International relocation, the real exchange rate and effective demand
AbstractBy introducing an international relocation mechanism into a two-country model, we analyze the effects of an increase in the corporation tax in the richer country on employment and effective demand in both countries. This taxation policy proves to produce not only enterprise relocation, but also depreciation in the real exchange rate. The latter is also shown to dominate the former, such that rich-country employment and effective demand are stimulated. However, the two countries respond in opposing ways regarding enterprise relocation and real exchange rate adjustment. Consequently, employment and effective demand in the poor country will fall.
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Bibliographic InfoArticle provided by Elsevier in its journal Japan and the World Economy.
Volume (Year): 21 (2009)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/505557
Enterprise relocation Real exchange rate Effective demand Corporation tax;
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