A NEW MEASURE TO QUANTIFY HYSTERESIS LOSSES: THE CASE OF ITALIAN WINE EXPORTS TO THE UNITED STATES

Abstract

This paper introduces a new measure to capture dynamic losses for exporting firms on markets that exhibit hysteresis on the supply side. Our indicator aims to quantify dynamic losses caused by sunk adjustment costs in case of exchange rate fluctuations. While the standard procedure in welfare analysis is to compare two equilibria, we focus on welfare effects that take place during dynamics. We analyze negative dynamic effects on producers' income that are generated due to writing off sunk adjustment costs. As an example, we investigate Italian wine exports to the United States over the period 1995–2013. After testing for hysteresis on the market, we present the indicator of hysteresis losses. It captures a continuous increase of dynamic losses during the period 2003–2008. Moreover, over-proportionately large hysteresis losses are generated in comparison to the exchange rate changes if the pain threshold of the exchange rate (ca. 1.25$/€) is passed.