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The Exchange Rate Adjustment Role in Imperfect Competition: the Case of the Czech Republic

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  • Filip Novotný

    () (Czech National Bank)

Abstract

One of the approaches to an international trade analysis is the assumption of prevailing imperfect competition where monopolistic firms determine prices of their production on segmented foreign markets. Based on aggregate data of quarterly financial indicators of non-financial enterprises, the hypothesis was tested whether producers based in the Czech Republic absorb nominal exchange rate fluctuations in their profit margins. Estimated results indicate that domestic private firms absorb a substantial part of exchange rate fluctuations whereas the impact on firms under foreign control is ambiguous which implies application of optimization strategies in the case of multinational companies. These strategies are associated with pricing of intrafirm transactions. Tax optimization of multinational companies causes the dependence of the profitability of firms under foreign control on the level of effective taxation in EU countries. Both local-currency-pricing strategy (domestic private firms) and optimization strategies of multinational companies (firms under foreign control) lead to weakening of the exchange rate adjustment mechanism. In the case of small open economies, arguments in favor of a flexible exchange rate regime are therefore weakening with increasing globalization and imperfect competition in international trade.

Suggested Citation

  • Filip Novotný, 2008. "The Exchange Rate Adjustment Role in Imperfect Competition: the Case of the Czech Republic," ACTA VSFS, University of Finance and Administration, vol. 2(1), pages 38-55.
  • Handle: RePEc:prf:journl:v:2:y:2008:i:1:p:38-55
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    File URL: http://www.vsfs.cz/periodika/acta-2008-03.pdf
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    References listed on IDEAS

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    1. Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001. "An analytic approach to credit risk of large corporate bond and loan portfolios," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1635-1664, September.
    2. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    3. Boris Hofmann, 2001. "The determinants of private sector credit in industrialised countries: do property prices matter?," BIS Working Papers 108, Bank for International Settlements.
    4. John G. Cragg & Russell S. Uhler, 1970. "The Demand for Automobiles," Canadian Journal of Economics, Canadian Economics Association, vol. 3(3), pages 386-406, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    exchange rate; foreign market; imperfect competition; multinational company; pricingto- market; profit margin;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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