Premium
Exchange Rate Hysteresis from Trade Account Interaction
Author(s) -
McCausland W. David
Publication year - 2000
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00184
Subject(s) - economics , exchange rate , hysteresis , monetary economics , macro , stock (firearms) , balance of trade , terms of trade , international economics , engineering , mechanical engineering , physics , quantum mechanics , computer science , programming language
An explicitly specified macro model of exchange rate determination is integrated with a model of trade account hysteresis. In this macro model, flow imbalances in the trade account must be matched by equilibrating stocks of imperfectly substitutable assets, generating a stock–flow consistent determination of the exchange rate. In this paper, changes in the real exchange rate induce firms to enter particular markets for internationally traded goods, which in turn affects the trade balance. When there are sunk costs associated with this entry, returning the real exchange rate to its initial state may not induce those firms to exit the markets that they have entered. This causes trade account hysteresis. Since the real exchange rate is in part determined by the trade balance, trade account hysteresis feeds through to give exchange rate hysteresis.