Authors

• Hossein Mohammadi ¹
• Aida Ariabod ²

¹ Ferdosi Mashhad University

² MA Student, Ferdosi Mashhad University

Abstract

Exchange regimes at the international level, over many years have several ups and downs and they affect the economic structure of countries. Different exchange regimes show how to determine the exchange rate in the economy. The impact of exchange rate regimes on trade is one of the important issues that have been in many applied studies. Devaluation (i.e. increase in Real exchange rate), will cause examined the current account status to worsen and then after a short period, the situation may reverse and the current account state will improve. This change in the current account is called J-shaped curve. For current account in this paper, using a vector error correction model VECM and impulse response functions, Iran and South Korea's trade balance dynamics during the 1996 -2008 period was reviewed using quarterly data and J-shaped curve for current account tested. The results of tests did not confirm the hypothesis of the existence of a J-shaped curve between the trade balance and Real exchange rate over the studied period. The reaction of trade balance to an increase in exchange rate in the long term was found as negative and significant. In connection with the positive impact real income of South Korea on Iran's trade balance, results indicate this coefficient is significant. Also the reaction of trade balance with respect to Iran's real income is negative and significant.

Keywords

• J-shaped curve
• Iran's trade balance
• real exchange rate
• error correction model
• impulse response function