British-European Trade Relations and Brexit - An Empirical Analysis of The Impact of Economic and Financial Uncertainty On Exports

International Journal of
Financial Studies
Article
British-European Trade Relations and Brexit: An
Empirical Analysis of the Impact of Economic and
Financial Uncertainty on Exports
Ansgar Belke 1,2, * ID
and Sebastian Ptok 3
1 Institute for Business and Economic Studies (IBES), University of Duisburg-Essen, Berliner Platz 6-8,
45127 Essen, Germany
2 Centre for European Policy Studies (CEPS), Place du Congrès 1, 1000 Brussels, Belgium
3 Institut für Mittelstandsforschung Bonn (IfM), Maximilianstraße 20, 53111 Bonn, Germany; [email protected]
* Correspondence: [email protected]; Tel.: +49-201-183-2777

Received: 14 May 2018; Accepted: 8 August 2018; Published: 17 August 2018
Abstract: Brexit, the withdrawal of the United Kingdom (UK) from the European Union (EU), has led
to significant exchange rate fluctuations and to uncertainty in financial markets and in UK–EU trade
relations. In this article, we use a non-linear model to study how this uncertainty affects export
companies. Exports tend to react in spurts when exchange rate fluctuations go beyond a band of
inaction, referred to here as a “play area”. We apply an algorithm to study this hysteretic relationship
with ordinary least squares (OLS) regressions. We examine the export relationship between Europe
(Belgium, Germany, France, Italy, and The Netherlands) and the UK. To guarantee the robustness of
the results, we estimate a variety of specifications for modeling economic uncertainty: (a) constant
uncertainty, (b) exchange rate volatility, (c) volatility in European equity markets, (d) the Treasury
Bill EuroDollar Difference (TED-spread), (e) the Economic Policy Uncertainty Index (EPUI), and (f)
a combination of exchange rate volatility and the EPUI. Since the results show little evidence of
hysteretic effects on British exports, we focus on the European side. The specifications including
exchange rate and equity market volatility show a significant effect of hysteresis.
Keywords: Brexit; uncertainty; play-hysteresis; exports; exchange rate volatility; stock market volatility
JEL Classification: C51; F14
1. Introduction
Significant exchange rate fluctuations have a major effect on export companies’ profits and losses.
The devaluation of the pound since the Brexit vote is a crucial issue at present for exporting countries
in the European Union (EU). Although it was then Prime Minister David Cameron who called the
referendum during his premiership, he also warned against the negative impacts of leaving the EU.
“At the core of the European Union must be, as it is now, the single market. Britain is at the
heart of that Single Market, and must remain so. [ . . . ] However, when the Single Market
remains in-complete [ . . . ] it is only half the success it could be. We would need to weigh up
very carefully the consequences of no longer being inside the EU and its single market, as a
full member.” (Cameron 2013)
The Brexit process has now formally begun, calling the political relationship between the United
Kingdom (UK) and Europe fundamentally into question. It can be expected to affect not only diplomatic
relationships and political cooperation between the EU and the UK but also joint trade. It is likely
Int. J. Financial Stud. 2018, 6, 73; doi:10.3390/ijfs6030073 www.mdpi.com/journal/ijfs

Int. J. Financial Stud. 2018, 6, 73 2 of 22
that the UK will lose access to the European Single Market. This, along with uncertainty about future
bilateral trade relations, is a concern for numerous companies as well as politicians and policy makers.
According to a survey conducted by the Bertelsmann Foundation, 36% of companies headquartered in
Germany or the UK expect negative impacts on their business activities (Bertelsmann-Stiftung 2016).
2. Path-Dependency and the European Single Market

Hysteresis describes a model characteristic due to which shocks on the endogenous variable have
a long-term, persistent effect. It may occur in various contexts, such as the pricing-to-market strategy
of export companies. Since a substantial investment is required to enter the export market, companies
may have an interest in keeping their sales prices in foreign currencies stable. To do so, companies will
absorb smaller exchange rate fluctuations and only adapt prices to the exchange rate asymmetrically,
when certain thresholds are exceeded (Fedoseeva and Werner 2014).
This paper is concerned with hysteresis in international trade relations. The classical theory
describes a simple relationship between exchange rates and exports: when a country’s currency
depreciates, exports increase, and vice versa (Belke and Polleit 2009, p. 622; Belke and Volz 2015). This is
a strictly macroeconomic perspective, and one that fails to consider a number of interactions. This basic
relationship remains essentially unchanged if one assumes hysteretic effects on a country’s exports.
In this paper, we also include microeconomic effects in addition to macroeconomic relationships in our
proposed explanation. The two key points here are sunk costs and uncertainty. In relation to export
activity, sunk costs may include the costs of marketing or setting up the logistics or infrastructure for
exports (Baldwin and Krugman 1989). As soon as these investments have been made, they play a minor
role in further calculations. This is based on the assumption that these kinds of capital investments
can no longer, or can only partly be converted into liquidity. After a company’s decision to enter the
export market, the only relevant issue is whether the variable unit costs are covered.
On the microeconomic level, this leads into areas where companies do not react to exchange rate
changes, which is referred to as a “band of inaction” (Belke et al. 2014). The underlying argumentation
is that a company that is not active on the export market initially has to cover market entry costs.
These include the expenses of creating the appropriate infrastructure and the costs of marketing. Only if
the exchange rate exceeds the level at which not only variable unit costs but also sunk costs are covered
will the company enter the export market, or in the reverse case, leave the market. Uncertainty about
future economic trends leads to similar arguments and widens the band of inaction,1 since it then
makes more sense to wait and see, for instance, how the exchange rate develops. A decision is only
made if trends continue over a longer period. The option value of waiting rises with increasing
uncertainty (Côté 1994). If the exchange rate is favorable enough for market entry (i.e., if the domestic
currency has depreciated against the foreign currency) and a company has therefore entered the export
market, this does not mean that a reversal of the exchange rate development will lead to the company
immediately exiting the market. In this case, if there are sunk costs, the company will not immediately
stop exporting its goods. Instead, it will stay in the export market as long as variable unit costs are
covered (Belke et al. 2013). These relationships lead to persistent effects of exchange rate shocks.
Shifting to the macroeconomic perspective, the aggregation of individual companies means—as
is the case in the microeconomic perspective—that areas form in which exchange rates have only a
minor effect on exports, which are referred to as “play areas” (Belke et al. 2013, 2014). These areas
become relevant when the exchange rate shows only minimal fluctuations. Such small exchange rate
fluctuations only cross the threshold for entering or leaving the export sector for a few companies.
If the exchange rate moves in one direction far enough and for a long enough period of time, exports
1 There are also other mechanisms that can widen or narrow the band of inaction. These are described in detail in
Belke et al. (2014).
show an even stronger spurt reaction to exchange rate fluctuations (Belke et al. 2013), since for many
companies, the critical level has been reached.
With regard to trade relations between Europe and the United Kingdom, one can assume that
hysteretic effects exist. This is particularly likely since the United Kingdom is a member of the European
Union but not the Monetary Union. This means that exchange rate fluctuations will continue to play a
role in trade with the United Kingdom into the future.2 At the same time, the United Kingdom is still
part of the Single Market, at least for the foreseeable future. For trade with other member states, this
means significantly decreased sunk costs through the dismantling of trade barriers such as tariffs. With the
UK’s upcoming Brexit, however, it is still unclear what position Europe will adopt toward the United
Kingdom. Leaving the EU will probably mean that the United Kingdom loses its member status in the
European Single Market. It is difficult to predict whether it will be possible for the British government
to negotiate a special status for the United Kingdom, and if so, what this would look like specifically.
If the United Kingdom loses its trade privileges completely, one has to assume that hysteresis will have a
more significant effect on trade flows than it has up to now, since the increased costs will widen the band
of inaction.
A further example of the significance of hysteresis in European trade with the United Kingdom
is the low exchange rate elasticity of German exports in the important machinery and transport
equipment sector. Belke et al. (2013) attribute this in part to the high market power German companies
in these sectors have. As a result, exchange rate fluctuations will have much stronger long-term effects
in this area than are evident at the present point in time.
3. Brief Literature Review

Baldwin and Krugman (1989), as well as Dixit (1989), laid the foundations for empirical studies of
hysteresis in exports.
This article is based on a series of recent empirical studies that have used an algorithm to determine
the concrete size of the play area. The first of these was a 2014 paper providing an overview of
various possibilities for empirical modeling of hysteretic effects (Belke et al. 2014). In the same year,
Belke et al. (2013) introduced an approach that has also been adopted in this paper to test the existence
of hysteresis in German export relationships. Their study, which was limited to a constant play area,
concluded that hysteresis is relevant for the majority of German exports. In another paper, the same
methodology was applied to Greek imports, but this time with a variable play component based on the
economic policy uncertainty index (EPUI) (Belke and Kronen 2015). Also in 2015, Belke et al. (2015a)
published an article studying Eurozone exports to the United States, also assuming a variable play area.
Here, instead of the EPUI, they used the volatility of the real exchange rate as the basis for the variable
play component.
In a further paper, Belke et al. (2015b) also assumed hysteresis in export dynamics. Here, instead
of determining the play area based on the development of the exchange rate, they used companies’
capacity utilization rates. They argued that the rate of capacity utilization has an influence on the
relationship between domestic demand and companies’ export market activities. Based on these
considerations, they applied a smooth transition regression model to study the existence of a nonlinear
reaction of exports. The advantage of this model is that it does not assume an abrupt shift from one
regime to another, allowing for a more differentiated determination of the hysteresis loop. It does not,
however, allow for explicit modeling of economic uncertainty.
Besides the methods used by Belke et al. in the aforementioned works, there are different
approaches. Examples of these include Agur (2003) and Kannebley (2008). Using export data for
16 countries, Agur (2003) focuses on structural breaks in the constant term and real exchange rate
2 De Grauwe (2016) explains the advantages of membership in a monetary union in detail.

elasticity of the import volume. Kannebley uses a threshold cointegration analysis to determine the
impact of hysteresis on Brazilian exports.
All these papers have a macroeconomic perspective in common, even though their theoretical
foundation stems from microeconomic literature. Examples for this strain of research include
Campa (2004); Máñez et al. (2008); Ilmakunnas and Nurmi (2010); and Impulitti et al. (2013).
4. Method
The present study is of a primarily empirical nature: it uses ordinary least squares (OLS) to
identify hysteretic path-dependencies in EU exports to the United Kingdom and in British exports
to the EU. The model estimated here and the underlying code are based on the procedure used by
Belke and Kronen (2015). We used the following specification:
Exports = α × RER + β × SPURT + δ × indprodt−1 + Seas(i ) (1)
The main variable of interest is the real exchange rate (RER). The interpretation of its coefficient
depends on the specification of the Spurt-Variable (SPURT). Equation (1) is constructed in such a
way that it can be solved very simply with β = 0. In this case, there is no play area and the effects
of exchange rate uncertainty and sunk costs are not explicitly included in the equation. In this case,
the real exchange rate variable can be interpreted as in a standard linear regression. The interpretation
is different when β 6= 0: here, one has to distinguish between a constant play area and a specification
with an additional variable that explicitly models uncertainty. The latter leads to a variable play
area. Industrial production (indprod) is included as a proxy for gross domestic product (GDP) at
a one-month delay. We accounted for seasonal influences by including a dummy variable as well
(Seas(i)). This avoids endogeneity between exports and industrial production. The exchange rate is
included without a delay, however, in order to avoid J-curve effects as much as possible. This also
corresponds to the procedure used in Belke and Kronen (2015).
We start by discussing how the results of such a regression can be interpreted. We do not venture
into interpretations about the size of play areas. The area size itself does not factor into the regression.
Instead, it is used to estimate the coefficient of the spurt-variable. Likewise, we do not analyze the size
of the spurt variable effect. There are two reasons for this. Firstly, by using the Standard International
Trade Classification, the aggregated groups are very large and heterogeneous. Any discussion about
the results would have to stay very vague. The second reason stems from the fact that the spurt
variable is determined endogenously (see below). While the existence of hysteresis can have a strong
impact on trade relations, the interpretation of the exact values of the regression results is therefore not
meaningful. To mitigate this disadvantage, we use the following rules to identify cases of hysteresis.
A relatively clear case of hysteresis can be seen to exist in European exports3 when4 :
• The coefficient for the spurt variable is significant and negative.

• The coefficient for the real exchange rate is not significant or negative.
• The play area is not so large that it collapses into a structural break.
Further discussion on the interpretation of the regression results can be found in Belke et al. (2013),
and in Belke and Kronen (2015, pp. 20–21).
In the case of a constant play area, the key question is how to determine the area’s size. The solution
is a grid search algorithm. Here, we first define an interval for the possible size of the play area. The size
of the interval depends on the size of the underlying variables. In this study, the exchange rate is set as
the driving variable behind the development of exports. In addition, a local maximum (or minimum)
3 The following also applies to British exports, but with the reverse (positive) sign: We assume a euro-pound exchange rate
expressed as an indirect quotation, that is, in pounds per euro.
4 Based on the procedure described in Belke et al. (2014).
exchange rate has to be set as the starting and ending point of the grid search. The algorithm for the grid
search thus starts at the beginning or end of the play area that is to be determined. Within this interval,
the regression described above is estimated repeatedly for different play area sizes and the coefficient
Int. J. Financial Stud. 2018, 6, x FOR PEER REVIEW
of determination is computed. We chose not to use a dummy variable for the period 5after of 22
the start of
the financial crisis—an option that is discussed in Belke et al. (2015a). Due to the
dummy variable for the period after the start of the financial crisis—an option that is discussed in close theoretical and
Belke et al. (2015). Due to the close theoretical and empirical interrelationship
empirical interrelationship of hysteresis and structural breaks, a dummy variable could, under some of hysteresis and
structural breaks, a dummy variable could, under some circumstances, make it impossible to
circumstances, make it impossible to adequately capture the hysteretic aspect. This is also discussed in
adequately capture the hysteretic aspect. This is also discussed in Belke et al. (2015, pp. 47‒50). In
Belke et al. (2015a,
Figure pp. 1, an47–50).
exampleInisFigure 1, an
provided example
showing is provided
the result of a gridshowing
search forthe result
Belgian of a grid
exports in search for
Belgian exportsmachinery and transport
in machinery andequipment
transport(Standard
equipmentInternational TradeInternational
(Standard Classification (SITC)
Trade7). Classification
Here, we (SITC)
clearly see the constant play area maximizing the coefficient of determination.
7). Here, we clearly see the constant play area maximizing the coefficient of determination.
Figure 1. Grid search

Figure 1. Gridfor Belgian
search exports
for Belgian exportstotothe
the United Kingdom
United Kingdom (Standard
(Standard International
International Trade Trade
ClassificationClassification
(SITC) 7, constant play play
(SITC) 7, constant areaarea
max.:
max.:0.045).
0.045).
The resulting play area and the real exchange rate enable us to compute the spurt variable. The
spurt variable
The resulting playindicates
area andby how
themuch
realtheexchange
exchange rate exceeds
rate the play
enable usarea.
to compute the spurt variable.
The procedure is similar with a variable play area. The difference lies in the fact that the size of
The spurt variable indicates by how much the exchange rate exceeds the play area.
the play area consists not only of a constant component but also of an uncertainty variable. The play
The procedure is similar
area is therefore with using
determined a variable playformula:
the following area. The difference lies in the fact that the size of
the play area consists not only of a constant component = ( ) + ( ) ×but also of an uncertainty variable. (2) The play
area is therefore determined using the following formula:
The variable used to model uncertainty thus enters into the regression in the form of a
multiplier. This results in not just one but two components that have to be determined through grid
γ =hysteresis
search, in contrast to the case of constant y(v) × µThis means that an interval also has to
y(c) + dynamics. (2)
be determined for the multiplier of the uncertainty variable y(v). Its size does not depend on the
exchange rate, but on the time series assigned to the multiplier. The difficulty lies in the choice of a
The variable used to model uncertainty thus enters into the regression in the form of a multiplier.
variable that adequately represents economic uncertainty. It is a key condition that the selected
This results in not just
variable one but
is stationary. If a two components
time series thatis have
with a unit root to leads
used, this be determined
to play area thatthrough
constantly grid search,
in contrast toincreases
the casein size
of over time. This
constant can limit thedynamics.
hysteresis scope for interpreting the estimation
This means that anresults.
interval also has to be
Since two, rather than just one, components must be determined by grid search in the case of
determined for the multiplier of the uncertainty variable y(v). Its size does not depend on the exchange
hysteresis with a variable play area, the analysis has become more complex. A one-dimensional
rate, but on the time series
representation likeassigned
Figure 1 is tono
thelonger
multiplier.
adequate,Thesincedifficulty
there is now liesa in the choice
multitude of a variable that
of possible
combinations
adequately represents of y(c) and
economic y(v). The result
uncertainty. It isisaakey
correspondingly
condition that largethe
matrix of coefficients
selected variable of is stationary.
determination. To visualize this more clearly, Figure 2 presents the results of the grid search for a
If a time series with a unit root is used, this leads to play area that constantly increases in size over
variable play area.
time. This can limit the scope for interpreting the estimation results.
Since two, rather than just one, components must be determined by grid search in the case of hysteresis
with a variable play area, the analysis has become more complex. A one-dimensional representation like
Figure 1 is no longer adequate, since there is now a multitude of possible combinations of y(c) and y(v).
The result is a correspondingly large matrix of coefficients of determination. To visualize this more clearly,
Figure 2 presents the results of the grid search for a variable play area.
Int. J. Financial Stud. 2018, 6, x FOR PEER REVIEW 6 of 22
Figure 2. Grid search for Belgian exports to the United Kingdom (SITC 7, constant play area: 0.01,
Figure 2. Grid search for Belgian exports to the United Kingdom (SITC 7, constant play2 area: 0.01,
variable play area (multiplier): 75.6). X-axis: constant play area; Z-axis: variable play area; Y-axis: r .
variable play area (multiplier): 75.6). X-axis: constant play area; Z-axis: variable play area; Y-axis: r2 .
Figure 2 focuses on SITC7 exports from Belgium to the United Kingdom. Exchange rate
volatility of the real exchange rate is used to model uncertainty. As expected, similarities to Figure 1
Figureare2 apparent.
focuses on SITC7 exports from Belgium to the United Kingdom. Exchange rate volatility
This is especially the case when looking solely at the axes for the constant play area
of the real exchange rate isofused
and the coefficient to model uncertainty. As expected, similarities to Figure 1 are apparent.
determination.
This is especially the case
In addition to when looking
the version with asolely at the
play area axes one
including for variable
the constant playitarea
component, and
is also the coefficient
possible
to include
of determination. two variables to model uncertainty. Here, we forego use of the constant play component
in order to still be able to limit the grid search to a two-dimensional area. The play area is computed
In addition to the version with a play area including one variable component, it is also possible to
in this case as follows:
include two variables to model uncertainty. Here, we forego use of the constant play component in order
= ( ) × + ( 2) × (2) (3)
to still be able to limit the grid search to a two-dimensional area. The play area is computed in this case
as follows: 5. Data
γ = y(v) × µ + y(v2) × µ(2) (3)
In the following, we describe the data used in this study of trade relations between the United
Kingdom and the European Union. The data are monthly unless otherwise noted.
5. Data The export series come from Eurostat (2017a) and are price-adjusted using a GDP deflator from
In thethe Organisation
following, wefor Economicthe
describe Co-operation
data usedand Development
in this study of(OECDtrade2017a) This between
relations classification
the United
allows for differentiated examination of the influences on different categories of export products, in
Kingdom and the European Union. The data are monthly unless otherwise noted.
contrast to studies focusing solely on a country’s total exports. The focus here is on the product groups
The export
in SITCseries
5-8. One come
reasonfrom Eurostat
for this choice is(2017a) and are price-adjusted
the heterogeneity of SITC groups 0-4, using
which a can
GDP deflator
lead to from
the Organisation for in
distortions Economic
the analysisCo-operation
of hystereticand Development
effects (Belke and (OECD
Kronen 2017a) This classification
2015). Product groups 6 allows
(manufactured
for differentiated goods) and
examination of7the
(machinery
influencesand transport equipment),
on different in contrast,
categories are particularly
of export products, wellin contrast
suited to our purposes. Belke and Kronen (2015) also noted in their paper that the data on the product
to studies focusing solely on a country’s total exports. The focus here is on the product groups in SITC
group SITC 8 proved unreliable. This is probably due in part to the extreme heterogeneity of the goods
5-8. One reason
subsumed for under
this choice is the
this group heterogeneity
(various of SITC groups
types of manufactured goods,0-4, which
sanitary can leadshoes,
equipment, to distortions
in the analysis of hysteretic
photographic equipment,effects (Belke
clothing, etc.).and
One Kronen
could also2015). Product
argue that groups
sunk costs play a6major
(manufactured
role in the goods)
majority ofand
and 7 (machinery these products, which
transport again provides
equipment), an argument
in contrast, arefor hysteresis. Furthermore,
particularly well suited although
to oura purposes.
wide variety of product types are grouped together within this category, brand effects may well play a
Belke and role
Kronen (2015) also noted in their paper that the data on the product group SITC 8 proved
in many of these products—as is the case in the automotive sector—but particularly for clothing
unreliable.and
This is probably
shoes. For the sake due in part to the
of completeness, weextreme
present theheterogeneity of thegroups.
results for all product goodsWesubsumed
also includeunder this
the product
group (various typesgroup SITC 9, which includes
of manufactured goods, monetary
sanitarytransactions,
equipment, as well as products
shoes, that do not fit
photographic equipment,
into the other categories. Due to the mixed composition of SITC 9, the results for goods in this group
clothing, etc.). One could also argue that sunk costs play a major role in the majority of these products,
are difficult to interpret. The countries’ individual export sectors are structured differently in key
which again provides an argument for hysteresis. Furthermore, although a wide variety of product
respects—for instance, in terms of tolerance of uncertainty and sunk costs. This is reflected in the
types are grouped
results. together within this category, brand effects may well play a role in many of these
products—as is Thethekeycase
dependent variable is thesector—but
in the automotive real bilateral particularly
exchange rate, for expressed
clothingas an
andindirect
shoes. For the
quotation based on Eurostat (2017b) data, that is, in pounds per euro. The Consumer Price Index was
sake of completeness, we present the results for all product groups. We also include the product
used as a deflator (OECD 2017b).
group SITC 9, which includes monetary transactions, as well as products that do not fit into the other
categories. Due to the mixed composition of SITC 9, the results for goods in this group are difficult
to interpret. The countries’ individual export sectors are structured differently in key respects—for
instance, in terms of tolerance of uncertainty and sunk costs. This is reflected in the results.
The key dependent variable is the real bilateral exchange rate, expressed as an indirect quotation
based on Eurostat (2017b) data, that is, in pounds per euro. The Consumer Price Index was used as a
deflator (OECD 2017b).
GDP figures are made available at most on a quarterly basis. They are also published at a
significant delay. For this reason, we used industrial production (Eurostat 2017c).
To estimate hysteretic effects with a variable play area, we used the volatility of the real
exchange rate. As our estimation method, we used the standard deviation of monthly exchange
rates. This variable is therefore of an exclusively economic nature and indirectly incorporates the
current political and social mood. The EPUI offers an alternative (Baker et al. 2016). This index
provides a measure of economic uncertainty by analyzing two newspapers per country. For Germany,
they used the Handelsblatt and the Frankfurter Allgemeine Zeitung.5 The analysis is based on the number
of articles published per month containing previously specified keywords that indicate uncertainty,
normalized by the total number of articles published in the respective month. A measure of this kind
may be subject to subjective distortions, however, as it is heavily dependent on the choice of keywords
and the media culture of the particular country. The limitation to just two newspapers also means
that the index can only roughly reflect the perceived economic uncertainty, since other important
newspapers are left out. The advantage of using the EPUI, however, is that it allows us to not only
focus on economic-level information, but also to include the media level. Since the media contribute
significantly to public opinion formation, they are likely to affect export performance. However, there
are no corresponding time series of the index available for Belgium, and in the case of the Netherlands,
time series are only available as of 2003. The EPUI for the Netherlands is also constructed differently
than those for Germany, France, and Italy. For these reasons, a general EPUI is used for the European
Union as a whole to guarantee a certain level of comparability in results. The index for Europe is
comprised of the individual indices for Germany, France, Italy, Spain, and the United Kingdom and is
therefore not optimal for modeling uncertainty, especially in the cases of the Netherlands and Belgium.
It does, however, provide a rough indicator. Another option is to look at the stock market as an
indicator of economic uncertainty. The difficulty in this approach lies in the choice of an appropriate
stock index. In this paper, we used the Euro Stoxx 50. It contains fifty of the largest companies listed
on the stock market across all of Europe. To model uncertainty, we computed the volatility in mean
monthly stock prices, that is, the mean of the highest and lowest monthly prices (Börse-Online 2017).
In this study, we also test whether the Treasury Bill EuroDollar Difference (TED-spread) spread could
serve as an indicator for economic uncertainty in Europe as well (Federal Reserve Bank of Saint Louis 2017).
It is defined as the difference between the three-month London Interbank Offered Rate (LIBOR) (based on
the US dollar) and interest on three-month United States government bonds. Since the LIBOR gives the
average interbank interest rate, the TED spread offers a more promising indicator of uncertainty in the
banking sector.
The countries in this study were selected based on the intensity of their trade relations with the
United Kingdom. We looked at Belgium, Germany, France, Italy, and the Netherlands. In this paper,
we had all data for the relevant variables up to April 2016. Limiting our regression timeframe to the
time before Brexit, from 1998 up to the beginning of 2016 has the additional benefit of allowing us to
look at the export marketing independently from recent distortions caused by Brexit.
6. Results
The regressions conducted here suggest that hysteresis plays a major role in European exports.
Particularly the specifications that included exchange rate volatility or Euro Stoxx 50 volatility delivered
results that can be interpreted well. This is not true, however, in the case of British exports. There, even
the basic models with a constant play area give little indication of a systematic influence of hysteresis on
British exports to Europe. Instead, due to the financial crisis, the results often resemble structural breaks.
For this reason, we concentrate in the following on evaluating the results for European exports to the
United Kingdom.
5 France: Le Monde and Le Figaro; Italy: Corriere Della Sera and La Repubblica; the United Kingdom: The Times of London and
Financial Times; Spain: El Mundo and El País.
The results are heavily dependent on the specification chosen in each case. It is, therefore,
important to make as careful a selection as possible to provide the basis for robust conclusions. In this
study, we used several different approaches. The indicators examined here—exchange rate volatility,
EPUI, Euro Stoxx 50, and the TED spread—cover various aspects of uncertainty. When modeling
uncertainty, it is particularly important to:
• Avoid the reduction of the spurt variable into a dummy variable for a structural break.6
• Avoid cases in which the play area is represented only by a constant despite a variable component.
This makes it clear that the EPUI and the TED spread can only be seen to a limited extent as
valid indicators, at least when used in isolation as uncertainty variables. The TED spread delivered
extremely inconsistent results. Exchange rate volatility and the Euro Stoxx 50 proved to be much better
alternatives. For exchange rate volatility, only in two cases did we find indications of a structural
break dummy. Such indications did appear, however, for exports in SITC 0 and 1, for which hysteresis
is generally of low relevance. Results were similar for the Euro Stoxx 50; in fact, there, we found
only one of the aforementioned problems in the case of Dutch exports in SITC 8. In addition to the
specifications in which we used one variable to model uncertainty, we also tested an alternative with a
play area consisting of two variable components: exchange rate volatility and EPUI. This proved to be
the best of the options tested here, since structural breaks only appeared for French exports in SITC 1.
This makes it easier to distinguish between the existence of a structural break and actual hysteretic
effects. Especially when using a constant play area and to some extent with other specifications as
well, we found substantially more cases in which the play area was only passed in one direction (an
indication for a structural break instead of hysteresis). In addition, it accounts for two different aspects
of uncertainty, a clear advantage over the previous specifications.
Table 1 presents the results by countries and SITC groups. To illustrate how to interpret the results,
we look at the regression results for the German exports of machinery and transport equipment (SITC
7). The coefficients for RER (α) and the spurt variable (β) are both negative as expected. The coefficients
for y(v) and y(v2) determine the size of the play area (see Equation (3)). If the result is marked in red,
it would indicate that the resulting play area is too large for the exports to have shown an upwards
and downwards spurt movement. If only a one-sided spurt movement could be observed, it could
very well point to a simple structural break. As this is not the case in this example, the results show
significant evidence for hysteresis.
Substantial differences are evident between SITC groups 0–4 and 5–8. In the former, the results
are highly disparate and give little indication of hysteresis. In the latter groups, this is not true; almost
across the board, there are strong indications of hysteresis as a driving factor. The same can be said for
the aggregated exports.
The results for Italy are particularly noteworthy. They serve as a striking example of how substantially
the selected modeling of uncertainty can influence the results. With the exception of the estimation of the
Euro Stoxx 50, the various other specifications provided mostly mixed indications of hysteresis as a driving
force in export dynamics (see Appendix A). In contrast, when estimating a combination of exchange
rate volatility and the EPUI, the results give strong indications of hysteretic effects. This is an indication
that the interaction between these two components plays a substantially more important role than each
component viewed in isolation. With the other specifications, either the results for SITC 5 (as an example)
were indicators of a structural break, or the exchange rate variable used originally or the movement within
the play area had a coefficient with a positive sign. In this case, however, hysteresis appears to be relevant
as a driving force in export dynamics.7 A similar observation can be made for the results for the aggregated
exports of Italy. The analysis here is limited to this brief examination of the model with two indicators of
uncertainty. All other analyses are presented in the Appendix A.
6 The play area may be too large to be passed through completely.

7 Only in the regression with national EPUI does the exchange rate variable again have a “false”, that is, positive sign.
Table 1. Results for the regressions with a variable play area (estimated using exchange rate volatility and European EPUI).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 1.92 × 108 *** α = −45136055 *** α = −33460314 *** α = 7.96 × 108 *** α = −45633528 *** α = 5.07 × 108 ** α = −5.06 × 108 *** α = 2.43 × 108 α = −43864590 α = 5.63 × 108 *** α = −1.67 × 108
p(α) = 0.0000 p(α) = 0.0000 p(α) = −33460314 p(α) = 0.0022 p(α) = 0.0022 p(α) = 0.0116 p(α) = 0.0000 p(α) = 0.2424 p(α) = 0.4810 p(α) = 0.0000 p(α) = 0.6702
γ(v) = 0.000200 γ(v) = 0.000000 γ(v) = 0.001100 γ(v) = 0.000000 γ(v) = 0.000000 γ(v) = 0.000100 γ(v) = 0.000500 γ(v) = 0.000200 γ(v) = 0.000200 γ(v) = 0.000100 γ(v) = 0.000200
BE
γ(v2) = 3.000000 γ(v2) = 184.0000 γ(v2) = 0.800000 γ(v2) = 13.80000 γ(v2) = 3.000000 γ(v2) = 3.000000 γ(v2) = 106.0000 γ(v2) = 62.00000 γ(v2) = 33.00000 γ(v2) = 2.000000 γ(v2) = 56.00000
β = −2.50 × 108 *** β = −32277771 *** β = 38845417 *** β = −8.97 × 108 *** β = 72315272 *** β = −9.53 × 108 *** β = 3.33 × 108 *** β = −2.09 × 109 *** β = −4.86 × 108 *** β = −6.86 × 108 *** β = −3.32 × 109 ***
p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0001 p(β) = 0.0008 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000
α = 93822114 *** α = −35351857 *** α = −1.39 × 108 *** α = −6.31 × 108 *** α = −75102201 *** α = −4.52 × 108 ** α = −2.35 × 108 *** α = −2.83 × 109 *** α = 9.20 × 108 *** α = −1.06 × 109 *** α = −2.20 × 109 ***
p(α) = 0.0001 p(α) = 0.0006 p(α) = 0.0009 p(α) = 0.0000 p(α) = 0.0000 p(α) = 0.0118 p(α) = 0.0005 p(α) = 0.0000 p(α) = 0.0000 p(α) = 0.0000 p(α) = 0.0008
GE
β = −2.44 × 108 *** β = 48896285 *** β = 1.30 × 108 *** β = 6.85 × 108 *** β = 76972857 *** β = −8.81 × 108 *** β = −6.87 × 108 *** β = −3.77 × 109 *** β = −1.23 × 109 *** β = 1.20 × 109 *** β = −6.32 × 109 ***
α = −3.75 × 108 α = 33610219 α = 47907338 α = −3.42 × 108 α = −20157929 α = −2.07 × 108 α = 2.02 × 108 α = −9.60 × 108 α = −1.48 × 108 α = 3.01 × 108 α = −9.90 × 108
FR
β = 2.75 × 108 β = −2.69 × 108 β = −77572526 β = 8.20 × 108 β = 72167564 β = −5.57 × 108 β = −4.17 × 108 β = −1.90 × 109 β = −5.08 × 108 β = −3.12 × 108 β = −2.75 × 109
α = 1.11 × 108 α = −8355379 α = 45631207 α = −1.65 × 108 α = −12536134 α = −75446519 α = −4.98 × 108 α = −4.29 × 108 α = 62332150 α = 9.05 × 108 α = −1.10 × 109
γ(v) = 0.000100 γ(v) = 0.000100 γ(v) = 0.000000 γ(v) = 0.000100 γ(v) = 0.000100 γ(v) = 0.001300 γ(v) = 0.000000 γ(v) = 0.000700 γ(v) = 0.000500 γ(v) = 5.00 × 10−5 γ(v) = 0.001300
IT
β = −1.46 × 108 β = −47640379 β = −57588745 β = 2.19 × 108 β = 18373368 β = −3.39 × 108 β = 4.42 × 108 β = −3.48 × 108 β = −7.34 × 108 β = −9.12 × 108 β = −1.52 × 109
α = 2.78 × 108 α = 38605586 α = 2.94 × 108 α = −25374134 α = 1.70 × 108 α = −3.53 × 108 α = −26871777 α = −1.95 × 108 α = −36321946 α = 56192718 α = 7.13 × 108
NL
β = −4.65 × 108 β = −87889369 β = −3.34 × 108 β = 1.05 × 109 β = −96635944 β = −7.69 × 108 β = −2.74 × 108 β = −1.99 × 109 β = −5.32 × 108 β = −2.27 × 108 β = −4.09 × 109
Two variables for modeling uncertainty: y(v) is the multiplier for exchange rate volatility and y(v2) is the multiplier for European Economic Policy Uncertainty Index (EPUI). Instructions on
how to read this table and the tables in the Appendix A: The results in which both the coefficient and the grid search correspond to theoretical expectations and the results are significant at
the 5% level are shown in bold. All cases in which the coefficient for the original exchange rate variable does not correspond to theoretical expectations and is significant at the 5% level are
shown in italics. Red signifies that the play area is too large for the hysteresis loop to be passed through completely. Results in which the play area is limited to one constant are shown in
gray. Level of significance: *** for 1%, ** for 5%, *for 10%.
The question still remains, however, as to whether the combination of uncertainty variables
selected here is the best choice. The fact that this kind of play area encompasses media and public
perceptions as well as a primarily economic perspective in the form of exchange rate volatility speaks
in favor of the version used here.
It is difficult to predict what impacts the pound’s devaluation will have in the months and years
to come. For this reason, research should examine whether the depreciation of the pound against the
euro has already led to a spurt in European exports to the United Kingdom. Table 2 shows whether
the respective spurt variable had already reacted to the depreciation of the pound against the euro in
the period January to April 2016,8 that is, shortly before the referendum.9 This mode of presentation
also allows for comparison of the play areas and their respective effects on the development of the
spurt variables in the different specifications, despite the different sizes of the multipliers. The selected
presentation comprises all of the specifications used in this study in order to provide as complete
a picture as possible, because the results depend on the variable selected to model uncertainty.
In addition, we only include the product groups in SITC 5–8, as well as aggregated exports, as we
found that these were the groups with the greatest hysteretic effect.
For aggregated exports of the various countries, spurt variables already showed a reaction in
7 out of 30 cases. This was not the case, however, in 16 out of 30 cases.10 With regard to the individual
product groups, no clear pattern can be identified with regard to whether certain categories reacted
more than others. The results for regressions using EPUI are clear, however, and generally show no
change over the period under observation here (in the sense of a reaction of the spurt variable). The case
is similar for the specification with two uncertainty variables. Here the results show a relatively large
number of spurt movements already in progress, but with a constant play area. The reason for
this is that estimations with a constant play area lead to the play area not reacting to phases with
differing levels of uncertainty but instead always having the same threshold. This means that a major
devaluation of the pound, as seen at the end of 2015, will lead to a faster change in the spurt variable.
With a variable play area, this takes place more slowly, since the play area adapts to the change.
8 In this paper, we had all data for the relevant variables up to April 2016.
9 It makes sense that in general, only an upward movement in the spurt variable is possible, since the pound depreciated
sharply in this time period. A downward movement would require a sharp appreciation of the pound.
10 We counted all cases in which the results were significant and had the theoretically expected sign.
Table 2. Spurt movements between January and April 2016.
SITC Product Groups

Spurt Movements Since January 2016 Country
5 6 7 8 TOTAL
Belgium − − ↑ ↑ ↑
Germany − − − − −
Constant France − − ↑ ↑ ↑
Italy − − − − ↑
Netherlands − − ↑ ↑ ↑
Belgium ↑ − − − −
Germany ↑ − − ↑ −
Exchange rate volatility France ↑ ↑ ↑ − ↑
Italy − ↑ ↑ − −
Belgium − − ↑ − ↑
Germany − − − − −
EPUI France − − ↑ − −
Italy − ↑ − − −
Netherlands − − − ↑ −
Belgium ↑ ↑ − − −
Germany − − − ↑ ↑
Euro Stoxx 50 France − ↑ ↑ − −
Italy − − − − −
Netherlands − − − ↑ −
Belgium − − ↑ ↑ ↑
Germany ↑ − − − −
TED Spread France ↑ − ↑ ↑ ↑
Italy ↑ − ↑ − ↑
Belgium ↑ − − − −
Germany − − − ↑ −
Exchange rate volatility + EPUI France − ↑ − − −
Italy − ↑ − − −
Netherlands − − ↑ − −
↑ symbolizes an upward spurt; − no change in the spurt variable. Grey areas indicate a result that corresponds to
the theory of hysteresis (both for the play variable and for the spurt variable), together with significance at the 5%
level. Exchange rate volatility + EPUI relate to the results for European EPUI. An upward spurt means a decline in
exports to the United Kingdom. SITC: Standard International Trade Classification.
For the majority of product groups in SITC 5–8 and aggregated exports, the results give significant
indications of hysteresis, which therefore apparently plays an important role in European exports to the
United Kingdom. At the same time, the evidence that exports have already begun to react (in the sense
of a decline in exports due to a less advantageous exchange rate) is more mixed. Against this backdrop,
one can expect a more dramatic drop in European exports in the future if the pound continues to
depreciate. At the moment, the effects of Brexit on the exchange rate and on exports are still within the
bounds of the play area. This can be traced back, first, to the option value of waiting. Second, the time
period defined in Table 2 is fairly narrow (January to April 2016). Over such a limited period, companies
can protect themselves relatively well against losses due to exchange rate fluctuations through hedging
and other safeguarding mechanisms. Both of these explanations for European exports’ weak reaction
at present are specific to the limited period of time under consideration here. How the British pound
will fare in the future, and how negotiations over future trade agreements will go, should therefore be
considered critical factors.
7. Conclusions and Perspectives

This study applied a variety of approaches to modeling economic uncertainty in a first attempt to
determine the influence of hysteresis. This provides the basis, at minimum, for a limited comparison of
the models’ results. The results show that hysteresis is currently having little effect on British exports
to the European Union. However, across all specifications, the results show that hysteresis is having
a substantial impact on exports from Belgium, Germany, France, Italy, and the Netherlands to the
United Kingdom.
In addition to the indicators of uncertainty used by e.g., Belke et al. (2015a) or Belke and Kronen (2015)
(exchange rate volatility or the EPUI), the present study also tested the validity of stock indices and the
TED spread in modeling uncertainty. Our focus was on European exports. Stock indices—here, the Euro
Stoxx 50—proved appropriate as alternatives to exchange rate volatility or the EPUI. This approach could
conceivably be extended further by creating individual stock indices for each of the countries under
examination to eliminate distortions. The TED spread produced extremely mixed results and therefore
appears less appropriate as an index. A possible alternative would be to repeat the estimation with a
European version of the TED spread. We also used two uncertainty variables to represent uncertainty.
This has the advantage of covering multiple aspects of economic uncertainty. Since exchange rate volatility
and the EPUI were combined in the present study—to link this research to the existing literature, among
other reasons—it appears promising to explore further possibilities. As discussed above, exchange rate
volatility, stock indices, and combined play areas with multiple uncertainty variables appear to produce the
most clearly interpretable results. A combination of exchange rate volatility and an indicator for uncertainty
on the stock market could potentially offer useful insights.
A further study of this kind should be conducted at a later point in time. It is not yet clear
how Brexit will unfold in its entirety, how the process will be negotiated and managed, and what
influences it will have on trade relations between the United Kingdom and Europe. It is, therefore,
possible that future analyses of the trade relations examined here will arrive at different conclusions.
This will be particularly interesting to see in the cases where the play area under examination was
so large that the hysteresis loop was not passed through completely during the period covered.
In addition, the fundamental effect of a weaker British pound—in the sense of increasing British
exports11 and declining European imports—could possibly counteract higher trade barriers resulting
from a “hard” Brexit.
Author Contributions: Both authors contributed equally.

Funding: This research received no external funding.
Acknowledgments: We would like to thank the referees for carefully reading the manuscript and giving
constructive comments to improve the quality of the paper.
Conflicts of Interest: The authors declare no conflicts of interest.
11 It should be noted, however, that in the framework of the regressions conducted here, a devaluation of the pound appeared
to have no positive effect on British exports.
Appendix A
Table A1. Hysteresis with a variable play area (exchange rate volatility).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 2.10 × 108 α = 1242454 α = −47165081 α = 1.35 × 109 α = 93522388 α = 5.55 × 108 α = −4.51 × 108 α = 2.05 × 108 α = −26751285 α = 5.94 × 108 α = −2.12 × 108
γ(c) = 0.020000 γ(c) = 0.020000 γ(c) = 0.085000 γ(c) = 0.010000 γ(c) = 0.020000 γ(c) = 0.005000 γ(c) = 0.065000 γ(c) = 0.010000 γ(c) = 0.015000 γ(c) = 0.010000 γ(c) = 0.015000
BE
β = −2.96 × 108 β = −76659196 β = 45021690 β = −1.31 × 108 β = −77049986 β = −9.38 × 108 β = 3.14 × 108 β = −2.06 × 109 β = −4.79 × 108 β = −6.86 × 108 β = −3.36 × 109
α = 93251455 α = −50192661 α = 64293966 α = −8.46 × 108 α = 54147458 α = 6.83 × 108 α = −28288670 α = −1.51 × 109 α = 1.09 × 109 α = −1.09 × 109 α = −1.73 × 109
GE
β = −2.02 × 108 β = 67425118 β = −97643977 β = 9.41 × 108 β = −64429064 β = −1.90 × 109 β = −7.61 × 108 β = −4.38 × 109 β = −1.60 × 109 β = 1.19 × 109 β = −6.06 × 109
α = −3.86 × 108 α = 33610219 α = 1.45 × 108 α = −4.38 × 108 α = −23439145 α = 1.57 × 109 α = 5.63 × 108 α = −4.23 × 109 α = −1.43 × 108 α = 3.25 × 108 α = −5.59 × 108
FR
β = 2.76 × 108 β = −2.69 × 108 β = −1.90 × 108 β = 8.93 × 108 β = 70973392 β = −2.10 × 109 β = −7.34 × 108 β = 2.53 × 109 β = −4.25 × 108 β = −3.25 × 108 β = −3.06 × 109
α = 1.16 × 108 α = −8434539 α = 45631207 α = −1.41 × 108 α = −11996714 α = 3.71 × 108 α = 4.69 × 108 α = 3.30 × 108 α = −58098834 α = 1.19 × 109 α = −3.18 × 109
IT
β = −1.57 × 108 β = −46459482 β = −57588745 β = 1.90 × 108 β = 18083243 β = −5.92 × 108 β = −6.78 × 108 β = −9.34 × 108 β = −5.94 × 108 β = −1.24 × 109 β = 2.15 × 109
α = 2.78 × 108 α = 49979236 α = 2.94 × 108 α = 2.14 × 109 α = 1.78 × 108 α = −2.08 × 108 α = −25875090 α = 2.23 × 108 α = 1.52 × 108 α = 43280160 α = 1.10 × 108
γ(c) = 5 × 10−5 γ(c) = 0.030000 γ(c) = 0.000000 γ(c) = 0.005000 γ(c) = 0.020000 γ(c) = 0.055009 γ(c) = 0.030000 γ(c) = 0.002000 γ(c) = 0.025000 γ(c) = 0.030000 γ(c) = 0.010000
NL
β = −4.65 × 108 β = −1.01 × 108 β = −3.34 × 108 β = −2.15 × 109 β = −89039588 β = −7.93 × 108 β = −3.01 × 108 β = −2.32 × 109 β = −6.92 × 108 β = −2.08 × 108 β = −4.14 × 109
Results for the regressions with a variable play area (based on exchange rate volatility). Instructions on how to read the table can be found beneath Table 1.
Table A2. Hysteresis with a variable play area (EPUI, national).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 2.52 × 108 α = −40270674 α = −44262092 α = −7.83 × 108 α = −72624895 α = −5.37 × 108 α = −2.35 × 108 α = −2.21 × 109 α = 7.32 × 108 α = −5.94 × 108 α = −2.94 × 109
GE
β = −3.31 × 108 β = 41488234 β = 58539957 β = 9.73 × 108 β = 82069923 β = −7.28 × 108 β = −6.87 × 108 β = −3.56 × 109 β = −1.22 × 109 β = 6.70 × 108 β = −4.58 × 109
α = 1.87 × 108 α = 19316317 α = −25607258 α = 3.43 × 108 α = −22902207 α = −1.45 × 108 α = −1.06 × 108 α = −2.68 × 109 α = −1.43 × 108 α = −1.71 × 108 α = −3.32 × 109
FR
β = −3.78 × 108 β = −2.35 × 108 β = −2.08 × 108 β = −6.31 × 108 β = 74107731 β = −7.28 × 108 β = −2.50 × 108 β = −4.46 × 109 β = −4.69 × 108 β = 2.41 × 108 β = −6.41 × 109
p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0307 p(β) = 0.0000 p(β) = 0.0000 p(β) = −7.28 × 108 p(β) = 0.0114 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000 p(β) = 0.0000
α = 70068465 α = −21210292 α = −12316790 α = −1.29 × 108 α = −6410508 α = −42185082 α = −3.37 × 108 α = −4.54 × 108 α = −1.18 × 108 α = 7.42 × 108 α = −9.43 × 108
IT
β = −1.39 × 108 β = −54519165 β = 8750755 β = 1.81 × 108 β = 12410033 β = −3.55 × 108 β = 2.04 × 108 β = −3.08 × 108 β = −6.27 × 108 β = −7.61 × 108 β = −1.60 × 109
Results for the regressions with a variable play area (based on national EPUI). Instructions on how to read the table can be found beneath Table 1.
Table A3. Hysteresis with a variable play area (EPUI, European).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 21866974 α = −25922969 α = −37254709 α = 63000971 α = 38029277 α = −1.42 × 108 α = −3.99 × 108 α = 8.56 × 108 α = −73505391 α = −2.52 × 108 α = 4.82 × 108
BE
β = −1.91 × 108 β = −47909297 β = 45413269 β = −3.50 × 108 β = −47918652 β = −3.31 × 108 β = 3.42 × 108 β = −2.73 × 109 β = −3.95 × 108 β = 2.47 × 108 β = −3.67 × 109
α = 2.91 × 108 α = −37922977 α = −42800804 α = −4.76 × 108 α = −1.27 × 108 α = −5.30 × 108 α = −2.35 × 108 α = −2.54 × 109 α = 4.20 × 108 α = −4.71 × 108 α = −2.22 × 109
GE
β = −3.52 × 108 β = 49328724 β = 55070906 β = 6.06 × 108 β = 1.35 × 108 β = −7.57 × 108 β = −6.87 × 108 β = −3.94 × 109 β = −9.50 × 108 β = 7.99 × 108 β = −5.49 × 109
α = 1.01 × 108 α = 33610219 α = −17031872 α = −39781479 α = −23519497 α = −2.35 × 108 α = −1.80 × 108 α = −5.56 × 108 α = −1.49 × 108 α = −1.15 × 108 α = −1.14 × 109
FR
β = −2.81 × 108 β = −2.69 × 108 β = −30269582 β = 4.39 × 108 β = 73685802 β = −4.47 × 108 β = 1.80 × 108 β = −2.15 × 109 β = −4.97 × 108 β = 1.88 × 108 β = −2.66 × 109
α = 56218788 α = 258329.9 α = 13375917 α = 79727339 α = 1122092 α = −42185082 α = −1.18 × 109 α = −4.85 × 108 α = −1.41 × 108 α = 96695369 α = −6.29 × 108
IT
β = −1.06 × 108 β = −59094035 β = −22007803 β = −57628023 β = 5801011 β = −3.55 × 108 β = 1.00 × 109 β = −3.34 × 108 β = −6.28 × 108 β = −1.61 × 108 β = −1.27 × 109
α = 1.27 × 108 α = 51345646 α = 1.38 × 108 α = 6.65 × 108 α = 1.73 × 108 α = −3.26 × 108 α = −46033106 α = −1.17 × 109 α = −54581588 α = 74903928 α = 3.59 × 108
NL
β = −3.74 × 108 β = −93081641 β = −3.02 × 108 β = −1.27 × 109 β = −77761480 β = −8.64 × 108 β = −2.71 × 108 β = −9.29 × 108 β = −5.46 × 108 β = −2.42 × 108 β = −3.75 × 109
Results for the regressions with a variable play area (based on EPUI for Europe). Instructions on how to read the table can be found beneath Table 1.
Table A4. Hysteresis with a variable play area (Euro Stoxx 50).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 60629813 α = −43894715 α = −45591146 α = −1.34 × 108 α = 47473572 α = 5.69 × 108 α = −9.97 × 108 α = −4.51 × 108 α = −1.04 × 108 α = −1.46 × 109 α = −1.46 × 109
BE
β = −1.81 × 108 β = −44867766 β = 51065940 β = 4.93 × 108 β = −51087138 β = −9.00 × 108 β = 7.95 × 108 β = −1.74 × 109 β = −3.61 × 108 β = −2.33 × 109 β = −2.33 × 109
α = 1.48 × 108 α = −29084575 α = 86401652 α = −1.68 × 108 α = −44187476 α = −5.83 × 108 α = −52742720 α = −1.43 × 109 α = 1.03 × 109 α = 2195757 α = −1.15 × 109
GE
β = −7.45 × 108 β = 56051258 β = −1.08 × 108 β = 6.54 × 108 β = 68303503 β = −2.65 × 109 β = −6.62 × 108 β = −3.52 × 109 β = −1.47 × 109 β = 1.22 × 109 β = −6.54 × 109
α = −29861972 α = 1.15 × 108 α = −90780344 α = −3.30 × 108 α = −37446555 α = −5.26 × 108 α = −5.79 × 108 α = −1.15 × 109 α = −2.95 × 108 α = 2.26 × 108 α = −1.28 × 109
FR
β = −2.66 × 108 β = −2.18 × 108 β = 72885827 β = 7.32 × 108 β = 71359732 β = 4.65 × 108 β = 5.11 × 108 β = −2.20 × 109 β = −3.83 × 108 β = −2.72 × 108 β = −3.18 × 109
α = −7963677 α = 6337960 α = 2782612 α = 1.17 × 108 α = 13609699 α = −3.09 × 108 α = −3.10 × 108 α = −6.36 × 108 α = −87288103 α = 2.37 × 108 α = −6.36 × 108
IT
β = −1.30 × 108 β = −62273108 β = −14383708 β = −89107856 β = −13607871 β = 3.27 × 108 β = 2.81 × 108 β = −1.30 × 109 β = −5.79 × 108 β = −2.62 × 108 β = −1.30 × 109
α = −3.78 × 108 α = 25595615 α = −58649269 α = −2.43 × 109 α = 2.05 × 108 α = −1.69 × 108 α = −1.02 × 108 α = −2.08 × 109 α = −54581588 α = −19996907 α = −1.02 × 109
NL
β = 4.41 × 108 β = −81868393 β = 2.23 × 108 β = 2.59 × 109 β = −1.64 × 108 β = −8.63 × 108 β = −3.23 × 108 β = 1.46 × 109 β = −5.46 × 108 β = −1.65 × 108 β = −5.15 × 109
Results for the regressions with a variable play area (based on the Euro Stoxx 50). Instructions on how to read the table can be found beneath Table 1.
Table A5. Hysteresis with a variable play area (TED spread).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 21866974 α = −49139448 α = −41460001 α = 63000971 α = 38029277 α = −1.32 × 108 α = −4.40 × 108 α = 8.60 × 108 α = −1.68 × 108 α = −2.49 × 108 α = 7.78 × 108
BE
β = −1.91 × 108 β = −34143157 β = 46582632 β = −3.50 × 108 β = −47918652 β = −2.97 × 108 β = 3.69 × 108 β = −2.97 × 109 β = −3.64 × 108 β = 2.47 × 108 β = −3.91 × 109
α = 5.61 × 108 α = −28815160 α = 25505218 α = −2.65 × 108 α = −23883149 α = −3.54 × 108 α = −2.35 × 108 α = −2.56 × 109 α = 3.15 × 108 α = −4.96 × 108 α = −2.02 × 109
GE
β = −6.38 × 108 β = 56007847 β = −54630985 β = 4.90 × 108 β = 30875329 β = −1.04 × 109 β = −6.87 × 108 β = −3.80 × 109 β = −8.86 × 108 β = 8.34 × 108 β = −5.27 × 109
α = 16510274 α = 33610219 α = −17031872 α = 60782984 α = −27505920 α = −6.65 × 108 α = −2.08 × 108 α = −5.89 × 108 α = −1.73 × 108 α = −1.29 × 108 α = −6.31 × 108
FR
β = −1.75 × 108 β = −2.69 × 108 β = −30269582 β = 4.46 × 108 β = 70788585 β = 5.49 × 108 β = 2.07 × 108 β = −2.13 × 109 β = −3.77 × 108 β = 1.94 × 108 β = −2.71 × 109
α = 1.58 × 108 α = −2244012 α = −13417599 α = −25090006 α = −19475670 α = −4.02 × 108 α = −3.44 × 108 α = −8.78 × 108 α = −2.08 × 108 α = 7.54 × 108 α = −2.29 × 109
IT
β = −2.06 × 108 β = −60148975 β = 8743585 β = 97123967 β = 26024147 β = 3.67 × 108 β = 2.06 × 108 β = 4.01 × 108 β = −6.55 × 108 β = −7.57 × 108 β = 1.27 × 109
α = 51104705 α = 38532165 α = −1.35 × 108 α = 6.65 × 108 α = 2.18 × 108 α = −3.20 × 108 α = −36455571 α = −2.30 × 109 α = −38315865 α = 27470762 α = 1.00 × 1010
NL
β = −4.29 × 108 β = −77275027 β = 2.74 × 108 β = −1.27 × 109 β = −1.60 × 108 β = −8.21 × 108 β = −2.98 × 108 β = 1.23 × 109 β = −5.60 × 108 β = −2.02 × 108 β = −1.34 × 1010
Results for the regressions with a variable play area (based on the TED spread). Instructions on how to read the table can be found beneath Table 1.
Table A6. Hysteresis with a variable play area and two uncertainty variables (EPUI, national).
SICT Product groups

0 1 2 3 4 5 6 7 8 9 Total
α = 1.31 × 108 α = −40270674 α = −1.39 × 108 α = −1.19 × 108 α = −77335022 α = −6.79 × 108 α = 22472405 α = −2.21 × 109 α = 7.95 × 108 α = −1.18 × 109 α = −3.19 × 109
GE
β = −3.63 × 108 β = 41488234 β = 1.30 × 108 β = 5.03 × 108 β = 80755643 β = −9.94 × 108 β = −9.71 × 108 β = −3.56 × 109 β = −1.13 × 109 β = 1.35 × 109 β = −4.88 × 109
α = −1.14 × 108 α = −28950790 α = −61679864 α = −4.25 × 108 α = −12704366 α = −1.00 × 108 α = 2.02 × 108 α = −2.68 × 109 α = −3.95 × 108 α = 3.21 × 108 α = −3.32 × 109
FR
β = −1.54 × 108 β = −2.59 × 108 β = 46293504 β = 8.79 × 108 β = 66619369 β = −7.19 × 108 β = −4.17 × 108 β = −4.44 × 109 β = −2.85 × 108 β = −3.20 × 108 β = −6.39 × 109
α = 69906390 α = −21187139 α = −18443856 α = −1.23 × 108 α = −7706616. α = 85523775 α = −4.97 × 108 α = −3.06 × 108 α = 42399497 α = 3.54 × 108 α = −3.34 × 108
IT
β = −1.39 × 108 β = −54776223 β = 12618050 β = 1.67 × 108 β = 14131934 β = −3.48 × 108 β = 4.41 × 108 β = −4.82 × 108 β = −7.15 × 108 β = −4.18 × 108 β = −1.63 × 109
Results for the regressions with a variable play area (two variables modeling uncertainty: y(v) is the multiplier for exchange rate volatility and y(v2) the multiplier for the national EPUI).
Instructions on how to read the table can be found beneath Table 1.
Table A7. Hysteresis with a variable play area and two uncertainty variables (EPUI, European).
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 1.92 × 108 *** α = −45136055 *** α = −33460314 *** α = 7.96 × 108 *** α = −45633528 *** α = 5.07 × 108 ** α = −5.06 × 108 *** α = 2.43 × 108 α = −43864590 α = 5.63 × 108 *** α = −1.67 × 108
p(α) = 0.0000 p(α) = 0.0000 p(α) = −33460314 p(α) = 0.0022 p(α) = 0.0022 p(α) = 0.0116 p(α) = 0.0000 p(α) = 0.2424 p(α) = 0.4810 p(α) = 0.0000 p(α) = 0.6702
BE
β = −2.50 × 108 *** β = −32277771 *** β = 38845417 *** β = −8.97 × 108 *** β = 72315272 *** β = −9.53 × 108 *** β = 3.33 × 108 *** β = −2.09 × 109 *** β = −4.86 × 108 *** β = −6.86 × 108 *** β = −3.32 × 109 ***
α = 93822114 *** α = −35351857 *** α = −1.39 × 108 *** α = −6.31 × 108 *** α = −75102201 *** α = −4.52 × 108 ** α = −2.35 × 108 *** α = −2.83 × 109 *** α = 9.20 × 108 *** α = −1.06 × 109 *** α = −2.20 × 109 ***
GE
β = −2.44 × 108 *** β = 48896285 *** β = 1.30 × 108 *** β = 6.85 × 108 *** β = 76972857 *** β = −8.81 × 108 *** β = −6.87 × 108 *** β = −3.77 × 109 *** β = −1.23 × 109 *** β = 1.20 × 109 *** β = −6.32 × 109 ***
α = −3.75 × 108 α = 33610219 α = 47907338 α = −3.42 × 108 α = −20157929 α = −2.07 × 108 α = 2.02 × 108 α = −9.60 × 108 α = −1.48 × 108 α = 3.01 × 108 α = −9.90 × 108
FR
β = 2.75 × 108 β = −2.69 × 108 β = −77572526 β = 8.20 × 108 β = 72167564 β = −5.57 × 108 β = −4.17 × 108 β = −1.90 × 109 β = −5.08 × 108 β = −3.12 × 108 β = −2.75 × 109
α = 1.11 × 108 α = −8355379 α = 45631207 α = −1.65 × 108 α = −12536134 α = −75446519 α = −4.98 × 108 α = −4.29 × 108 α = 62332150 α = 9.05 × 108 α = −1.10 × 109
γ(v) = 0.000100 γ(v) = 0.000100 γ(v) = 0.000000 γ(v) = 0.000100 γ(v) = 0.000100 γ(v) = 0.001300 γ(v) = 0.000000 γ(v) = 0.000700 γ(v) = 0.000500 γ(v) = 5.00 × 10−5 γ(v) = 0.001300
IT
β = −1.46 × 108 β = −47640379 β = −57588745 β = 2.19 × 108 β = 18373368 β = −3.39 × 108 β = 4.42 × 108 β = −3.48 × 108 β = −7.34 × 108 β = −9.12 × 108 β = −1.52 × 109
α = 2.78 × 108 α = 38605586 α = 2.94 × 108 α = −25374134 α = 1.70 × 108 α = −3.53 × 108 α = −26871777 α = −1.95 × 108 α = −36321946 α = 56192718 α = 7.13 × 108
NL
β = −4.65 × 108 β = −87889369 β = −3.34 × 108 β = 1.05 × 109 β = −96635944 β = −7.69 × 108 β = −2.74 × 108 β = −1.99 × 109 β = −5.32 × 108 β = −2.27 × 108 β = −4.09 × 109
Results for the regressions with a variable play area (two variables modeling uncertainty: y(v) is the multiplier for exchange rate volatility and y(v2) the multiplier for European EPUI.
Instructions on how to read the table can be found beneath Table 1.
Table A8. Hysteresis with a constant play area.
SICT Product Groups

0 1 2 3 4 5 6 7 8 9 Total
α = 21866974 α = −55309042 α = −47541453 α = 63000971 α = 38029277 α = −1.80 × 108 α = −4.49 × 108 α = 1.09× 109 α = −28675315 α = −2.51 × 108 α = 7.78 × 108
BE γ = 0.260000 γ = 0.125000 γ = 0.105000 γ = 0.260000 γ = 0.260000 γ = 0.150007 γ = 0.125000 γ = 0.045000 γ = 0.045000 γ = 0.185000 γ = 0.045000
β = −1.91 × 108 β = −23718891 β = 49958982 β = −3.50 × 108 β = −47918652 β = −2.43 × 108 β = 3.61 × 108 β = −2.82 × 109 β = −4.08 × 108 β = 2.46 × 108 β = −3.91 × 109
α = 92010477 α = −28695977 α = 1.56 × 108 α = 1.44 × 108 α = −29449879 α = −8.15 × 108 α = −2.35 × 108 α = −2.84 × 109 α = 3.03 × 108 α = −4.84 × 108 α = −2.11 × 109
GE γ = 0.130000 γ = 0.250000 γ = 0.015000 γ = 0.280000 γ = 0.050000 γ = 0.120000 γ = 0.280000 γ = 0.180000 γ = 0.185000 γ = 0.180000 γ = 0.095000
β = −1.41 × 108 β = 55977109 β = −1.76 × 108 β = −3.17 × 108 β = 35053661 β = −5.01 × 108 β = −6.87 × 108 β = −4.01 × 109 β = −8.95 × 108 β = 8.47 × 108 β = −5.21 × 109
α = 1.74 × 108 α = 33610219 α = −17031872 α = 4.05 × 108 α = −17480899 α = −4.47 × 108 α = −1.64 × 108 α = −5.56 × 108 α = −1.63 × 108 α = 15029386 α = −5.82 × 108
FR γ = 0.030000 γ = 0.285000 γ = 0.285000 γ = 0.285000 γ = 0.180000 γ = 0.285000 γ = 0.165000 γ = 0.050000 γ = 0.075000 γ = 0.280000 γ = 0.050000
β = −3.33 × 108 β = −2.69 × 108 β = −30269582 β = −2.80 × 108 β = 69381445 β = −2.35 × 108 β = 1.44 × 108 β = −2.15 × 109 β = −3.83 × 108 β = 1.18 × 108 β = −2.75 × 109
α = 56514979 α = −31002928 α = −12239438 α = −1.23 × 108 α = 1946513 α = −42185082 α = −1.56 × 108 α = −4.80 × 108 α = −2.07 × 108 α = 1.35 × 109 α = −9.43 × 108
IT γ = 0.165000 γ = 0.120008 γ = 0.120000 γ = 0.015000 γ = 0.050000 γ = 0.270000 γ = 0.270000 γ = 0.120000 γ = 0.240000 γ = 0.005000 γ = 0.270000
β = −1.05 × 108 β = −23728318 β = 7616633 β = 1.73 × 108 β = 4855150 β = −3.55 × 108 β = −2.42 × 108 β = −1.95 × 108 β = −6.55 × 108 β = −1.33 × 109 β = −1.60 × 109
α = 51104705 α = 46425219 α = 1.38 × 108 α = 6.65 × 108 α = 1.50 × 108 α = −3.56 × 108 α = 9289179 α = 7.35 × 109 α = −54581588 α = 85513062 α = −2.21 × 108
NL γ = 0.265005 γ = 0.055009 γ = 0.265000 γ = 0.265000 γ = 0.055000 γ = 0.150000 γ = 0.055000 γ = 1.00 × 10−8 γ = 0.060000 γ = 0.055000 γ = 0.060000
β = −4.29 × 108 β = −79055937 β = −3.02 × 108 β = −1.27 × 109 β = −44212311 β = −7.88 × 108 β = −2.60 × 108 β = −8.77 × 109 β = −5.46 × 108 β = −2.32 × 108 β = −2.64 × 109
Results for the regressions with a constant play area. Instructions on how to read the table can be found beneath Table 1.
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International Journal of

JEL Classification: C51; F14

Int. J. Financial Stud. 2018, 6, 73; doi:10.3390/ijfs6030073 www.mdpi.com/journal/ijfs

2. Path-Dependency and the European Single Market

3. Brief Literature Review

2 De Grauwe (2016) explains the advantages of membership in a monetary union in detail.

Exports = α × RER + β × SPURT + δ × indprodt−1 + Seas(i ) (1)

• The coefficient for the spurt variable is significant and negative.

Figure 1. Grid search

6 The play area may be too large to be passed through completely.

SICT Product Groups

Table 2. Spurt movements between January and April 2016.

SITC Product Groups

7. Conclusions and Perspectives

Author Contributions: Both authors contributed equally.

SICT Product Groups

Table A2. Hysteresis with a variable play area (EPUI, national).

SICT Product Groups

Table A3. Hysteresis with a variable play area (EPUI, European).

SICT Product Groups

SICT Product Groups

Table A5. Hysteresis with a variable play area (TED spread).

SICT Product Groups

SICT Product groups

SICT Product Groups

Table A8. Hysteresis with a constant play area.

SICT Product Groups

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