Investigating the Commercial Relations between Iran and Its Other Major Trading Partner Focusing on J-Curve Test

The appearance of J-curve phenomenon to the issues of international economics in 1970s attracted the attention of researchers to short-run dynamics of trade balance response to the exchange rate changes. While, before 1970s; the studies investigated the reaction of trade balance statically. J-curve hypothesis violates the positive effectiveness of currency depreciation on the trade balance in short-run. In this paper, we attempt to combine short-run dynamics of trade balance to its long-run changes by using appropriate method to test J-curve between Iran and other major trading partners in Asia. Bound test method in co-integration and Error Correction Model are used during 1991Q2-2007Q3. Outcomes of our study suggest that there is J-curve effect in bilateral trade balance between Iran and its two other partners, China and Japan. Also, the depreciation of Rial versus other currencies has a favorite effect on bilateral trade balance in long-run.