Exports versus Multinational Production under Nominal Uncertainty
AbstractI consider the effects of nominal uncertainty on the decision firms face between exporting and multinational production. I develop a stochastic general equilibrium model of trade and multinational production and examine its implications under monetary uncertainty. If both exports and multinational production are priced in the local (destination) currency, the model implies that nominal uncertainty does not affect the relative decision. Because the vast majority of U.S. exports are priced in dollars, however, I consider an alternative model in which exports are producer-cost priced while multinational production is local-currency priced. In this model environment, an increase in foreign nominal volatility reduces multinational sales relative to exports. Intuitively, a foreign nominal contraction benefits an exporter through both the increased home-currency value of profits and the automatically lower prices faced by foreign consumers. Because multinational firms set their prices in the foreign currency, they do not benefit from the latter. I take the model's prediction to U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that an increase in inflation volatility leads to a significantly lower ratio of multinational production to total foreign sales.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 223.
Date of creation: 2011
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Other versions of this item:
- Logan T. Lewis, 2011. "Exports versus multinational production under nominal uncertainty," International Finance Discussion Papers 1038, Board of Governors of the Federal Reserve System (U.S.).
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Goldberg, Linda S & Kolstad, Charles D, 1995.
"Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November.
- Goldberg, Linda S. & Kolstad, Charles D., 1994. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," Working Papers 94-23, C.V. Starr Center for Applied Economics, New York University.
- Linda S. Goldberg & Charles D. Kolstad, 1994. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," NBER Working Papers 4815, National Bureau of Economic Research, Inc.
- Stefania Garetto & Jose Luis Fillat, 2010.
"Risk, Returns, and Multinational Production,"
2010 Meeting Papers
777, Society for Economic Dynamics.
- Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
- Aaron Brown, 2011. "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, by Barry Eichengreen," Quantitative Finance, Taylor & Francis Journals, vol. 11(6), pages 825-826.
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000.
"Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?,"
NBER Working Papers
7869, National Bureau of Economic Research, Inc.
- Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 533-63, July.
- V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
- V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
- Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2007.
"Currency Choice and Exchange Rate Pass-through,"
NBER Working Papers
13432, National Bureau of Economic Research, Inc.
- 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.
- Anthony Landry, 2009.
"State-dependent pricing, local-currency pricing, and exchange rate pass-through,"
Globalization and Monetary Policy Institute Working Paper
39, Federal Reserve Bank of Dallas.
- Landry, Anthony, 2010. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1859-1871, October.
- VEronica Rappoport & Natalia Ramondo, 2009.
"The Role of Multinational Production in a Risky Environment,"
2009 Meeting Papers
1106, Society for Economic Dynamics.
- Ramondo, Natalia & Rappoport, Veronica, 2010. "The role of multinational production in a risky environment," Journal of International Economics, Elsevier, vol. 81(2), pages 240-252, July.
- Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
- Alfonso A. Irarrazabal & Luca David Opromolla, 2008. "A Theory of Entry and Exit into Exports Markets," Working Papers w200820, Banco de Portugal, Economics and Research Department.
- Cavallari, Lilia & D'Addona, Stefano, 2012.
"Business cycle determinants of US foreign direct investments,"
43616, University Library of Munich, Germany.
- Lilia Cavallari & Stefano D'Addona, 2013. "Business cycle determinants of US foreign direct investments," Applied Economics Letters, Taylor & Francis Journals, vol. 20(10), pages 966-970, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.