NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

David C. Parsley, Shang-Jin Wei

NBER Working Paper No. 4738
Issued in May 1994
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w4738

Published: Review of Economics and Statistics, Vol. 75, no. 4 (1993): 606-613.

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