Managing Country Risk in an Age of Globalization by Michel Henry Bouchet & Charles A. Fishkin & Amaury Goguel

Author:Michel Henry Bouchet & Charles A. Fishkin & Amaury Goguel
Language: eng
Format: epub
ISBN: 9783319897523
Publisher: Springer International Publishing

Supply elasticities

Demand elasticities

Δ + Domestic production

Δ − Domestic consumption

Δ + Foreign demand

Δ + Import prices

Δ + Foreign demand

Δ − Export prices

The relative dependency of domestic production’s foreign inputs might generate a so-called J-curve in the trajectory of a trade deficit reduction. The exchange rate variation first will worsen the deficit given that the price response of imports will be quicker and larger than the enhanced competitiveness of exports whose inertia and time lag depend on many factors, often beyond the country’s control. Figure 8.1 illustrates the worsening trajectory of a trade deficit after a one-off move in the exchange rate.

Fig. 8.1The day after a devaluation : “J-curve” and time path of the trade deficit adjustment

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