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Another View of the J-Curve

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Author Info
Olivier, CARDI

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Abstract

We use a two-good dynamic optimizing small open economy model to provide a new explanation of the J-Curve phenomenon in terms of habit persistence in consumption and sluggishness in capital adjustment. The results differ markedly depending on the permanence or temporary nature of the relative price change. A short-lived terms of trade worsening may lead to a once-for-all decrease in the marginal utility of wealth and to higher steady-state values of the habitual standard of living, the real expense, and the net foreign assets through the combination of intertemporal speculation, inertia, and hysteresis effects. Investment and real expense folow non-monotonic transitional paths and current account dynamics are driven by new forces. In accordance with recent empirical results, investment is procyclical, trade balance deteriorates initially, net foreign assets adjustment exhibits a J-Curve, and the current account surplus phase is associated with a fall in real income.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005029.

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Length: 37
Date of creation: 15 Jun 2005
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Handle: RePEc:ctl:louvec:2005029

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Related research
Keywords: Current account; Habit Formation; Temporary Shock; J-Curve;

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
  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. [Downloadable!]
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