Concept and causes
The Marshall–Lerner condition says that a devaluation improves the trade balance if demand for exports and imports is elastic enough. These elasticities, however, tend to grow over time. Stephen Magee (1973) distinguished a currency-contract period, in which trade contracted before the devaluation is settled at old prices and currencies, a pass-through period, in which prices adjust to the new exchange rate, and a later stage in which quantities adjust fully. At first import volumes stay the same while their cost in domestic currency rises, so the trade balance worsens; as consumers and firms gradually switch suppliers and purchases, exports rise, imports fall and the balance improves. Junz and Rhomberg (1973) estimated that this adjustment could take several years.
The 1980s US case and hysteresis
The J-curve drew wide attention when the US trade deficit failed to shrink for some time after the dollar's sharp fall from 1985. Krugman and Baldwin (1987) analyzed the persistence of the deficit, and Krugman (1991) concluded that adjustment did eventually occur. Baldwin (1988) and Dixit (1989) showed that because foreign firms incur fixed costs to enter a market, import patterns may not return to their original state even after a temporary exchange rate swing has reversed, a phenomenon known as hysteresis. Goldberg and Knetter (1997) surveyed evidence that exporters price differently across markets and pass only part of exchange rate changes into prices.
Empirical debate and assessment
The empirical evidence for the J-curve is mixed. Bahmani-Oskooee (1985) found J-curve patterns in several developing countries, whereas Rose and Yellen (1989) found no clear J-curve in US data. Backus, Kehoe and Kydland (1994) showed that the correlation between the trade balance and the terms of trade traces an asymmetric S-curve across leads and lags. Bahmani-Oskooee and Brooks (1999) used bilateral data to reduce aggregation bias, and the review by Bahmani-Oskooee and Ratha (2004) concluded that results differ widely by country, period and method. Burstein and Gopinath (2014) emphasized that the practice of invoicing trade in dominant currencies such as the dollar shapes exchange rate pass-through. The topic is studied together with theories of exchange rate dynamics such as the overshooting model.
FAQ
- What is the J-curve effect in simple terms?
- After a currency falls, import bills rise at first and the trade balance worsens, but over time exports grow and imports shrink, so the balance improves.
- Does the J-curve always appear?
- No. Empirical results vary widely by country, period and method, and in many cases no clear J-curve is observed.
Sources reviewed: 2026-10-26
References
- Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, 1973(1), 303–325.
- Junz, H. B., & Rhomberg, R. R. (1973). Price competitiveness in export trade among industrial countries. American Economic Review, 63(2), 412–418.
- Krugman, P. R. (1991). Has the Adjustment Process Worked? Washington, DC: Institute for International Economics.
- Krugman, P. R., & Baldwin, R. E. (1987). The persistence of the U.S. trade deficit. Brookings Papers on Economic Activity, 1987(1), 1–55.
- Bahmani-Oskooee, M. (1985). Devaluation and the J-curve: Some evidence from LDCs. Review of Economics and Statistics, 67(3), 500–504.
- Rose, A. K., & Yellen, J. L. (1989). Is there a J-curve? Journal of Monetary Economics, 24(1), 53–68.
- Backus, D. K., Kehoe, P. J., & Kydland, F. E. (1994). Dynamics of the trade balance and the terms of trade: The J-curve? American Economic Review, 84(1), 84–103.
- Baldwin, R. (1988). Hysteresis in import prices: The beachhead effect. American Economic Review, 78(4), 773–785.
- Dixit, A. (1989). Hysteresis, import penetration, and exchange rate pass-through. Quarterly Journal of Economics, 104(2), 205–228.
- Bahmani-Oskooee, M., & Brooks, T. J. (1999). Bilateral J-curve between US and her trading partners. Weltwirtschaftliches Archiv, 135(1), 156–165.
- Bahmani-Oskooee, M., & Ratha, A. (2004). The J-curve: A literature review. Applied Economics, 36(13), 1377–1398.
- Goldberg, P. K., & Knetter, M. M. (1997). Goods prices and exchange rates: What have we learned? Journal of Economic Literature, 35(3), 1243–1272.
- Burstein, A., & Gopinath, G. (2014). International prices and exchange rates. In Handbook of International Economics (Vol. 4, pp. 391–451). Amsterdam: Elsevier.