Macroeconomics, 2nd Edition by Pearson

138

MACROECONOMICS

at time

t

1

(see Figure 5.4), the trade balance deteriorates, and after some time,

say, after more than two quarters of a year, it improves.

Magee

8

explains this pattern in terms of

ADJUSTMENT

LAGS

resulting from

(a) currency contracts signed prior to devaluation; (b) newer currency con-

tracts signed after devaluation—the period of pass-through; and (c) sluggish

quantity adjustments. Let us consider each case.

(a)

Currency contracts signed prior to devaluation:

Prior to signing a

contract, economic agents take into account their expectations concerning

the future devaluation or appreciation of currencies ...