Hysteresis in Export Markets

50 Pages Posted: 27 Dec 2005  

Luca David Opromolla

Bank of Portugal; CEPR; UECE - Research Unit on Complexity in Economics

Alfonso A. Irarrazabal

New York University (NYU) - Department of Economics

Date Written: March 23, 2006

Abstract

This paper develops a dynamic monopolistic competition model with heterogenous firms to analyze the effects of uncertainty on international trade. We characterize a stationary equilibrium, with N symmetric countries, where firms' productivities evolve stochastically over time. Our model retains the main results of previous recent papers like Melitz (2003) and Bernard, Eaton, Jensen and Kortum (2003) and provides additional new predictions. Reentry export costs generate hysteresis in export participation creating a band of inaction within the stationary distribution of firms' productivities. The decision to export becomes history-dependent and new entrants and incumbent firms might sustain temporary negative profits before becoming profitable. Most importantly, the model is very amenable to estimation and simulation, therefore representing a useful tool for analyzing the effects of trade policies. Several moments, like average age, size and productivity of different categories of firms (exporters, entrants, exiters, incumbents), the hazard rate of exiting or of becoming an exporter as a function of age and others have closed-form solutions that are crucial for matching static and dynamic features of the data.

Keywords: Hysteresis, Firm Dynamics, Productivity

JEL Classification: F1, L11, O11, O12

Suggested Citation

Opromolla, Luca David and Irarrazabal, Alfonso A., Hysteresis in Export Markets (March 23, 2006). Available at SSRN: https://ssrn.com/abstract=871512 or http://dx.doi.org/10.2139/ssrn.871512

Luca David Opromolla (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro 2
Lisbon, 1150-165
Portugal

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

Alfonso A. Irarrazabal

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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