Do Exchange Rate Changes have Symmetric Effect on the S-Curve?

Abstract

The S-Curve hypothesis postulates that while the cross-correlation between the current exchange rate and future values of the trade balance could be positive, the same correlation between the current exchange rate and past values of the trade balance could be negative. In this paper we decompose the movement in the real effective exchange rate into partial sums of negative changes (depreciation) and positive changes (appreciation) and try to determine whether exchange rate changes have symmetric or asymmetric effects on the trade balance using the S-Curve concept. Like other areas in the literature we find that the effects are asymmetric in most countries since the S-Curve associated with depreciation does not resemble the one associated with appreciation.

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