Exchange Rate Volatility and other Determinants of Hysteresis in Exports - Empirical Evidence for the Euro Area

Abstract

This paper surveys export hysteresis on a micro (firm) level and an aggregate level if sunk adjustment costs matter for export market entry and exit decisions. Furthermore, the impacts of option-to-wait effects due to uncertainty on the aggregation procedure are illustrated. It then illustrates the so-called play-algorithm which allows an estimation of the aggregate/macro hysteresis loop taking into account the variable option value effects resulting from on changing volatility of exchange rates. The play regression model is then applied to empirical export equations (Euro Area member countries to the United States). We do not confine ourselves to the aggregate macro level but also take a sectoral/branch perspective. Analyzing one of the largest export destinations outside the Eurozone, the US, to which 12% of total EA exports were directed in 2012, we find hysteretic effects in many cases of EA member countries’ exports. However, not every increase or decrease of the exchange rate will, automatically, lead to positive or negative reactions of the volume of exports. But a large appreciation of the euro means passing the play-area (i.e. a kind of 'pain-threshold') and results in a strong reaction of exports, et vice versa.

Exchange rate volatility and trade flows in Indonesia and ten main trade partners: asymmetric effects

“…Secondly, developing countries often lack access to hedging tools, and this increases the risk perception of traders (Fang et al , 2009; Hall et al , 2010), making them more vulnerable to ERV. Furthermore, the link between price volatility and international flows of goods in countries with “commodity currency” (Hegerty, 2016) indicates that for them, cross-border trade is more responsive to adjustments in prices (higher price elasticity) than others, possibly displaying asymmetric effects in trade flows (Belke et al , 2015). In line with findings from previous studies regarding the possible presence of asymmetric effects in ERV (Chi, 2020; Fang et al , 2009; Sharma and Pal, 2018), our study aims to test whether such effects occur for the case of Indonesia and its top ten trade partners, with respect to both exports and imports.…”