, and Smith (2001, Table CI, Case III, p. 300).
c
The critical value for significance of ECMt-1 is −3.46 (−3.78) at the 10 % (5 %) level when k =3. The comparable figures when k = 4 are
−3.66 and −3.99 respectively. These come from Pesaran, Shin, and Smith (2001, Table CII, Case III, p. 303).
d
LM is the Lagrange Multiplier statistic to test for autocorrelation. It is distributed as χ2 with 4 degrees of freedom. The critical value is
7.78 (9.48) at the 10 % (5 %) level.
e
RESET is Ramsey’s test for misspecification. It is distributed as χ2 with one degree of freedom. The critical value is 2.71 (3.84) at the 10 %
(5 %).
f
Both Wald tests are distributed as χ2 with one degree of freedom. The critical value is 2.71 (3.84) at the 10 % (5 %).

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The results for each partner are reported in two columns where the estimates of the linear ARDL model is
identified as L-ARDL and those of the nonlinear model by NL-ARDL. Furthermore, for each model, short-run
estimates are reported in Panel A, the long-run estimates in Panel B, and associated diagnostics in Panel C.
Since the major trading partner of Singapore is China, we review the estimates for the Singapore-China model
first and then summarize for all the partners together next.
Concentrating on the Singapore-China model first, from the short-run coefficient estimates in Panel A and
the linear ARDL model, we gather that all three exogenous variables carry at least one significant short-run
estimate, implying that all three variables have short-run effects on the bilateral trade balance. However, only
short-run effects of Chinese income and the real bilateral exchange rate last into the long run since these two
variables carry coefficient estimates that are significant in Panel B.7 Are these estimates meaningful? The answer
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is in the affirmative by the F test which is highly significant, supporting cointegration. Since in some cases
the F statistic could be insignificant, we also report an alternative test. Under this alternative test, we use the
normalized long-run estimates and long-run model (1) and generate the error term, called the error-correction
term, denoted by ECM. We then replace the linear combination of the lagged level variables with ECMt-1 and
estimate the new specification at the same optimum lags as before. A significantly negative coefficient estimate
of ECMt-1 will support cointegration. Banerjee, Dolado, and Mestre (1998) who proposed this test within the
Engle-Granger cointegration method demonstrated that the t-statistic that is used to judge the significance of
ECMt-1 has a non-standard distribution for which they tabulated new critical values. Pesaran, Shin, and Smith
(2001) extended the same concept to ARDL model and like their F test, they tabulated an upper and a lower
bound critical values that are used here and reported in the notes to Table 1. Clearly, cointegration is also
supported by this test in this model.
We have also reported several additional diagnostic statistics. Following the literature, we rely upon the
Lagrange Multiplier (LM) test to identify models in which the residuals suffer from serial correlation. This
statistic is distributed as χ2 with four degrees of freedom and is significant at the 10 % level but not at the
5 % level. Therefore, there is some autocorrelation issue in this linear model. However, this optimum model
is correctly specified since the RESET specification test is insignificant. This test is also distributed as χ2 but
with only one degree of freedom. Furthermore, we have applied the CUSUM (denoted by CS) and CUSUMSQ
(denoted by CS2 ) to establish the stability of all coefficient estimates. These estimates seem to be stable in this
model, which we have indicated by “S”. Unstable estimates are identified by “US”.
Now that we have established that exchange rate changes affect the Singapore-China trade balance in the
short run and long run, are these affects symmetric or asymmetric? This is answered by moving to estimates
of the nonlinear model. First, there is clear evidence of short run adjustment asymmetry since ΔPOS takes one
lag whereas, ΔNEG takes five lags. Second, there is evidence of short-run asymmetric effects since the size and
the sign of the coefficient estimates are absolutely different. Third, sum of the short-sun coefficient estimates

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of ΔPOS is significantly different than the same sum associated with ΔNEG variable, supporting short-run
cumulative or impact asymmetry. This is indicated by the Wald statistic, which is reported in Panel C as Wald-S.
Do short-run effects translate into the long run in this nonlinear model? The answer is in the affirmative by the
estimates in Panel B. In the nonlinear model, unlike the linear model, Singapore income carries its expected
positive and significant coefficient, implying that as Singapore grows, she imports more from China.8 Like the
linear model, Chinese income also carries its expected negative and significant coefficient. The POS and NEG
variables both carry significant coefficients that are negative, just like the linear model. However, since the two
coefficients are not statistically different, the long-run asymmetry effects is rejected by the Wald test that is
reported as insignificant Wald-L. All long-run estimates are valid since cointegration is supported by both the
F and ECMt-1 tests.
Based on the above analysis, we can now summarize the results for all Singapore’s partners. Concentrating
on the role of the real exchange rate, from the linear model, we gather that it carries at least one short-run
significant coefficient in all of the models except those that belong to Malaysia, Korea, and the U.K. However,
when we consider the short-run estimates from the nonlinear models, clearly introducing nonlinearity helps the
case of Malaysia in which at least either ΔPOS or ΔNEG variable carries a significant coefficient. Furthermore,
there is support for short-run adjustment asymmetry in the bilateral models that belong to Singapore and
China, Hong Kong, Indonesia, Japan, the Philippines, Thailand and the U.S. In these models ΔPOS and ΔNEG
take different lag orders. By these observations, we also note the short-run asymmetric effects of exchange
rate changes since almost all estimates attached to ΔPOS are different than those attached to ΔNEG. But, are
these short-run asymmetric effects significantly different? To this end, we restrict ourselves for testing short-run
cumulative or impact asymmetry. The results of Wald-S in Panel C reveals that only in the cases of China,
Indonesia, and the Philippines the Wald statistic is significant, supporting the impact asymmetry effects of
exchange rate changes on Singapore’s trade balance with these partners. Do these short-run asymmetry effects
translate into the long run?
From Panel B and the long-run coefficient estimates, we gather that in the linear models, the real exchange
rate carries a significant coefficient in six models that belong to Australia, China, Hong Kong, Indonesia, Thai-
land and the U.S. and only in the cases of Australia, and the U.S., are the estimated coefficient is positive,
supporting the notion that a depreciation of the Singapore dollar will improve her trade balance with these
two countries only and an appreciation will hurt them due to the symmetry assumption in the linear model.
However, when we move to the nonlinear models, there are now seven models in which at least either POS
or NEG or both carry significant coefficients, supporting the nonlinear adjustment of the exchange rate. These
models are those that belong to Australia, China, Hong Kong, Indonesia, Japan, Malaysia, and the U.S. The
asymmetry effects in these countries seem to be country specific. For example, in the results for Australia, the
same positive and significant coefficient of the real exchange rate in the linear model is also present in the non-
linear model for both POS and NEG variables and the size of the coefficient estimates are almost the same. This
is confirmed by the Wald-L which is insignificant. The same is true for the results for China and Hong Kong.
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In the bilateral linear model with Japan, the real exchange rate carries an insignificant coefficient. If we were
to rely upon old literature, we would have stopped the exercise here and concluded that the real bilateral ex-
change rate plays no role in the trade between Singapore and Japan. However, when we separate depreciations
from appreciations and shift to the nonlinear model, we gather that at least the POS variable carries a signifi-
cantly negative coefficient, implying that an appreciation of the Singapore dollar against the yen, in real terms,
will improve Singapore trade balance with Japan. Again, this could be due to the fact that Japanese demand for
Singapore’s exports is inelastic. The same is true for the case of Malaysia, the second largest trading partner of
Singapore. In the results, with the third largest partner, the United States, although the real bilateral exchange
rate is significant in the linear model, the nonlinear model reveals that while the appreciation of Singapore’s
dollar could hurt her trade balance with the U.S., depreciation will have no effect.
The long-run asymmetry effects and long-run coefficient estimates of income variables seem to be valid due
to the fact that cointegration is supported by either the F or ECMt-1 tests. We do not see too many significant LM
or RESET statistics, supporting autocorrelation free residuals and correctly specified models in most instances.
Furthermore, the short-run and long-run estimates seem to be stable in most models as indicated by the CUSUM
and CUSUMSQ test results.

4 Conclusion and Summary

The traditional approach of assessing the impact of a devaluation or a depreciation of a country’s currency on
its trade balance was based on estimating the well-known Marshall-Lerner condition.9 The condition is not only
an indirect method, but also is a long-run condition. Advances in theory, empirics, and experiences by many
countries prove that the short-run effects of exchange rate changes on the trade balance could be different.

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Indeed, the J-curve theory asserts that due to adjustment lags, trade balance could deteriorate in the short run
and improve in the long run. New advances in modelling and methods today provide tools that are aimed
at assessing the J-curve hypothesis. From the literature we gather that while some have used aggregate trade
flows between one country and the rest of the world, some have used aggregate trade flows at the bilateral level
between two countries. Finally, some have disaggregated the bilateral trade flows between the two partners and
have employed trade flows at the commodity level.
No matter what level of aggregation, all of the studies of the J-curve literature have one common assumption,
that is, if depreciation improves the trade balance, appreciation should hurt it. This is commonly referred to
as the symmetry assumption. There is now a new direction introduced by Bahmani-Oskooee and Fariditavana
(2015, 2016) that questions the symmetry assumption and argues for asymmetry assumption. As they argue,
not only the traders’ reaction could be different to currency depreciation as compared to appreciation, but the
same adjustment lags that are the source of the J-curve effect, could also be the source of asymmetric effects,
since production of exportable goods could react differently than those of importable goods. These goods are
produced in two different countries that are subject to different rules, regulations, and trade environments.
Bahmani-Oskooee and Fariditavana (2016) who introduced the notion of asymmetry analysis associated
with the J-curve concept, considered trade flows between the U.S. and six largest trading partners, similar to
Rose and Yellen (1989) country pairs. In this paper, we extend the literature on asymmetric effects of exchange
rate changes on the trade balance by considering bilateral trade between Singapore and 11 of her largest trading
partners. Like the previous literature, we first estimate 11 linear models, in which the symmetry assumption
is relevant. We then move to asymmetry analysis, which requires using nonlinear models, and we estimate 11
nonlinear models. Once the estimates are compared, we arrive at the following summary.
First, we find support for the short-run J-curve effect originally tested by Bahmani-Oskooee (1985, 1989) ,
i. e., initial deterioration in the trade balance followed by an improvement (both in the short run) in the linear
models where Singapore’s trading partners are Hong Kong, Japan, Thailand, and the U.S. Second, the long-run
J-curve effect, i. e., short-run deterioration combined with long-run improvement due to Rose and Yellen (1989)
is supported only in the bilateral linear model, between Singapore and the U.S. only. Third, when appreciations
are separated from depreciations and we consider the results from the nonlinear models, Bahmani-Oskooee and
Fariditavana’s (2016) short-run definition that is based only on currency depreciation (i. e., ΔNEG) variable is
supported in the models between Singapore and China and the U.S. In sum, putting the results from the linear
and nonlinear models together, we find support for the J-curve effect in the trade between Singapore and five
partners, i. e., Hong Kong, Japan, Thailand, and the U.S. and China. The two largest partners, China and the
U.S. are among the list and clearly, estimating the nonlinear model adds Singapore’s largest partner, China, to
the list.
Considering the estimates from the nonlinear models, we also find short-run asymmetric effects in all 11
models, short-run adjustment asymmetry in seven models, short-run cumulative or impact asymmetry effects
in three models, and long-run asymmetry effects in two models. In most cases, Singapore’s largest partner,
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China, is on the list. However, the asymmetric effects seem to be partner specific. In the trade with the two
largest partners, the real depreciation of the Singapore dollar seems to have adverse effects on her trade balance
with both partners which could be due to an inelastic demand by Singapore for goods imported from China and
Malaysia. On the other hand, while depreciations do not seem to have significant long-run effects on Singapore
trade balance with the third largest partner, the U.S., appreciation of the Singapore dollar will hurt its trade
balance with the U.S. These three partners engage in almost 50 % of trade with Singapore.

Appendix. Data definition and sources

Quarterly data over the period 1975QI-2015QII are used to carry out the empirical analysis. They come from
the following sources:

a. Direction of Trade Statistics by the IMF.

b. International Financial statistics (IFS)

c. Monetary Authority of Singapore (Central Bank of Singapore)

Due to the unavailability of data on some variables, however, the period was restricted to 2003–2015 for In-
donesia, 1981–2015 for the Philippines, 1993–2015 for Thailand, 1981–2015 for Hong Kong, and 1996–2015 for
China.

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Variables

TBi = Singapore trade balance with partner i is defined as Singapore’s imports from partner i over her exports
to partner i. The data come from source a.
YSG = Measure of Singapore’s income. It is proxied by index of real GDP. The data come from source b.
Yi = Trading partner i’s income. This is also proxied by the index of real GDP in country i and the data come
from source b.
REXi = The real bilateral exchange rate of the Singapore dollar against the currency of partner i. It is defined
as REXi = (PSG * NEXi /Pi ) where NEXi is the nominal exchange rate defined as number of units of partner i’s
currency per Singapore dollar, PSG is the price level in Singapore. (measured by CPI) and Pi is the price level
in country i (also measured by CPI). Thus, a decline in REX reflects a real depreciation of the Singapore dollar.
All the nominal exchange rates and price levels data come from source b.

Singapore’s Trade Shares with Her Trading Partners in the Last Quarter of 2015 (Source a)

Trading Partner Exports Imports Trade Share (%)

Australia 2,828,248,252.91 707,746,859.76 2.3%
China 12,509,798,749.31 11,007,951,521.13 15.1 %
Hong Kong 9,921,233,717.03 762,258,721.41 6.8%
Indonesia 6,515,810,115.26 3,358,497,039.99 6.3%
Japan 3,988,977,708.47 4,571,484,171.38 5.5 %
Malaysia 9,029,167,629.95 7,907,313,270.98 10.9 %
Philippines 1,686,891,208.33 1,158,149,357.89 1.8%
South Korea 3,277,919,772.55 4,324,449,285.77 4.9 %
Thailand 3,358,346,598.40 1,773,515,734.28 3.3 %
United Kingdom 966,455,372.44 1,464,436,873.18 1.6 %
United States 5,906,540,026.70 8,252,477,901.30 9.1 %
World 84,637,867,323.75 71,442,649,626.07 156,080,516,949.82

Trade share is defined as the sum of the exports and imports of each partner as a % of the sum of Singapore’s total exports and imports.

Notes
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1
The J-curve effect claims that after a devaluation or depreciation, the trade balance deteriorates first and improves later (Magee 1973;
Bahmani-Oskooee 1985).
2
Delatte and Lopez-Villavicencio (2012) is another study which shows the pass-through of exchange rate to domestic prices are in an
asymmetric manner.
3
This section closely follows Bahmani-Oskooee and Fariditavana (2016) who used such methods to estimate the bilateral trade balances
between the U.S. and six of her major trading partners.
4
Defining the trade balance as the ratio of imports over exports or vice versa, allows us to specify the model in log-linear form. Further-
more, the ratio is a unit free measure (Bahmani-Oskooee 1991).
5
This argument is based on the dependency between POS and NEG variables. See Shin, Yu, and Greenwood-Nimmo (2014), 291.
6
For some other application of these methods see Apergis and Miller (2006), Halicioglu (2007), Wimanda (2014), Verheyen (2013),
Bahmani-Oskooee, Halicioglu, and Hegerty (2016), Hajilee and Al-Nasser (2014), McFarlane, Das, and Chowdhury (2014), Gregoriou,
Healy, and Savvides (2014), Gogas and Pragidis (2015), Durmaz (2015), Baghestani and Kherfi (2015), Al-Shayeb and Hatemi-J (2016), Lima
et al. (2016), Gregoriou (2017), Arize, Malindretos, and Igwe (2017), Nusair (2017), and Aftab et al. (2017) .
7
Chinese income carries its expected negative sign, implying that as China grows, Singapore exports more to China. However, the
real exchange rate carries a significantly negative coefficient, implying that as the Singapore dollar depreciates (REX increases), her trade
balance deteriorates. This could be the case if Singapore’s import demand for Chinese goods is inelastic.
8
In some models, Singapore’s income carries a significantly negative coefficient, implying that as Singapore grows, she imports less.
This could be due to the increase in the production of import substitute goods in Singapore (Bahmani-Oskooee 1986).
9
For a review article related to the Marshall-Lerner condition see Bahmani-Oskooee, Harvey, and Hegerty (2013) .

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