Currency depreciations and the U.S.–Italian trade balance: Industry-level estimates

• This study investigates the J-Curve effect in the trade between the U.S. and Italy.
• Previous research used aggregate trade data to address the issue.
• We use trade flows of 106 industries that trade between the two countries.
• More than half of the industries are affected in the short run.
• 19 industries benefit from depreciation in the long run.

As one of the indebted Southern European countries that have put pressure on the Euro in recent months, Italy would benefit from a reduction in its external trade deficit. One channel could be through a weakening of its currency—which would only work if the Euro depreciated against the currency of an outside importer, such as the U.S. dollar. This study examines the response of the trade balances of 106 individual industries to such depreciations, using annual data and applying cointegration analysis. We find that only 19 industries register a long-run improvement, with these concentrated in miscellaneous manufactures (SITC sector 8). Two major products in the automotive industry—petroleum and road motor vehicles, show evidence of a “J-curve” effect.