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How does multinational production change international comovement?

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  • Silvio Contessi

Abstract

I study the aggregate implications of the entry of Multinational Firms (MNFs) in a two country Dynamic Stochastic General Equilibrium model in which firms have heterogeneous productivity in the sense of Ghironi and Melitz (2005). Unlike the extant open economy macroeconomics literature, this model endogenizes both multinational production and exports as possible strategies of internationalization of production, a feature that substantially improves the match between model-simulated moments and business cycle data along two dimensions. First, once I allow for concurrent entry (and exit) of MNFs and exporters over the business cycle, the consumption output anomaly disappears and I can successfully replicate the ranking of cross-country correlations of output and consumption found in the data. Second, I show that the model with heterogeneous MNFs is capable of bringing the simulated volatility of the Real Exchange Rate much closer to the data than previous models with either representative or heterogeneous exporters.

Suggested Citation

  • Silvio Contessi, 2010. "How does multinational production change international comovement?," Working Papers 2010-041, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2010-041
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    Cited by:

    1. Sven Blank & Mathias Hoffmann & Moritz A. Roth, 2020. "Foreign direct investment and the equity home bias puzzle," Working Papers 2008, Banco de España.
    2. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    3. Javier Cravino & Andrei A. Levchenko, 2017. "Multinational Firms and International Business Cycle Transmission," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 921-962.
    4. Contessi, Silvio, 2015. "Multinational firms׳ entry and productivity: Some aggregate implications of firm-level heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 61-80.
    5. Zlate, Andrei, 2016. "Offshore production and business cycle dynamics with heterogeneous firms," Journal of International Economics, Elsevier, vol. 100(C), pages 34-49.

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    Business cycles; International business enterprises;

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