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Another View Of The J-Curve

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  • CARDI, OLIVIER

Abstract

Most of empirical studies find evidence of the J-Curve, but recent results cast doubt over its standard explanation. By addressing the countercyclicality of the current account and its dynamic link with the terms of trade, this paper revisits the J-Curve phenomenon using a two-good dynamic optimizing small open economy model allowing for a habit-forming behavior and capital adjustment costs. While the nonmonotonic adjustment of the current account relies on the degree of habit persistence in consumption and the magnitude of capital installation costs after an unanticipated terms of trade worsening, we show that the sizes of the long-run intertemporal elasticity of substitution under time nonseparable preferences and the import content of real consumption and investment matter as well after a temporary perturbation. As a consequence of an intertemporal speculation effect and an inertia effect, the small country reaches the long-term equilibrium with higher foreign assets after a short-lived terms of trade worsening.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): 02 (April)
Pages: 153-174

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Handle: RePEc:cup:macdyn:v:11:y:2007:i:02:p:153-174_06

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Cited by:
  1. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
  2. Marques, Luis B, 2007. "The Costs to Consumers of a Depreciated Conversion Rate to the Euro," MPRA Paper 5723, University Library of Munich, Germany.

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