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Persistent Trade Effects of Large Exchange Rate Shocks

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Author Info
Baldwin, Richard
Krugman, Paul

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Abstract

This paper presents a theoretical basis for the argument that large exchange rate shocks--such as the 1980s dollar cycle--may have persistent effects on trade flows and the equilibrium exchange rate itself. The authors begin with a partial-equilibrium model in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level. They then develop a simple model of the feedback from hysteresis in trade to the exchange rate itself. Here they see that a large capital inflow, which leads to an initial appreciation, can result in a persistent reduction in the exchange rate consistent with trade balance. Copyright 1989, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 104 (1989)
Issue (Month): 4 (November)
Pages: 635-54
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Handle: RePEc:tpr:qjecon:v:104:y:1989:i:4:p:635-54

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  1. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-42.
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This page was last updated on 2009-10-19.

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