Insignificant and Inconsequential Hysteresis: The Case of the U.S. Bilateral Trade

David Parsley and Shang-Jin Wei

No 4738, NBER Working Papers from National Bureau of Economic Research, Inc

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-codes: F31 F32 (search for similar items in EconPapers)
Date: 1994-05
Note: ITI IFM
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Published as Review of Economics and Statistics, Vol. 75, no. 4 (1993): 606-613.

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