J curve

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The J-curve or the J-curve effect is an economic theoretical hypothesis that describes the effects over time of a real devaluation of the domestic currency on a country's external contribution in an open economy . In the short term, the effect on the current account is negative (import value> export value); Only over time does a real devaluation of the domestic currency lead to the desired improvement in the current account. The curve takes its name from its similarity to the letter J.

Change in net exports over time with typical J-curve shape

Normal reaction of the current account

All other things being equal, a devaluation of the domestic currency leads to an improvement in the current account:

  • A devaluation of the domestic currency increases the real exchange rate (in the price quotation ).
  • Domestic goods and services are becoming relatively cheaper.
  • Overall economic demand for domestic goods and services is increasing.
  • Domestic goods and services are increasingly in demand abroad.
  • More is exported.
  • Imports decline as residents substitute domestic products and services for foreign products and services.
  • The external contribution increases, the current account improves.

An appreciation, on the other hand, leads to a deterioration in the current account. This reaction of the current account is called the normal reaction of the current account . It is assumed here that the Marshall-Lerner condition is met and that the demand elasticity is sufficiently high .

Delays in effect of an exchange rate change

The above improvement in the current account after a devaluation of the domestic currency can only be obtained in the context of a static comparative analysis. The equilibrium on the goods market before and after a change in the exchange rate is compared. The transition phase from the old to the new equilibrium is disregarded here. However, it can happen that the current account deteriorates immediately after a currency devaluation. In such a case, a positive change can only be observed after a few months. The graphical development of the current account - only getting worse before an improvement occurs - is very similar to the line of the letter J (see figure below).

Reasons for the delay

The prices and quantities of foreign trade are usually fixed months in advance. The export business is done in the domestic currency and imports in the foreign currency.

If there is a devaluation of the domestic currency, there will be no short-term changes for export transactions in the domestic currency. However, the devaluation increases the exchange rate. For one unit of domestic currency, you get fewer units of foreign currency. The imports are now relatively more expensive, which means that more domestic monetary units have to be paid for the imports specified in advance. The increase in import expenditure due to increased relative prices, also known as price effects , leads to a deterioration in the external balance and thus to a deterioration in the current account.

It can therefore be seen that a devaluation affects the price of goods (in foreign currency) in the short term, but not the export and import volumes. An adjustment of the trading quantities takes place much more slowly. Only when new export and import contracts are concluded does a volume reaction take place. Due to the rise in the exchange rate

  • Domestically manufactured goods have become cheaper for foreign buyers. The demand for domestic goods and thus also exports abroad are increasing.
  • the goods manufactured abroad have become relatively more expensive. Former domestic customers import fewer goods and instead substitute foreign goods for domestic goods.

Over time, exports rise and imports fall. Ultimately, when the Marshall-Lerner condition is met and the positive effects on the trade balance outweigh the negative, the current account improves beyond its original value.

Immediately after a currency devaluation, the current account deteriorates (point A to point B). Only when the import and export volumes have adjusted to the new exchange rate does the current account improve (point B to point C). After point C was exceeded, the current account balance improved beyond the level before the devaluation.

Empirical relevance

The J-curve effect can be demonstrated empirically, especially for foreign trade goods with a price-elastic demand. For goods whose demand does not or hardly reacts to price changes, a negative reaction in the foreign trade balance can be observed as a result of a devaluation. An example of this is crude oil, the import volume of which depends only to a relatively small extent on its price.

Since the latter goods are exceptions, Blanchard and Illing come to the following conclusion: "In general, econometric analyzes [...] allow the conclusion that a real devaluation in all OECD countries ultimately leads to an improvement in the trade balance. However, they also show that this process takes a while, generally between six months and a year ”.

Practical relevance

Practical example of dollar devaluation

The US net exports in the period between 1984 and 1991 are proof of the practical relevance of the J-curve effect.

At the beginning of the 1980s, there was a strong appreciation of the dollar in the USA and a sharply deteriorating current account. Although the dollar depreciated rapidly from 1985 to 1986, and the exchange rate deteriorated rapidly, the current account continued to deteriorate. It wasn't until 1987 that the hoped-for improvement finally came about. The figure clearly shows the similarity of the net exports over time with the letter J.

Walking stick effect

So far, only the consequences of a devaluation of the domestic currency have been considered. In the event of an appreciation, the J-curve effect can be reversed: This initially shows an improvement in the power balance and only in the course of further adjustments does it deteriorate. This reverse J-curve effect is also known as the “walking stick effect ” .

Individual evidence

  1. ^ A b Siebert, Horst (1994), Außenwirtschaft , 6th edition, Stuttgart: Gustav Fischer Verlag, pages 227-238
  2. ↑ Dieck Heuer, Gustav (1991), International Economics , 2nd edition, Munich: Oldenbourg Verlag, pp 132 et seq.
  3. ↑ Blanchard, Oliver; Illing, Gerhard (2004), Macroeconomics , 3rd edition, Munich: Pearson Studium, p. 563
  4. ↑ Statistics database of the Deutsche Bundesbank, time series WJ5009 ( Memento from October 16, 2008 in the Internet Archive ) Processing status : April 12, 2008 (accessed: April 9, 2008)
  5. ↑ AMECO database status: April 12, 2008 (accessed: April 9, 2008)

literature

  1. Blanchard, Oliver; Illing, Gerhard (2004), Macroeconomics , 3rd edition, Munich: Pearson Studium, ISBN 3827370515
  2. Dieckheuer, Gustav (1991), International Economic Relations , 2nd Edition, Munich: Oldenbourg Verlag, ISBN 3486220853
  3. Dornbusch, Rüdiger (1995), Macroeconomics , 6th edition, Munich: Oldenbourg Verlag, ISBN 3486228005
  4. Koch, Eckart (1992), International Economic Relations , Munich: Verlag Vahlen, 1992, ISBN 3800633574
  5. Krugman, Paul; Obstfeld, Maurice (2003), International Economy. Theory and Politics of Foreign Trade , 6th edition, Munich: Pearson Studium, ISBN 3827370817
  6. Siebert, Horst (1994), Außenwirtschaft , 6th edition, Stuttgart: Gustav Fischer Verlag, ISBN 3825280810
This version was added to the list of articles worth reading on May 14, 2008 .