Real Exchange Rate and Mechanism of J and S Curves among Iran and its Major Trade Partners

Although studies about responses of trade balance to exchange rate volatilities have been considered static until 1970s, the entering of J-curve phenomenon in international economics studies lead attention to short-run dynamics response of trade balance to exchange rate volatilities. Moreover, new approach of S-curve have been introduced for investigating short-run effects of real exchange rate volatilities on trade balance in recent decades which can be useful for policy implications. Using a suitable model, this study tries to investigate the existence of J and S curves among Iran and its 16 major trade partners. In tis regards, an auto-regressive distributed lags model have been used to estimate short-run trade balance equation and J-curve and the cross-correlation have been used to investigate S-curve during 1985-2014. The results show that J and S curve phenomenon of bilateral trade balance is confirmed for almost countries. Hence policy makers should apply suitable policies for bilateral exchange rate to minimize losses caused from real exchange rate fluctuations.