J CURVE

J Curve Effect

Executive Summary

The J-curve is a term coined in political economy to explain the time course of the effects of monetary policy in respect of the balance of payments. The analysis tool is also known as J effect. In a nutshell, the J-curve analyzes the effect of a devaluation of the exchange rate on the balance of payments to show the order in which they occur the positive and negative effects in the short and medium term. Following the devaluation shows a worsening of the balance of payments in the short term and in the medium-term improvement. This is due to the difference in the price elasticity of demand in the short and long term.

In the short term, the markets are very inelastic to price changes and firstly it has quantitatively consistent imports that are more expensive. The exports are hit due to the unfavorable exchange rate. The trade balance deteriorates so quickly in such situations. By the devaluation of the currency of the country concerned exported more long term, as the products are cheaper for foreign buyers. Conversely become more expensive for domestic consumers, foreign goods. In the long run, exports rise and imports fall. The time course of this reaction to the devaluation of the currency, however, depends greatly on how quickly and how elastic the various markets and industry respond n to the individual price changes. However, to understand the meaning of the graph is useful to distinguish the effects of the devaluation of the exchange rate in the short and medium-long term.

J Curve Effect

Definition

The J-curve or the J-curve effect is a theoretical economic hypothesis that over time the impact of a real depreciation of the domestic currency on the trade balance of a country in an open economy is illustrated. In the short term, the effect on the current account balance is negative (import value> export value), only over time causes a real depreciation of the domestic currency to the desired improvement of the current account. The curve is aptly named because of its resemblance to the letter J.

Normal Reaction of the Current Account

A depreciation of the domestic currency leads ceteris paribus to an improvement of the current account:

By a devaluation of the domestic currency increases the real exchange rate (in the quoted price ).

Domestic goods and services are relatively cheaper.

The aggregate demand for domestic goods and services rises.

Domestic goods and services are in demand abroad increased.

It more is exported.

Imports are reduced because foreign nationals substitute products and services by domestic products and services.

The external balance is increased, the current account improves.

A contrast enhancement leads to a deterioration of the current account. This reaction of the current account is called normal reaction of the current account. Here it is assumed that the Marshall-Lerner condition is met, and a sufficiently large elasticity of demand is given.

Lags of the Exchange Rate

The above improvement in the current account following a devaluation of the domestic currency can only be obtained in a static-comparative ...