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ANOTHER VIEW OF THE J-CURVE

Published online by Cambridge University Press:  19 March 2007

OLIVIER CARDI
OLIVIER CARDI
Affiliation:
ERMES, Université Paris 2 and IRES, Université Catholique de Louvain
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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.

Keywords

Current AccountHabit FormationTemporary ShockJ-Curve
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 2 , April 2007 , pp. 153 - 174
Copyright
© 2007 Cambridge University Press

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