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Entry, Multinational Firms, and Exchange Rate Volatility

Author

Listed:
  • Katheryn N. Russ
  • Thomas A. Lubik

    (Department of Economics, University of California Davis)

Abstract

Recent discussions of exchange rate determination have emphasized the possible role of foreign direct investment in influencing exchange rate behavior. Yet, there are few existing models of multinational enterprises (MNEs) and endogenous exchange rates. This paper demonstrates that the entry decisions of MNEs can influence the volatility of the real exchange rate in countries were there are significant costs involved in maintaining production facilities, even when prices are perfectly flexible. For empirically plausible parameters, MNE activity can make the exchange rate much more volatile than relative consumption.

Suggested Citation

  • Katheryn N. Russ & Thomas A. Lubik, 2006. "Entry, Multinational Firms, and Exchange Rate Volatility," Working Papers 622, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:06-22
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    File URL: http://wp.econ.ucdavis.edu/06-22.pdf
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    References listed on IDEAS

    as
    1. Naknoi, Kanda, 2008. "Real exchange rate fluctuations, endogenous tradability and exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 645-663, April.
    2. 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.
    3. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2004. "The US Current Account Deficit and Economic Development: Collateral for a Total Return Swap," NBER Working Papers 10727, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2010. "FDI determination and corporate tax competition in a volatile world," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 532-555, October.
    2. Wataru Johdo, 2013. "Corporate Tax Reductions, Cross-Border Ownership and Welfare," The Japanese Economic Review, Japanese Economic Association, vol. 64(4), pages 484-503, December.

    More about this item

    Keywords

    exchange rate volatility; foreign direct investment; market entry;

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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