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Exchange rates and trade: How important is hysteresis in trade?

  • Campa, Jose Manuel

This paper looks at the responsiveness of a country's export supply to exchange rate changes and measures its quantitative importance by breaking down export adjustments between changes in output levels by existing exporters (intensive margin) and movements due to changes in the number of exporters (extensive margin). Using data on a representative sample of Spanish manufacturing firms, the paper finds sunk costs hysteresis in entry and exit to be an important factor in determining export market participation, but unrelated to exchange rate uncertainty. The sunk costs of entering the market appear to be much larger than the costs of exiting the market. Finally, although hysteresis exists, its effect on the responsiveness of aggregate trade volumes to exchange rate changes is quantitatively small. A 10% home currency depreciation results in an increase in export volume due to the increase in the number of exporting firms of only 1.5% of export volume.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 48 (2004)
Issue (Month): 3 (June)
Pages: 527-548

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Handle: RePEc:eee:eecrev:v:48:y:2004:i:3:p:527-548
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Kenneth A. Froot & Paul Klemperer, 1989. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
  2. G. S. Maddala, 1987. "Limited Dependent Variable Models Using Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 307-338.
  3. James J. Heckman, 1981. "Heterogeneity and State Dependence," NBER Chapters, in: Studies in Labor Markets, pages 91-140 National Bureau of Economic Research, Inc.
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  7. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
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  10. Roberts, M. & Tybout, J., 1993. "An Empirical Model of Sunk Costs and the Decision to Export," Papers 4-93-3, Pennsylvania State - Department of Economics.
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  12. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November.
  13. Manski, Charles F, 1990. "Nonparametric Bounds on Treatment Effects," American Economic Review, American Economic Association, vol. 80(2), pages 319-23, May.
  14. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-64, May.
  15. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May.
  16. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
  17. Bee Yan Aw & Xiaomin Chen & Mark J. Roberts, 1997. "Firm-level Evidence on Productivity Differentials, Turnover, and Exports in Taiwanese Manufacturing," NBER Working Papers 6235, National Bureau of Economic Research, Inc.
  18. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  19. 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.
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