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Hysteresis and the long shadow of the exchange rate regime

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  • Thomas Barnebeck Andersen

Abstract

This paper offers empirical evidence consistent with hysteresis, which is the idea that temporary demand shocks can have long-lasting effects on the economy. I rely on the fact that fixers (i.e., countries with fixed exchange rates) were on average hit harder by the 2008 global financial crisis than non-fixers. Fixers continue to underperform non-fixers more than a decade after the crisis. This holds for the period 2008–2019, but also for sub-periods such as 2010–2019 and 2012–2019, which is indicative of hysteresis and even super-hysteresis effects. If hysteresis is real, it has important implications for macroeconomic stabilization policies and, by extension, the choice of exchange rate regime.

Suggested Citation

  • Thomas Barnebeck Andersen, 2024. "Hysteresis and the long shadow of the exchange rate regime," Review of Keynesian Economics, Edward Elgar Publishing, vol. 12(4), pages 499-517, October.
    • Handle: RePEc:elg:rokejn:v:12:y:2024:i:4:p499-517
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    More about this item

    Keywords

    hysteresis; global financial crisis; exchange rate regimes;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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