The J-Curve: Evidence from Fiji

This article provides new evidence on both long-run and short-run determinants of trade balance for Fiji and investigates evidence of J-curve adjustment behaviour in the aftermath of a devaluation. We adopt the partial reduced form model of Rose and Yellen (1989) which models the real trade balance directly as a function of the real exchange rate and real domestic and foreign incomes. Cointegration analysis is based on the recently developed Pesaran and Shin (1998) autoregressive distributed lag approach - shown to provide robust results in finite samples - not previously used in the balance-of-trade literature. The long-run elasticities are also estimated using the dynamic ordinary least squares approach of Stock and Watson (1993) and the Fully Modified Ordinary Least Squares (FM-OLS) of Phillips and Hansen (1990). The major results show that there is a long-run relationship between trade balance and its determinants. There is evidence of the J-curve pattern; growth in domestic income affects Fiji's trade balance adversely while foreign income improves it.