Trade-volume hysteresis: an investigation using aggregate data
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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