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)| false “An Empirical Analysis of the External Deficit, 1980-86,” in Helkie, William, and Peter Hooper, External Deficits and the Dollar: The Pit and the Pendulum, ed. ( by Ralph C. Bryant, Gerald Holtham, and Peter Hooper Washington D.C.: The Brookings Institute, 1988).
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Giorgia Giovannetti is at Trinity College, Cambridge, and University of Cassino, Italy. The authors wish to thank David T. Coe, Leonardo Bartolini, Tamim Bayoumi, Bankim Chadha, Alexander Hoffmaister, and Carmen Reinhart for helpful comments; and Toh Kuan for assistance with the data. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the International Monetary Fund.
Rose and Yellen (1989) find little evidence of a reliable long-run relationship between the U.S. trade balance and the real exchange rate.
Exchange rate volatility can also influence export quantities and prices in hysteresis models of trade, although the direction of the effect is not always clear (see Dixit (1989a) and Froot and Klemperer (1989)).
Note also that some studies find that the traditional determinants of trade flows, in particular the real exchange rate, perform well in explaining the external adjustment of Japan (see Corker (1989) and Meredith (1993)).
This existing empirical evidence is mainly descriptive. A notable exception is Knetter (1994) where a model of price discrimination by a monopolist selling to several export destinations is used to allow for the possibility of destination-specific mark-ups. By using disaggregated industry-level data for Germany and Japan, he provides some econometric support for his model.
The existing empirical tests of hysteresis often involve testing for unit roots rather than for non-stationarity of a more general nature. See Amable, et al. (1994).
Note that instead of a cost variable, the capital stock could be used as a determinant of export supply when rigidities in the production structure do not allow firms to fully optimize (see, for example, Holly and Wade (1991)).
In Dixit (1994), the thresholds can be different in different time periods or for different firms. He calculates entry and exit thresholds for the yen/dollar exchange rate in different periods. He divides the period 1979-89 into two sub-periods, 1979-84 and 85-89, derives lower and upper limits of 98 and 174 for the first sub-period, and 137 and 235 for the second sub-period. He also points out that since different exporters have different costs, these thresholds should be “interpreted as merely indicative of the position of what is actually a very fuzzy band, over which import penetration will gradually increase or decrease as the exchange rate moves through this range”.
A number of empirical tests reject the hypothesis of stationarity for exchange rates. See Giovannetti (1992) for a survey.
Data sources for manufacturing exports, export unit prices, and industrial countries’ GDP and prices are the OECD. The latter two variables were aggregated using the World Economic Outlook PPP weights. The exchange rate data is from the World Economic Outlook database. All estimations are done by maximum-likelihood Gauss version 3.00.
Attempting to estimate both λ and the variance of eci was unsuccessful so the latter was set equal to the variance of Δet and only the former was estimated freely.
Note, of course, that the presence of non-linearities in Japanese export volume, although consistent with the hypothesis of hysteresis, could also have other causes.