Exchange rate hysteresis in the UK imports from the South Asian Countries

What is it about?

This paper finds evidence of the asymmetric effect of exchange rate volatility that ‘large’ depreciations significantly reduce UK imports from Bangladesh; however, ‘large’ appreciations do not increase the imports significantly. We also find a partial support for the hysteresis hypothesis in UK import from India, Pakistan and Sri Lanka. We find that hysteresis can be both country- and commodity-dependent, which is largely consistent with previous empirical studies. Theoretical literature suggests that hysteresis occurs due to the presence of sunk costs, however, we find that hysteresis occurs even beyond the sunk costs.

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Why is it important?

Countries that follow the export-led growth policy will realize that the exchange rate movements do not necessarily have a systematic effect on their export. There is evidence of the asymmetric effect of exchange rate on international trade.