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Trade-volume hysteresis: an investigation using aggregate data

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  • I. Agur

Abstract

Sunk costs of entry create a wedge between the real exchange rate for which a foreign exporter enters the domestic market, and that for which he exits. On the macroeconomic level, heterogeneous cost structures make the number of entry and exit thresholds approach a continuum: any movement of the real exchange rate beyond its historical peak triggers some entry or exit. A sufficiently large appreciation followed by an equivalent depreciation (a `cycle') could hysteretically affect the trade volume, because some exporters enter and stay. This paper investigates whether trade-volume hysteresis indeed occurs during such cycles, by testing for structural breaks in the constant term and the real exchange rate elasticity of the import volume in a standard import-volume specification. Binomial tests indicate that constant-term breaks have the sign predicted by hysteresis theory significantly more than 50% of the time. Breaks in the real exchange rate elasticity, on the other hand, have the `reverse' sign in significantly more than half of the cases.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 740.

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Length: 55 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:dnb:wormem:740

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Keywords: Hysteresis; Trade volumes; Real exchange rate cycles; Recursive coefficient estimations;

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References

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Cited by:
  1. Ansgar Belke & Matthias Göcke & Martin Günther, 2012. "Exchange Rate Bands of Inaction and Play-Hysteresis in German Exports - Sectoral Evidence for Some OECD Destinations," ROME Working Papers 201202, ROME Network.
  2. Verheyen, Florian, 2013. "Exchange rate nonlinearities in EMU exports to the US," Economic Modelling, Elsevier, vol. 32(C), pages 66-76.
  3. Ansgar Belke & Matthias Göcke & Martin Günther, 2009. "When Does It Hurt?: The Exchange Rate "Pain Threshold" for German Exports," Discussion Papers of DIW Berlin 943, DIW Berlin, German Institute for Economic Research.

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