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Economics explained
Category:
Exchange rates
Reverse J-curve
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A higher exchange rate may increase a current account deficit or reduce a current account surplus but the outcome will depend mainly on the price elasticities of demand for exports and imports.
The Marshall-Lerner condition and the J-curve work in reverse.
So a current account surplus will only be reduced if the sum of the price elasticities of demand for exports and imports is greater than 1. A rise in the exchange rate may increase a current account surplus in the short run before reducing it in the longer run.
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