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- Title
HYSTERESIS, IMPORT PENETRATION, AND EXCHANGE RATE PASS-THROUGH.
- Authors
Dixit, Avinash
- Abstract
A competitive industry has established home firms, and foreign firms with entry and exit costs. The real exchange rate follows a Brownian motion. Industry equilibrium is determined using methods of option pricing. Entry requires the operating profit to exceed the interest on the entry cost, and similarly for exit. The middle band of rates without entry or exit yields hysteresis; it is found to be very wide for plausible parameter values. The exchange rate pass-through to domestic prices is found to be close to one in the phases where foreign firms enter or exit, and near zero otherwise.
- Subjects
WIENER processes; INTERNATIONAL trade; INDUSTRIES; IMPORT laws; FOREIGN exchange rates; INDUSTRIAL costs
- Publication
Quarterly Journal of Economics, 1989, Vol 104, Issue 2, p205
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/2937845