Persistent Trade Effects of Large Exchange Rate Shocks

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ID: 299880
1989
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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.
Reference Key
openalex_W2065560699 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Richard Baldwin, Paúl Krugman
Journal the quarterly journal of economics
Year 1989
DOI
10.2307/2937860
URL
https://doi.org/10.2307/2937860
Keywords Keywords not found

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