Asymmetric effects of exchange rate and income changes on maritime freight flows between Japan and the US

Past studies have generally used the perfect reversibility of exchange rate and income changes on trade flows, assuming that the impacts of a positive change in exchange rate (income) are of the same magnitude and move in the opposite direction of the effects of a negative change. To date, no empirical evidence has been found to support the potential asymmetric effects of exchange rate and income on maritime trade flows. The objective of this paper is to explore the long-run exchange rate and income asymmetries in bilateral maritime freight flows between Japan and the US. We use both aggregate and disaggregate industry data from January 2003 to July 2016 in a nonlinear autoregressive distributed lag (ARDL) framework. From the nonlinear ARDL models, the exchange rate is found to be an important factor affecting the maritime freight flows in exporting and importing industries in Japan. This conclusion differs from the findings from the linear ARDL models in which exchange rate is insignificant in the majority of cases. More importantly, we find empirical evidence of the asymmetric effects of exchange rate and income on the bilateral maritime freight flows at both aggregate and disaggregate levels. This suggests that using the perfectly reversible (linear) elasticities of demand could mislead the effects of exchange rate and income changes and result in biased estimation. At the disaggregate level, the asymmetric effects of exchange rate and income changes tend to vary across industries.