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The cost of doing business abroad and international capital market equilibrium

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Author Info
Milind Shrikhande
Abstract

The implications of the costs of doing business in foreign countries for the resulting capital market equilibrium are studied. When transferring capital goods across national boundaries, the costs incurred are quasi-fixed in a one-good, two-country, intertemporal model with complete financial markets. In our model of the international capital market, deviations from purchasing power parity are endogenously generated. The relative price of physical resources located in one country compared to resources located in another is called the "real exchange rate." The outcome of the model-based analysis is an endogenous generation of a mean-reverting real exchange rate in a continuous-time, general equilibrium model of the international capital market. In dynamic equilibrium, the transfer of capital goods between the two countries is found to be infrequent and lumpy in nature as is observed in foreign direct investment.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 97-3.

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Date of creation: 1997
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Handle: RePEc:fip:fedawp:97-3

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Keywords: Capital market ; International finance ; Macroeconomics;

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  3. Svensson, L.E., 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," Papers 493, Stockholm - International Economic Studies.
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  4. Hsieh, David A, 1989. "Testing for Nonlinear Dependence in Daily Foreign Exchange Rates," Journal of Business, University of Chicago Press, vol. 62(3), pages 339-68, July. [Downloadable!] (restricted)
  5. Uppal, Raman, 1993. " A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, vol. 48(2), pages 529-53, June. [Downloadable!] (restricted)
  6. repec:fth:michin:282 is not listed on IDEAS
  7. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 149-214, January. [Downloadable!] (restricted)
  9. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring. [Downloadable!] (restricted)
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  10. Alan C. Stockman & Linda L. Tesar, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Bruce Mizrach, 1993. "Mean reversion in EMS exchange rates," Research Paper 9301, Federal Reserve Bank of New York.
  12. Stockman, A.C. & Tesar, L.L., 1990. "Tastes And Technology In A Two-Country Model Of The Business Cycle: Explaining International Comovements," University of California at Santa Barbara, Economics Working Paper Series 16-90, Department of Economics, UC Santa Barbara.
  13. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1.
  14. Jeremy C. Stein, 1994. "Waves of Creative Destruction: Customer Bases and the Dynamics of Innovation," NBER Working Papers 4782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, vol. 33(1-2), pages 147-166, August. [Downloadable!] (restricted)
  16. Koedijk, Kees G. & Schotman, Peter, 1990. "How to beat the random walk : An empirical model of real exchange rates," Journal of International Economics, Elsevier, vol. 29(3-4), pages 311-332, November. [Downloadable!] (restricted)
  17. Evans, Martin D. D. & Lothian, James R., 1993. "The response of exchange rates to permanent and transitory shocks under floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 563-586, December. [Downloadable!] (restricted)
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