Abstract
This paper is testing empirically the
effect of a devaluation of a currency on the trade account of the country, the
J-curve effect, by using the trade between the U.S. and seven countries
(Euro-zone, Mexico, Canada, United Kingdom, Switzerland, Japan, and Australia).
A devaluation (depreciation) of the U.S. dollar is increasing the spot exchange
rate ($/FC) and increases the price of imports and reduces the price of
exports. Then, imports are falling and exports are increasing and the trade
account is improved in the long-run. In the short-run, the trade account is
deteriorated because the international trade transactions are pre-arranged and
the invoices are in foreign currency, so it cannot be adjusted. This J-curve
hypothesis is tested by using a regression equation and a VAR model, where the
volatility of the real exchange rate (TOT) is specified with a GARCH-M process.
Also, different stationary tests are taking place, like, unit root and
cointegration ones. The empirical results mostly are supporting the J-curve
effect.
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