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Exchange rate uncertainty and play nonlinearity in aggregate employment

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  • Ansgar Belke
  • Matthias Göcke

Abstract

In a microeconomic model, a band of inaction due to hiring and firing costs is widened by option-value effects of exchange rate uncertainty. Applying an adequate aggregation approach, uncertainty leads to intervals of a weak response to exchange rate reversals—the so-called play areas—on the macro level. If changes go beyond the play area, then suddenly strong reactions (spurts) occur. The width of the play is a positive function of the degree of uncertainty. These nonlinear dynamics are captured in a simplified linearized way in a regression framework. As an empirical application, the exchange rate impacts on German employment are analyzed considering play. Since these mechanisms generally apply to investment cases where an aggregation of microeconomic real option effects under uncertainty is relevant, they may be of a general interest. Copyright International Atlantic Economic Society 2001

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  • Ansgar Belke & Matthias Göcke, 2001. "Exchange rate uncertainty and play nonlinearity in aggregate employment," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(1), pages 38-50, February.
    • Handle: RePEc:kap:iaecre:v:7:y:2001:i:1:p:38-50:10.1007/bf02296590
    DOI: 10.1007/BF02296590
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    References listed on IDEAS

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    6. Cross, Rod, 1994. "The Macroeconomic Consequences of Discontinuous Adjustment: Selective Memory of Non-dominated Extrema," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(2), pages 212-221, May.
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    Cited by:

    1. Jolita Adamonis & Matthias Göcke, 2019. "Modelling economic hysteresis losses caused by sunk adjustment costs," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 299-318, April.
    2. Lucas dos Santos Lourenço & Claudio Roberto Fóffano Vasconcelos, 2019. "Impacts of exchange rate non-linearity on Brazilian foreign trade," International Economics and Economic Policy, Springer, vol. 16(4), pages 679-699, October.
    3. Verheyen, Florian, 2013. "Exchange rate nonlinearities in EMU exports to the US," Economic Modelling, Elsevier, vol. 32(C), pages 66-76.
    4. Belke, Ansgar & Frenzel Baudisch, Coletta & Göcke, Matthias, 2020. "Interest rate bands of inaction and play-hysteresis in domestic investment – Evidence for the Euro Area," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 19-39.
    5. Sérgio Kannebley Júnior & João Paulo Martins Baroni & Diogo de Prince, 2015. "Macro-Hysteresis Test for Brazilian Exports of Manufactured Products: A threshold Panel Approach," Metroeconomica, Wiley Blackwell, vol. 66(4), pages 606-637, November.
    6. Hans Christian Kongsted, 2012. "Trade policy dynamics, entry costs, and exchange rate uncertainty," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 21(2), pages 197-216, December.
    7. Kannebley Jr., Sergio, 2008. "Tests for the hysteresis hypothesis in Brazilian industrialized exports: A threshold cointegration analysis," Economic Modelling, Elsevier, vol. 25(2), pages 171-190, March.

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