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

This paper casts doubt on the validity of the hysteresis hypothesis as an explanation of the persistent U.S. trade deficits in the 1980s. The authors 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. The authors find little support for either aspect of the hysteresis hypothesis. Copyright 1993 by MIT Press.