In: Economics
The J - curve explains that depreciation lowers the domestic
interest rate and
hence will lead to an increase in domestic consumption and
investment. Do you
agree? Explain.
The given statement is not true.This is because J-curve effect shows that the nation's trade balance first deteriorates before improving as a result of depreciation or devaluation.
This is due to the tendency of the domestic-currency price of imports to rise faster than export prices soon after the devaluation or depriciation, with quantities initially not changing very much. Over time, the quantity of exports rises and the quantity of imports fall, and export prices catch up with the import prices, so that the initial deterioration in the nation's trade balance is halted and then reversed.