Across the world, efforts by countries to gain international competitiveness and boost export levels has generated renewed interest on the response of trade balances to exchange rate devaluations or depreciations. The trade literature posits that the existence of adjustment lags delays improvements in a country’s trade balance following a currency devaluation or depreciation. Instead, such currency devaluations or depreciations tend to worsen trade balance in the short-run before realization of lags cause an improvement in the long-run. The different patterns of short and long-run responses of trade balance to currency devaluation or depreciation describes the J-curve hypothesis.
by 