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A Macroeconomic Model of Entry with Exporters and Multinationals

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Author Info
Lilia Cavallari (University of Rome III)

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Abstract

This paper provides a framework for the analysis of firms' integration strategies that incorporates the endogenous determination of the number of firms that serve foreign markets through exports and the number of multinational firms that choose to engage in horizontal foreign direct investments. The aim of the study is to investigate how differences in firms' integration strategies affect the way productivity and monetary policy shocks spread their effects worldwide. Building on a general equilibrium model in the tradition of the new open economy macroeconomics with national and multinational enterprises, I find that firms' integration strategies play a key role in the international business cycle and they help explain a number of puzzling features in exchange rate data. The paper makes two main contributions. First, it provides an explanation of long-term deviations from purchasing power parity due to changes in the extensive margin of firms serving world markets via exporting and foreign investment that is novel in the literature. Second, it explores optimal monetary policy in a framework with endogenous trade and foreign investments, elucidating an interesting new trade-off between efficiency and volatility. My results show that monetary stabilization, by discouraging entry of new firms, might involve a policy trade-off between the desire to smooth fluctuations in producers' prices and the need to facilitate adjustments in consumers' prices.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1573-1573
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Handle: RePEc:bep:maccon:v:7:y:2007:i:1:p:1573-1573

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Related research
Keywords: foreign direct investment multinational firms monetary policy stabilization policy PPP

Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

References listed on IDEAS
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  1. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584. [Downloadable!] (restricted)
  2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September. [Downloadable!] (restricted)
    Other versions:
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  4. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Reuven Glick & Paul R. Bergin, 2003. "A model of endogenous nontradability and its implications for the current account," Working Papers in Applied Economic Theory 2002-11, Federal Reserve Bank of San Francisco. [Downloadable!]
  6. Lilia Cavallari, 2004. "Optimal monetary rules and internationalized production," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 175-186. [Downloadable!]
  7. Murray, Christian J. & Papell, David H., 2002. "The purchasing power parity persistence paradigm," Journal of International Economics, Elsevier, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  8. Aizenman, Joshua & Marion, Nancy, 2004. "The merits of horizontal versus vertical FDI in the presence of uncertainty," Journal of International Economics, Elsevier, vol. 62(1), pages 125-148, January. [Downloadable!] (restricted)
    Other versions:
  9. Reuven Glick & Paul Bergin, 2003. "Endogenous Nontradability and Macroeconomic Implications," Computing in Economics and Finance 2003 106, Society for Computational Economics. [Downloadable!]
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  10. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, vol. 55(1), pages 87-105, October. [Downloadable!] (restricted)
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  11. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
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  12. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  13. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February. [Downloadable!] (restricted)
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  14. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  15. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June. [Downloadable!] (restricted)
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  16. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2005. "Business Cycles and Firm Dynamics," 2005 Meeting Papers 842, Society for Economic Dynamics. [Downloadable!]
  17. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research. [Downloadable!]
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  18. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April. [Downloadable!] (restricted)
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