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Exchange Rate Volatility and First-Time Entry by Multinational Firms

  • Katheryn Niles Russ

Using a model with upfront sunk costs, heterogeneous firms, and endogenous exchange rates, this paper demonstrates theoretically that volatility in fundamental variables such as the nominal interest rate that drive exchange rate volatility can simultaneously impact the entry behavior of multinational firms through a relative price channel unrelated to exchange rate risk. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of foreign direct investment on exchange rate volatility. It is the first paper to provide empirical evidence that interest rate volatility may influence the behavior of multinational firms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13659.

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Date of creation: Nov 2007
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Publication status: published as Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 148(2), pages 269-295, June.
Handle: RePEc:nbr:nberwo:13659
Note: ITI IFM
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