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The effect of exchange rate fluctuation on intra-industry reallocation in a firm heterogeneity model with trade and foreign direct investment

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  • Nishiyama, Hiroyuki

Abstract

This paper presents a North-South firm-heterogeneity model with trade and two types of foreign direct investment (FDI): vertical and horizontal. We examine the short-run effect of exchange rate changes on intra-industry reallocation. Home currency depreciation concentrates intra-industry resources on export firms and away from domestic and FDI firms. The effect of the depreciation on industry-wide productivity is uncertain in a purely theoretical analysis, but the robust estimation in a fixed effects model using firm-level data (2010–2015) from the Japanese manufacturing industry (general machinery, electric machinery, and transportation equipment) suggests that home currency (yen) depreciation raises industry-wide productivity.

Suggested Citation

  • Nishiyama, Hiroyuki, 2017. "The effect of exchange rate fluctuation on intra-industry reallocation in a firm heterogeneity model with trade and foreign direct investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 32-43.
    • Handle: RePEc:eee:quaeco:v:64:y:2017:i:c:p:32-43
    DOI: 10.1016/j.qref.2016.09.003
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    2. Wira Ganet Aribowo, 2018. "Analysis of foreign direct investment as a comparison of macroeconomic factors in seven countries Asean 5, China and Japan during period 1996-2015," Journal of Economic Development, Environment and People, Alliance of Central-Eastern European Universities, vol. 7(4), pages 29-42, December.

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