HYSTERESIS IN INTERNATIONAL-TRADE - A GENERAL EQUILIBRIUM-ANALYSIS

This paper presents a simple general equilibrium model of hysteresis i n international trade, i.e., temporary exchange rate fluctuations can have persistent effects on trade flows. Besides supporting earlier par tial equilibrium results, the analysis bears out a conjecture by Baldw in and Krugman (1989) that a hysteretic shift in trade flows will caus e a hysteretic shift in the equilibrium exchange rate. A positive dema nd shock which leads to a temporary exchange rate appreciation is foll owed by a persistent depreciation. Another implication is that equity values in the country with a positive demand shock will ultimately fal l below their pre-shock level. Temporarily high profits reduce future profitability by attracting competitors who remain in the market after the shock has receded.