The hysteretic effects on the real exchange rates

Abstract

In this paper we investigate the dynamics developed from the exchange rate relative price relationship using a hysteresis framework. The rationale for such hysteretic effects is in terms of firms' unresponsiveness to the exchange rate changes due to pricing to market-type arguments. The empirical support of these ideas is derived by applying a linear approximation of the hysteretic effects. We conclude that the hysteretic effects are a source of non-linearity, strongly affecting the long-run relationship of exchange rate and prices.