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Relative Prices and Hysteresis: Evidence from US Manufacturing

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  • Douglas L. Campbell

    () (New Economic School (NES))

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 RER shocks 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, and that the magnitude of the shock in the early 2000s was large enough to have played a role in the onset of secular stagnation, lending support to the Bernanke Hypothesis.

Suggested Citation

  • Douglas L. Campbell, 2017. "Relative Prices and Hysteresis: Evidence from US Manufacturing," Working Papers w0212, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0212
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    File URL: http://www.cefir.ru/papers/WP212.pdf
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Real Exchange Rate and China's Savings
      by Doug Campbell in Douglas L. Campbell on 2017-03-15 07:49:00
    2. The Real Exchange Rates and Trade Literature
      by Doug Campbell in Douglas L. Campbell on 2017-04-07 01:50:00
    3. Is US Manufacturing Really Great Again?
      by Doug Campbell in Douglas L. Campbell on 2017-05-09 23:36:00
    4. Ben Bernanke, in Denial? "When Growth is Not Enough"
      by Doug Campbell in Douglas L. Campbell on 2017-07-09 13:14:00
    5. Ben Bernanke, in Denial? “When Growth is Not Enough”
      by ? in Naked Capitalism on 2017-07-11 10:24:00
    6. Robert Lawrence's New Manufacturing Paper: Confusing Trends and Levels
      by Doug Campbell in Douglas L. Campbell on 2017-11-16 16:13:00

    Citations

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    Cited by:

    1. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    2. Muendler, Marc-Andreas, 2017. "Trade, technology, and prosperity: An account of evidence from a labor-market perspective," WTO Staff Working Papers ERSD-2017-15, World Trade Organization (WTO), Economic Research and Statistics Division.

    More about this item

    Keywords

    Exchange Rates; American Manufacturing; Hysteresis; Trade;

    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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