In testing the short-run effects of currency depreciation on the trade balance, rather than engaging in regression analysis, part of the literature basically looks at the correlation coefficients between past and future values of the trade balance and the current exchange rate. It is postulated...

It has been proved theoretically that correlation coefficients between future values of the trade balance and current exchange rate is positive where as those correlation coefficients between past values of the trade balance and the current exchange rate is negative, hence the S-Curve pattern....

Because consumer prices and trade quantities tend to exhibit stronger rigidities than do nominal exchange rates, trade balances usually respond to currency appreciations and depreciations only after a time lag. This dynamic adjustment – depicted as correlations between deviations in a...