J-curve effect

J-curve effect

the tendency for a country's BALANCE OF PAYMENTS deficit to initially worsen following a DEVALUATION of its currency before then moving into surplus. This is because the full adjustment of trade volumes to devaluation involves a time lag: there is an immediate fall in export prices and a rise in import prices so current exports earn less foreign exchange and current imports absorb more foreign exchange, thereby increasing the size of the payment deficit (the downturn of the J-curve). Over time, however, the lower export prices will increase overseas demand and export earnings will rise, while higher import prices will reduce domestic demand for imports, leading to an improvement in the balance of payments (the upturn of the J-curve).

See BALANCE OF PAYMENTS EQUILIBRIUM.

References in periodicals archive ?
Adjustment lags such as recognition lags, production lags, delivery lags, and so on can also contribute to the J-curve effect.
The first one investigated J-curve effect on devaluation.
He added that it takes a considerable amount of time for the weakening of a currency to affect exports, citing the J-curve effect.
Over time, however, it was expected that Japan's trade balance would improve in line with the J-curve effect as the weaker yen translates into lower and hence more competitive export prices of Japanese products, which in turn would lead to a rise in the volume of exports.
Although many studies on the J-curve effect have been published, few of them focus on Central and Eastern European (CEE) countries and Czechia in particular.
According to Preqin, this appeared to be a response to investors' search for opportunities that offered lower fees, improved transparency and mitigation of the J-curve effect, in which returns first drop below initial value and later show profits exceeding the initial level.
Moreover, by estimating the corresponding ECM and IRF, they demonstrated the existence of a J-curve effect. Their estimates suggest that trade balance tends to deteriorate in the first five quarters, but subsequently improves and reaches a new equilibrium value over approximately thirteen quarters.
That is the reason why our exports are also not responding to the fluctuations in exchange rate and giving us the benefits of J-curve effect.
Now, amidst the debate about economic reforms in Europe, another kind of J-curve effect is upon us.
Over the sample period 1981:1-1993:12, we find, while there is a slight dampening of the response of the trade account and its components over the NAFTA period relative to the pre-NAFTA period, a J-curve effect does not occur over both periods.
The J-curve effect of food aid on commercial food imports is clear in this graphic.
One is the so-called J-curve effect, according to which a devaluation tends to cause exports to dip first and rise later.