Financial and insurance services trade and role of the exchange rate: An asymmetric analysis

Almost all studies in the trade literature have concentrated on the trade in goods. Recently, a study considered trade in two service industries (insurance and financial) between the U.S. and six of her trading partners and concluded that exchange rate changes have no significant effects on the U.S. service trade. Could such a finding be due to assuming the effects to be symmetric? We provide an affirmative answer by arguing and demonstrating that the effects of exchange rate on service trade could be asymmetric, which requires using nonlinear models. Once we estimate the nonlinear models, indeed we show that dollar depreciation and dollar appreciation have significant short-run and long-run effects on the U.S. inpayments from and outpayments to most of its partners in the two service industries. We attribute our new discoveries to the nonlinear adjustment of the real exchange rate. (C) 2021 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.