The J-curve in the emerging economies of Eastern Europe

Abstract

Devaluation or depreciation of a currency worsens the trade balance before improving it, resulting in a J-curve pattern. A new definition of the hypothesis implies a short-run deterioration combined with the long-run improvement. By using monthly data over the January 1990–June 2005 period from 11 east European emerging economies, most of which are the new European Union (EU) members or the EU candidate countries, this article uses the bounds testing approach to cointegration and error-correction modelling and finds empirical support for the J-curve hypothesis in three countries of Bulgaria, Croatia and Russia. The results have important implications for policymakers involved in economics in terms of using exchange rate policy as a policy device to achieve real convergence toward EU standards.