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Trade-volume hysteresis: an investigation using aggregate data

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I. Agur

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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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Publisher 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
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Handle: RePEc:dnb:wormem:740

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

Find related papers by JEL classification:
D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
F19 - International Economics - - Trade - - - Other
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
  2. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Fiscal increasing returns, hysteresis, real wages and unemployment," European Economic Review, Elsevier, vol. 31(3), pages 543-560, April. [Downloadable!] (restricted)
    Other versions:
  3. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
    Other versions:
  4. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Dixit, Avinash, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-32, Winter. [Downloadable!] (restricted)
  6. Parsley, David C & Wei, Shang-Jin, 1993. "Insignificant and Inconsequential Hysteresis: The Case of U.S. Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 606-13, November. [Downloadable!] (restricted)
  7. Campa, José Manuel, 2000. "Exchange Rates and Trade: How Important is Hysteresis in Trade?," CEPR Discussion Papers 2606, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Dionysios Chionis, 2002. "The Hysteretic Effects on the Real Exchange Rates," International Review of Applied Economics, Taylor and Francis Journals, vol. 16(4), pages 451-463, October. [Downloadable!] (restricted)
  9. Richard Baldwin, 1988. "Some Empirical Evidence on Hysteresis in Aggregate US Import Prices," NBER Working Papers 2483, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Ljungqvist, Lars, 1994. "Hysteresis in international trade: a general equilibrium analysis," Journal of International Money and Finance, Elsevier, vol. 13(4), pages 387-399, August. [Downloadable!] (restricted)
  11. Kim, Yoonbai, 1991. "External Adjustments and Exchange Rate Flexibility: Some Evidence from U.S. Data," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 176-81, February. [Downloadable!] (restricted)
  12. Susan A. Hickok & Juann H. Hung & Kurt C. Wulfekuhler, 1991. "An expanded, cointegrated model of U.S. trade," Research Paper 9121, Federal Reserve Bank of New York.
  13. Yunjong Wang, 1995. "Comparative Advantage And Hysteresis In Trade Balance," International Economic Journal, Korean International Economic Association, vol. 9(4), pages 57-76, December. [Downloadable!] (restricted)
  14. Piscitelli, Laura, et al, 2000. "A Test for Strong Hysteresis," Computational Economics, Springer, vol. 15(1-2), pages 59-78, April. [Downloadable!]
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  15. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1987-1), pages 1-56. [Downloadable!]
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