Exports versus Multinational Production under Nominal Uncertainty
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.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- José L. Fillat & Stefania Garetto, 2015.
"Risk, Returns, and Multinational Production,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 130(4), pages 2027-2073.
- 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.
- Jose L. Fillat & Stefania Garetto, 2014. "Risk, Returns, and Multinational Production," Boston University - Department of Economics - Working Papers Series wp2014-008, Boston University - Department of Economics.
- Stefania Garetto & Jose Luis Fillat, 2010. "Risk, Returns, and Multinational Production," 2010 Meeting Papers 777, Society for Economic Dynamics.
- Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010.
"Currency Choice and Exchange Rate Pass-Through,"
American Economic Review,
American Economic Association, vol. 100(1), pages 304-36, March.
- VEronica Rappoport & Natalia Ramondo, 2009.
"The Role of Multinational Production in a Risky Environment,"
2009 Meeting Papers
1106, Society for Economic Dynamics.
- Ramondo, Natalia & Rappoport, Veronica, 2010. "The role of multinational production in a risky environment," Journal of International Economics, Elsevier, vol. 81(2), pages 240-252, July.
- Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
- 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.
- Landry, Anthony E., 2009. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 39, Federal Reserve Bank of Dallas.
- Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
- 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.
- Aaron Brown, 2011. "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, by Barry Eichengreen," Quantitative Finance, Taylor & Francis Journals, vol. 11(6), pages 825-826.
- Raphael Schoenle, 2010. "International Menu Costs and Price Dynamics," Working Papers 79, Brandeis University, Department of Economics and International Businesss School.
- Alfonso A. Irarrazabal & Luca David Opromolla, 2008. "A Theory of Entry and Exit into Exports Markets," Working Papers w200820, Banco de Portugal, Economics and Research Department.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:223. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.