Economics, Econometrics and Finance
4 years ago

Large exchange rate shocks can permanently alter trade relationships, impacting economies.

Persistent Trade Effects of Large Exchage Rate Shocks
Richard Baldwin, Paúl Krugman

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Large exchange rate shocks, like the dollar's rise from 1980 to 1985, can change how exchange rates affect trade. When exchange rates fluctuate a lot, businesses may decide to enter or leave markets, and these decisions can stick even after the exchange rate goes back to normal. This can create a feedback loop where trade affects the exchange rate, leading to a lasting impact on trade balance.