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Another View of the J-Curve

Olivier Cardi

No 2005029, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

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.

Keywords: Current account; Habit Formation; Temporary Shock; J-Curve (search for similar items in EconPapers)
JEL-codes: E21 E22 F32 F41 (search for similar items in EconPapers)
Pages: 37
Date: 2005-06-01
New Economics Papers: this item is included in nep-ifn and nep-upt
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Journal Article: ANOTHER VIEW OF THE J-CURVE (2007) Downloads
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