46 Baba and Yazici, Journal of International and Global Economic Studies, June 2016, 9(1), 46-74 THE J-CURVE HYPOTHESIS: AN INVESTIGATION OF BILATERAL TRADE BETWEEN NIGERIA AND EUROPEAN UNION Abubakar Kabir Baba and Mehmet Yazici* Kano State Ministry of Finance and Economic Development, Kano, Nigeria Department of Economics, Çankaya University, Ankara, Turkey Abstract This study investigates bilateral J-curve in the short-run and the Marshall-Lerner (ML) condition in the long-run between Nigeria and European Union 15 in particular and between Nigeria and each of the EU15 countries. Covering 1999:Q1–2012:Q4 period and employing Autoregressive Distributed Lag approach, this study found no evidence of the J- curve and that the Marshall–Lerner condition is not satisfied in bilateral case between Nigeria and EU15, but found evidence of the J-curve in bilateral cases between Nigeria and each of Austria, Denmark, Germany and Italy in the short-run, while in the long-run, the Marshall- Lerner condition exists only in the case of Luxemburg. The study concludes that to improve Nigeria’s trade balance, the naira is to be appreciated against the currencies of EU15 countries. Keywords: J-curve, Marshall-Lerner (ML) condition, Trade balance, Exchange rate, Nigeria, European Union JEL Classification: F14, F31 ___________________________________________________________________________ 1. Introduction The earlier literature on the relationship between terms of trade and trade balance in international economics concentrated on the investigation of Marshall-Lerner (ML) condition- named after the two economists who discovered it independently, Alfred Marshall (1842-1924) and Abba Lerner (1903-1982), which postulates that for a country to benefit from currency devaluation, the absolute sum of elasticities of import demand and export demand must be greater than unitary. While this condition is a long-run phenomenon, the more recent literature explains the short-run post devaluation behaviour of the relationship. This started with the work of Maggi (1973) who first explained the short-run post-devaluation behaviour of the U.S. trade balance. He observed that the U.S. trade balance continued to deteriorate despite the authorities’ effort to control it through further devaluation in the short-run. He then explained the phenomenon and highlighted that the consequences ware resulted due to the lags of currency contracts, pass-through, and quantity adjustments transitions. He showed that these dynamics of the response of balance of trade to currency depreciation trace out a j-shaped time path, which he eventually coined as ‘J-curve’. In the last four decades, three consequent groups of studies on the J-curve phenomenon emerged. The first group employed aggregate data by investigating the relationship between a reporting country and the rest of world. The second group used disaggregated bilateral data between a reporting country and its major trading partner(s), while the more recent studies disaggregated the data further to analyse the bilateral trade data at commodity/industry level. To date in Nigeria, the literature on J-curve phenomenon attracted little scholarly attention and all the studies to the best of our knowledge used aggregate data and ended with mixed