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Exports versus Multinational Production under Nominal Uncertainty

  • Logan Lewis

    (Federal Reserve Board)

I consider the effects of nominal uncertainty on the decision firms face between exporting and multinational production. I develop a stochastic general equilibrium model of trade and multinational production and examine its implications under monetary uncertainty. If both exports and multinational production are priced in the local (destination) currency, the model implies that nominal uncertainty does not affect the relative decision. Because the vast majority of U.S. exports are priced in dollars, however, I consider an alternative model in which exports are producer-cost priced while multinational production is local-currency priced. In this model environment, an increase in foreign nominal volatility reduces multinational sales relative to exports. Intuitively, a foreign nominal contraction benefits an exporter through both the increased home-currency value of profits and the automatically lower prices faced by foreign consumers. Because multinational firms set their prices in the foreign currency, they do not benefit from the latter. I take the model's prediction to U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that an increase in inflation volatility leads to a significantly lower ratio of multinational production to total foreign sales.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 223.

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Date of creation: 2011
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Handle: RePEc:red:sed011:223
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  1. José L. Fillat & Stefania Garetto, 2010. "Risk, returns, and multinational production," Risk and Policy Analysis Unit Working Paper QAU10-5, Federal Reserve Bank of Boston.
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  9. Landry, Anthony, 2010. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1859-1871, October.
  10. 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.
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  13. Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
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