J Curve Effect

The “J Curve effect” shows the possible time lags between a falling currency and an improved trade balance. Initially, a country’s external trade deficit (X-M) might increase following a currency depreciation. The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports & imports. The J Curve effect says a trade deficit can worsen after depreciation, but improve if the Marshall-Lerner condition holds.

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