Cardi, Olivier
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 di®er 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 follow 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.
Bibliographic reference |
Cardi, Olivier. Another View of the J-Curve. ECON Working Papers ; 2005/29 (2005) |
Permanent URL |
http://hdl.handle.net/2078.1/5711 |