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Insignificant and Inconsequential Hysteresis: The Case of the U.S. Bilateral Trade
David C. Parsley Vanderbilt University - Owen Graduate School of Management Shang-Jin Wei Columbia Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); China Academy of Financial Research (CAFR) May 1994 NBER Working Paper No. W4738 Abstract: This paper casts doubt on the validity of the hysteresis hypothesis as an explanation of the persistent U.S. trade deficits in the 1980s. We propose two tests to investigate two different implications of the hypothesis. The first implication is that cumulative changes in exchange rates, in addition to current exchange rate levels, are important determinants of trade flows. The second implication is that foreign exporting firms' perceptions of exchange rate volatility will affect their decisions to enter or exit the market. We find little support for either aspect of the hysteresis hypothesis.
JEL Classifications: F3 Working Paper SeriesDate posted: November 24, 2000 ; Last revised: November 24, 2000Suggested CitationContact Information
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