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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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  • Cardi, Olivier, 2007. "Another View Of The J-Curve," Macroeconomic Dynamics, Cambridge University Press, vol. 11(2), pages 153-174, April.
  • Handle: RePEc:cup:macdyn:v:11:y:2007:i:02:p:153-174_06
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    Cited by:

    1. Chen Fang & Po-Sheng Lin, 2013. "Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 502-529, October.
    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.
    3. Schubert, Stefan F., 2014. "Dynamic Effects Of Oil Price Shocks And Their Impact On The Current Account," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 316-337, March.
    4. Shinsuke Ikeda, 2009. "Export‐ and Import‐Specific Habit Formation," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 709-718, November.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E21 - Macroeconomics and Monetary Economics - - 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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