Hysteresis in Export Markets ∗

This paper develops a dynamic monopolistic competition model with het-erogenous firms to analyze the effects of uncertainty on international trade. We characterize a stationary equilibrium, with multiple countries, where firms ’ pro-ductivities evolve stochastically over time. Our model retains the main results of previous recent papers like Melitz (2003) and Bernard, Eaton, Jensen and Kortum (2003) and provides additional new predictions. The model is mostly in closed-form and therefore very amenable to estimation and simulation, rep-resenting a useful tool for analyzing the effects of trade policies. We provide some initial evidence using plant-level data for Chile and Colombia to show the importance of the model. Several moments, like average age, size and productiv-ity of different categories of firms (exporters, entrants, exiters, incumbents), the survivor function or transition matrices for productivity or export participation are derived and can be used to match static and dynamic features of the data. The introduction of reentry export costs generate hysteresis in export participa-tion creating a band of coexistence within the stationary distribution of firms’ ∗Acknowledgements: We would like to express our gratitude to Jonathan Eaton for his advice and constant support. We greatly benefited from multiple discussions with Gian Luca Clementi and Erzo G.J. Luttmer and from the suggestions of Jonathan Morduch. A special thank you to Atilla Yilmaz who spent much time helping us with stochastic processes. We also would like to thank Diego Comin