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Describe the J curve phenomenon


Describe the J curve phenomenon



In a flexible exchange rate regime, market forces correct the deficit in the balance of trade but it takes time to return to the initial equilibrium. The short run elasticity of demand for imports and exports may be very small compared to the long run elasticity of demand of exports and imports. This difference leads to the J curve phenomenon. This is the short run worsening of the balance of payment resulting to depreciation in the exchange rates. In a flexible exchange rate regime, the balance of payment deficit cannot be eliminated in the short run. However in the long run, the deficit is eliminated.

Dana05 answered the question on August 14, 2019 at 07:36

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