Search

This paper introduces a new measure to capture dynamic losses for exporting firms on markets that exhibit hysteresis on the supply side. This new indicator quantifies dynamic losses caused by sunk adjustment costs in case of exchange rate fluctuations. While the standard procedure in welfare analysis is to compare two equilibria in order to determine certain consumer and producer surplus effects (comparative statics), we focus on special welfare effects that take place during dynamics - the process of adjustment towards an equilibrium. More precisely, we analyze negative dynamic effects on producers' income that are generated due to writing off sunk adjustment costs. As an example we investigate Italian wine exports to the US over 1995-2013. After testing the existence of hysteresis on the market, using the play-algorithm proposed by Belke and Göcke [2001], we present a new indicator of hysteresis losses. It captures a continuous increase of dynamic losses during the period from 2003 to 2008 and over proportionately large hysteresis losses if the pain threshold of the exchange rate is passed, which seems to be about 1.25 $/€.

Pricing decisions of exporters, who are facing imperfect competition in their destination markets, might depend on exchange rate changes. While empirical literature often assumes that the impact of the exchange rate on the exporters’ prices is linear and the markup adjustment does not depend on magnitude or direction of the exchange rate, we question this statement and test for hysteresis and asymmetry of pricing-to-market (PTM). By means of the partial sum decomposition approach of Shin et al. (2013) using the beer market as an example, we show that both types of nonlinearities play an important role in PTM decisions.