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J-Curve Effect

Definition

A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point.

What is the 'J-Curve Effect'

The J-curve effect is a type of diagram where the curve falls at the outset and eventually rises to a point higher than the starting point, suggesting the letter J. While a J-curve can apply to data in a variety of fields, such as medicine and political science, the J-curve effect is most notable in both economics and private equity funds; after a certain policy or investment is made, an initial loss is followed by a significant gain.

Explaining 'J-Curve Effect'

A J-curve demonstration is a representation of any value that initially falls before recovering and ultimately rising; it shifts in investment values and the impacts of policy changes on applicable economic metrics. The theory focuses on the premise that an internal rate of return initially drops until a level of stability is established that allows a particular business or investment to enter into a profitable state.

J-Curves in Economics

An example of the J-curve effect is seen in economics when a country's trade balance initially worsens following a devaluation or depreciation of its currency. The higher exchange rate first corresponds to more costly imports and less valuable exports, leading to a bigger initial deficit or a smaller surplus.

J-Curves in Equity Funds

In private equity funds, the J-curve effect occurs when funds experience negative returns for the first several years. This is a common experience, as the early years of the fund include capital drawdowns and an investment portfolio that has yet to mature. If the fund is well managed, it will eventually recover from its initial losses and the returns will form a J-curve. Losses in the beginning dip down below the initial value, and later returns show profits above the initial level.


Further Reading


The J-curve: evidence from East Asia
www.jstor.org [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

Industry level J-curve in TurkeyIndustry level J-curve in Turkey
www.emerald.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

Is there J-Curve effect in Africa?Is there J-Curve effect in Africa?
www.tandfonline.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

The bilateral J-curve: Turkey versus her 13 trading partnersThe bilateral J-curve: Turkey versus her 13 trading partners
www.sciencedirect.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

The J-curve: evidence from commodity trade between US and ChinaThe J-curve: evidence from commodity trade between US and China
www.tandfonline.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

Is the J-curve effect observable in Turkish agricultural sector?Is the J-curve effect observable in Turkish agricultural sector?
hrcak.srce.hr [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

The J‐curve dynamics of Turkish bilateral trade: A cointegration approachThe J‐curve dynamics of Turkish bilateral trade: A cointegration approach
www.emerald.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

Import-content of exports and J-curve effectImport-content of exports and J-curve effect
www.tandfonline.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …

The J-curve: a literature reviewThe J-curve: a literature review
www.tandfonline.com [PDF]
… 2002-Center for International Economics, Sejong Institution … Changes in the real effective exchange rate may have different effects on the components of the trade balance, in … In this study, we use the impulse response function to examine the J-curve effect by tracing the effect of …



Q&A About J-Curve Effect


What does the MarshallLerner condition state?

The MarshallLerner condition states that if the absolute sum of a country's export and import demand elasticities (demand responsiveness to price) is greater than one, then if a country begins with a zero trade deficit, it will develop into a surplus when its currency depreciates.

How long does it take for private equity funds to recover from early losses?

It takes about five years for private equity funds to recover from early losses if they are well managed (Figure 2).

Why do countries experience initial losses after devaluing their currency?

The higher exchange rate first corresponds to more costly imports and less valuable exports, leading to bigger initial deficits or smaller surpluses.

What can be seen in private equity funds over time?

Private equity funds experience negative returns for several years before turning around and becoming profitable again like those shown in Figure 1 below (Figure 1).

How does an example of a J-curve appear in economics?

An example of a J-curve appears in economics when a country's trade balance initially worsens following a devaluation or depreciation of its currency.

How does this affect countries' balance of trade?

This affects countries' exports and imports by making their exports cheaper and imports more expensive due to changes in relative prices. This affects countries' balance of trade because it causes an increase in exports while decreasing imports.

When does this loss occur?

This loss occurs immediately after devaluing their currency.

What is the J-Curve Effect?

The J-Curve Effect is when a country's trade balance improves after its currency depreciates.

What is the J-curve effect?

The J-curve effect is a type of diagram where the curve falls at the outset and eventually rises to a point higher than the starting point, suggesting the letter J.

What happens next?

Eventually, this deficit will turn into surplus as exports increase and imports decrease with time. This forms an upward sloping line on the graph that resembles an upside down letter "J". This line continues until it reaches parity with other currencies on foreign exchange markets. At this point, there are no longer any gains or losses from changing exchange rates because they have reached equilibrium value between two currencies. In other words, there is no longer any need for intervention by central banks to manage these exchange rates since they are now stable without government interference.""