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This paper investigates the relevance of traditional trade-exchange rate theo-rem for developing countries facing sunk entry costs in international markets.First the theorems analysing pricing of tradable goods and the trade balancedynamics following exchange rate shocks are accounted for. Second the sunkcost hysteresis model of foreign trade is described, including the possibility forhysteresis both at the microeconomic and at the macroeconomic level. Thirdthe implications of sunk cost hysteresis for the predictions of the traditionaltrade-exchange rate theorems are discussed, focusing on both pricing of trad-able goods as well as short and long run trade balance dynamics followingexchange rate shocks. The paper argues that the sunk cost model providesa microeconomic basis for trade dynamics that allows for non-linearities andregime switches, something often seen in empirical anlysis. The predictionsof structural adjustment programs are however drawn from the traditionaltheorems, lacking the possibility for non-linearity. The sunk cost model isargued to push both pricing rules and trade balance dynamics closer towardsthe empirical record, mainly by allowing for a state-dependent relationshipbetween exchange rates and foreign trade. When it comes to policy implica-tions the paper argues in favour of context speci.c policy interventions andagainst the one size .ts all approach of structural adjustment programs

Are the traditional trade-exchange rate theorems relevant for developing countries facing entry costs in international markets?