DEVALUATION AND THE J-CURVE SOME EVIDENCE FROM LDCs Mohsen Bahmani The J-Curve term is used to describe the movement over time of the trade balance: it may deteriorate at first and improvement may come later time Trade Balance One might wonder why the US trade balance deteriorated so much in 1972 despite the devaluation of the dollar in 1971

The J curve´s Phenomenon has been explained by several factors Krueger (1983) currency contract period at the time that the exchange rate occurs, goods already in transit and under contract have been purchased and the completion of those transactions dominates the short term change in trade balance Magee (1973) pass through period The rapid increase in domestic demand due to devaluation may swamp any favorable effects that the devaluation might generate. Example: when a devaluation occurs the domestic currency price of imports increases but demand does not change, so imports value rise the foreign currency price of exports decreases but supply of exports does not change, so exports value fall Gandolfo (1989) quantity-adjustment period Quantities and prices can change.If the stability conditions of Laursen-Metzler model are satisfied the trade balance finally will improve. But from dynamic point of view it may happen that quantities don´t adjust as quickly as prices do so the balance of trade initially deteriorates.

The Model TB= F (Y, E/P) (+) (-) Magee(?) (+) (?) (-) E was defined inversely Units of Foreign currency/unit domestic currency