Direct Investment, Hysteresis, and Real Exchange Rate Volatility

Recent papers by Dixit and others have put forth the argument that real exchange shocks generate a condition of hysteresis in the export entry and exit prices, and that this wedge in prices explains the persistence in the U.S. current account deficit. This article shows that the critical hysteresis bounds for exports are altered dramatically by the additional option to locate manufacturing in the United States. We develop a model that...