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Global Production and Currency Devaluation

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  • Laixun Zhao
  • Yuqing Xing

Abstract

We model the production allocation choices of a multinational enterprise (MNE) in a three‐country framework—one northern country and two southern ones. Products made in the South are of lower quality than those made in the North. Substitutability between goods differs due to variations in product quality. We investigate how exchange rates affect production, employment, and welfare, and find that currency devaluation from different countries brings contrasting results. In particular, an appreciation in the southern country (X) producing the lowest‐quality good with the least cost may reduce production (employment) in the North, while an appreciation in the other southern currency (Y) always does the opposite. A northern depreciation against both southern currencies may increase production in country X, but always reduces that in country Y. These arise because the MNE shifts production globally to minimize costs. Northern welfare always falls following currency appreciation in southern countries.

Suggested Citation

  • Laixun Zhao & Yuqing Xing, 2006. "Global Production and Currency Devaluation," Review of International Economics, Wiley Blackwell, vol. 14(2), pages 202-211, May.
  • Handle: RePEc:bla:reviec:v:14:y:2006:i:2:p:202-211
    DOI: 10.1111/j.1467-9396.2006.00570.x
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    File URL: https://doi.org/10.1111/j.1467-9396.2006.00570.x
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    References listed on IDEAS

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    1. Michael W. Klein & Linda S. Goldberg, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
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    Cited by:

    1. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalisation," Working Papers id:640, eSocialSciences.
    2. Xing, Yuqing & Zhao, Laixun, 2008. "Reverse imports, foreign direct investment and exchange rates," Japan and the World Economy, Elsevier, vol. 20(2), pages 275-289, March.
    3. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalization," NBER Working Papers 12373, National Bureau of Economic Research, Inc.
    4. Witada Anukoonwattaka, 2013. "International Production Sharing and Exchange Rates of Asian Countries," Studies in Trade and Investment 80, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    5. Auboin, Marc & Ruta, Michel, 2011. "The relationship between exchange rates and International Trade: A review of economic literature," WTO Staff Working Papers ERSD-2011-17, World Trade Organization (WTO), Economic Research and Statistics Division.
    6. Marc Auboin & Michele Ruta, 2012. "The Relationship between Exchange Rates and International Trade: A Literature Review," CESifo Working Paper Series 3868, CESifo Group Munich.
    7. Auboin, Marc & Ruta, Michele, 2013. "The relationship between exchange rates and international trade: a literature review," World Trade Review, Cambridge University Press, vol. 12(3), pages 577-605, July.
    8. Alessandro Nicita, 2013. "Exchange rates, international trade and trade policies," International Economics, CEPII research center, issue 135-136, pages 47-61.

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