Persistent Trade Effects of Large Exchange Rate Shocks

Richard Baldwin and Paul Krugman

The Quarterly Journal of Economics, 1989, vol. 104, issue 4, 635-654

Abstract: This paper presents a theoretical basis for the argument that large exchange rate shocks—such as the 1980s dollar cycle—may have persistent effects on trade flows and the equilibrium exchange rate itself. We begin with a partial-equilibrium model in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level. Then 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.

Date: 1989
References: Add references at CitEc
Citations: View citations in EconPapers (621)

Downloads: (external link)
http://hdl.handle.net/10.2307/2937860 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Persistent Trade Effects of Large Exchage Rate Shocks (1986)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:104:y:1989:i:4:p:635-654.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().