If a country with a balance of payments problem, that is, insufficient foreign exchange receipts to meet foreign exchange requirements, seeks to remedy the situation by currency devaluation, things may get worse before they get better. This so-called J-curve effect occurs if the domestic-currency prices of exports are sticky, whether because they are cost based or subject to longer term contracts, so that export prices in foreign currency fall. Until favourable volume effects outweigh the unfavourable price effect, the balance of payments deteriorates. Such a J-curve effect should be distinguished both from the longer term erosion of the beneficial effects of devaluation as domestic costs and the prices of non-tradables rise and from the apparent J-curve due to the 'valuation effect'. If the current account is in deficit before devaluation, as will usually be the case, devaluation will widen the deficit in domestic currency because domestic-currency imports rise by a larger amount than exports. This is a pure valuation effect, of no significance for external balance. But it is liable to lead to unduly pessimistic judgements about the effectiveness of devaluation. In Australia during 1985-86, the current account deficit increased by $A3.5 billion, despite substantial depreciation of the $A. The main reason was a sharp deterioration in the terms of trade which is estimated to have worsened the current account by $A4.25 billion. Most of this was exogenous, though J-curve effects may have made a contribution. In addition, the valuation effect contributed a further, illusory, widening of the deficit, valued in domestic currency, by over $A1 billion. To avoid misleading inferences from the valuation effect, it is suggested that the balance of payments should, if possible, be presented in foreign currency. Copyright 1987 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 20 (1987)
Issue (Month): 1 ()
|Contact details of provider:|| Postal: The University of Melbourne, Victoria 3010|
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0004-9018
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0004-9018|
When requesting a correction, please mention this item's handle: RePEc:bla:ausecr:v:20:y:1987:i:1:p:9-19. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.