Many researches have been conducted on the influence that the increasing exchange rate has on the trade balance deficit in developing countries. This paper contributes to the literature by investigating and testing whether the J-curve phenomenon exists in Jamaica.
Meade (1988) stated that, because of the exchange rate rapid decline so much since early 1985 in the US and because the monthly trade statistics has been examined so thoroughly for any sign of a turnaround in the nominal trade balance, the J-curve phenomenon has received much attention. The statistics often implies that the negative effect of depreciation is reflected in the J-curve as the continuation of nominal trade deficit. Between early 1985 and 1988, the exchange value of US dollar in terms of currencies of other countries, registered a sizeable depreciation. The deficits recorded in the trade account were mirrored in the current account deficit. Meade depicted the significance of the exchange rate to the trade account as well as current account through the use of the J-curve highlighting that the phenomenon is used as a long-term goal to curb the deficits, however in the short-run, depreciation will increase the nominal deficits accumulated by a country.
More recently, Bahamani-Oskooee and Ratha (2007) gave a synopsis of the J-curve phenomenon, the expectations and effects that will occur under this phenomenon. They stated that due to lag structure, currency devaluation or depreciation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter J, hence the J-Curve phenomenon. This phenomenon tests the short-run dynamics of the post-devaluation or depreciation time-path of the trade balance. While exchange rate will adjust instantaneously, there is a lag in the time consumers and producers take to adjust to changes in the relative prices. Therefore, the short-run deterioration is consistent with a long-run improvement in the trade balance. Empirical studies on this phenomenon have proved to be mixed or inconclusive.
According to Ardnt and Hill (2000), the sharp decline in Thailand’s exports in 1996 stemmed from the three largest export destinations: The United States, Japan and Singapore. The loss in competitiveness of the exports was due to the appreciating real exchange rate, which had begun in 1988. Subsequently, there was a depreciation of Thailand’s dollar (baht) to the US Dollar. It was not the only leading factor to affect the depreciation of the dollar, Ardnt and Hill took into consideration the recession that was facing Japan at that time which increased the consumption tax in Japan as well as lessen the intake of imports within that time period. This shock in the economy also affected Singapore, which also reduced the import intake, thus decreasing the trade account balance and a large current account deficit.
In the research written by Blanchard, Giavazzi, and Sa (2005), they highlighted that there are two main...