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Title: |
The J-Curve and Short-run Exchange-Rate
Dynamics |
| Author: |
Kapur, Basant
K. |
| Author
Affiliation: |
Natl U
Singapore |
| Source: |
International Economic Journal, Autumn 1989, v. 3, no. 3, pp. 85-104 |
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Publication Date: |
Autumn 1989 |
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Abstract: |
Levin (1983) has argued that the J-curve's
conjunction with imperfect asset substitutability and rational
expectations necessarily results in overshooting of the exchange rate in
response to a real disturbance. We argue here that Levin has excluded
three important considerations from this analysis: (1) the response of
income and the interest rate to trade balance variations, (2) the effect
of exchange rate changes on the domestic price level, and (3) the
"valuation effect" of exchange rate changes on domestic holdings of the
foreign asset. We demonstrate that consideration (1) cannot, and
considerations (2) and (3) can, produce exchange rate undershooting, and
we also explore the effect of various parameter configurations on the
overall trajectory of the exchange rate. |
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