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Trade-volume hysteresis: an investigation using aggregate data

  • I. Agur

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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File URL: http://www.dnb.nl/binaries/wo0740_tcm46-146026.pdf
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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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Web page: http://www.dnb.nl/en/

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  1. Campa, Jose Manuel, 2004. "Exchange rates and trade: How important is hysteresis in trade?," European Economic Review, Elsevier, vol. 48(3), pages 527-548, June.
  2. Richard Baldwin, 1988. "Some Empirical Evidence on Hysteresis in Aggregate US Import Prices," NBER Working Papers 2483, National Bureau of Economic Research, Inc.
  3. 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.
  4. Dionysios Chionis, 2002. "The Hysteretic Effects on the Real Exchange Rates," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(4), pages 451-463.
  5. 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.
  6. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  7. 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.
  8. Piscitelli, Laura, et al, 2000. "A Test for Strong Hysteresis," Computational Economics, Society for Computational Economics, vol. 15(1-2), pages 59-78, April.
  9. Baldwin, R.E. & Lyons, R.K., 1991. "Exchange Rate Hysteresis : Large Versus Small Policy Misalignments," Papers fb-28, Columbia - Graduate School of Business.
  10. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  11. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Fiscal Increasing Returns, Hysteresis, Real Wages and Unemployment," NBER Working Papers 2034, National Bureau of Economic Research, Inc.
  12. 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(1), pages 1-56.
  13. Robert A. Blecker, 1992. "Structural Roots of U.S. Trade Problems: Income Elasticities, Secular Trends, and Hysteresis," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 14(3), pages 321-346, April.
  14. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  15. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  16. 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.
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