An empirical investigation of the J-curve phenomenon, 1985-1988

The J-curve phenomenon predicts that, following a currency depreciation, an initial deterioration in the balance of trade will occur before an improvement is realized. Past work has assumed that the volume effect of exchange rate changes on the trade balance is weak or absent during the first nine to twelve months following an exchange rate depreciation, and the terms of trade effect is responsible for the initial portion of the J-curve. The dissertation begins by examining the terms of trade effect of an exchange rate change on the value of the U.S. trade balance following the 1985 dollar depreciation. A study of bilateral pass-through follows to determine the incidence of price discrimination by foreign suppliers. The dissertation concludes by measuring the income and price elasticities of U.S. exports and imports at the aggregate and bilateral level. Results support a series of J-curves during the 1985-87 dollar depreciation and a lower rate of import pass-through. Japanese and German exporters were found to price discriminate in the U.S. market vis-a-vis the rest of the world