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Persistent Trade Effects of Large Exchage Rate Shocks

  • Richard Baldwin
  • Paul R. Krugman

This paper presents a theoretical basis fcr the srgunent that large exchange rate shocks - such as the rise of the dollar from 1980 to 1985 - may shift historical relationships between exchange rates and trade flows. We begin with partial models in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level. When we develop a simple model of the feedback from "hysteresis" in trade to the exchange rate itself. Here we see that a large capital inflow, which leads to an initial appreciation, can result in a persistent reduction in the exchange rate consistent with trade balance.

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File URL: http://www.nber.org/papers/w2017.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2017.

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Date of creation: Aug 1986
Date of revision:
Publication status: published as The Quarterly Journal of Economics, Vol. 104, No. 4 (Nov., 1989), pp. 635-654
Handle: RePEc:nbr:nberwo:2017
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-42.
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