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Exchange rate hysteresis in the UK imports from the South Asian Countries

Nusrate Aziz and Ahmad Hassan Ahmad

International Review of Economics & Finance, 2018, vol. 58, issue C, 159-178

Abstract: We investigate and find evidence for the hysteresis hypothesis in UK imports from South Asian countries, using a monthly sample of data that covers 1999 to 2012. This paper finds evidence of the asymmetric effect of exchange rate volatility that ‘large’ depreciations significantly reduce UK imports from Bangladesh; however, ‘large’ appreciations do not increase the imports significantly. We also find a partial support for the hysteresis hypothesis in UK imports from India, Pakistan, and Sri Lanka. We find that hysteresis can be both country- and commodity-dependent, which is largely consistent with previous empirical studies. Theoretical literature suggests that hysteresis occurs due to the presence of sunk costs, however, we find that hysteresis occurs even beyond the sunk costs.

Keywords: Hysteresis hypothesis; Sunk costs; Exchange rates; Recursive estimate (search for similar items in EconPapers)
JEL-codes: C22 F31 F32 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.iref.2018.03.007

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