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International relocation, the real exchange rate and effective demand

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  • Johdo, Wataru
  • Hashimoto, Ken-ichi
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    Abstract

    By 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 Info

    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 21 (2009)
    Issue (Month): 1 (January)
    Pages: 39-54

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    Handle: RePEc:eee:japwor:v:21:y:2009:i:1:p:39-54

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    Web page: http://www.elsevier.com/locate/inca/505557

    Related research

    Keywords: Enterprise relocation Real exchange rate Effective demand Corporation tax;

    References

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    1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    2. Yoshiyasu Ono, 2006. "International Asymmetry In Business Activity And Appreciation Of A Stagnant Country'S Currency," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 101-120.
    3. Wilfred J. Ethier & James R. Markusen, 1991. "Multinational Firms, Technology Diffusion and Trade," NBER Working Papers 3825, National Bureau of Economic Research, Inc.
    4. Johdo, Wataru & Hashimoto, Ken-ichi, 2005. "International relocation, the real exchange rate and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1449-1469, August.
    5. "Fukao, Kyoji", 1996. "Invest Abroad or Within Japan?―An Empirical Analysis of the Investment Location of Japan's Manufacturing Industries―," Economic Review, Hitotsubashi University, vol. 47(1), pages 47-63, January.
    6. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
    7. Daisuke Matsuzaki, 2003. "The Effects of a Consumption Tax on Effective Demand under Stagnation," The Japanese Economic Review, Japanese Economic Association, vol. 54(1), pages 101-118.
    8. Robert E. Lipsey & Guy V.G. Stevens, 1988. "Interactions between Domestic and Foreign Investment," NBER Working Papers 2714, National Bureau of Economic Research, Inc.
    9. Yoshiyasu Ono & Kazuo Ogawa & Atsushi Yoshida, 2004. "The Liquidity Trap And Persistent Unemployment With Dynamic Optimizing Agents: Empirical Evidence," The Japanese Economic Review, Japanese Economic Association, vol. 55(4), pages 355-371.
    10. "Fukao, Kyoji", 1997. "Foreign Direct Investment and the Macroeconomics," Economic Review, Hitotsubashi University, vol. 48(3), pages 227-243, July.
    11. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
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    Cited by:
    1. Ryu‐ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, 05.

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