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Relative Prices and Hysteresis: Evidence from US Manufacturing

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  • Douglas L. Campbell

    (New Economic School)

Abstract

A central tenet of economics is that prices matter. A corollary is that in a world with sunk costs, historical prices can affect current economic outcomes. There exists a large theoretical literature on exchange rate hysteresis, but recent empirical treatments are scarce. To fill the gap, I employ new measures of real exchange rates (RERs) to study the impact of large, temporary movements in relative prices on the US manufacturing sector. To identify a causal impact of RER movements on manufacturing, I test whether sectors more exposed to international trade respond differently when relative prices appreciate. I also compare the US experience to Canada's in the mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. I find that temporary RER shocks have a surprisingly persistent impact on employment, output, and productivity in relatively more open manufacturing sectors.

Suggested Citation

  • Douglas L. Campbell, "undated". "Relative Prices and Hysteresis: Evidence from US Manufacturing," Working Papers w0263, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0263
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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