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Hyteresis in Import Prices: The Beachhead Effect

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  • Baldwin, Richard

Abstract

This paper shows that temporary real exchange rate fluctuations can have persistent (hysteretic) effects on trade. Specifically, when market-entry costs are sunk, sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis. This simple result has strong implications for exchange rate theory, t rade policy, and estimation of trade equations. Empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in U.S. import prices. Namely, the aggregate pass-through equation (of exchange rates to import prices) shifted in the 1980s. The shift's nature and timing is broadly consistent with the hysteresis hypothesis. Copyright 1988 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 4 (September)
Pages: 773-85

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Handle: RePEc:aea:aecrev:v:78:y:1988:i:4:p:773-85

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  1. Charles Bean, 1988. "Sterling Misalignment and British Trade Performance," NBER Chapters, in: Misalignment of Exchange Rates, pages 39-76 National Bureau of Economic Research, Inc.
  2. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-42.
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