The Dynamics of Uncertainty or the Uncertainty of Dynamics: Stochastic J-Curves

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Abstract
That the U.S. trade account will improve in response to a depreciation is not generally in doubt; the key questions are by how much and by when. Addressing these questions involves studying the distribution of trade-account responses to a depreciation. Given a depreciation of the dollar, the paper generates this distribution by simulating a trade model with random drawings of both innovations and elasticity estimates. Unlike previous studies, this analysis explains trade on a bilateral basis and uses the Full Information Maximum Likelihood estimator for parameter estimation. According to the findings, the dispersion of trade-account responses grows over time and is directly related to the magnitude of the depreciation. Furthermore, the probability of a slow adjustment of the trade account is relatively high and the 95% confidence intervals are too wide to be useful for policies that target a given trade-account path.

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