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Capacity Choice, Foreign Trade and Exchange Rates

Listed author(s):
  • Alpay Filiztekin

    (Sabanci University)

  • Benan Z. Orbay

    (Istanbul Technical University)

We investigate the effects of exchange rate movements on investment decisions of firms in an oligopolistic market. In a two-country-world model, we focus on the capacity investment decisions of small (small initial capacity and high marginal cost) and large (large initial capacity and low marginal cost) domestic firms. Both type of firms use foreign inputs in production and sell their output in the foreign market, thus they are prone to changes in exchange rate from both cost and demand side. Results show that devaluations alter the composition of production and the relative share of small and inefficient firms at the expense of large and efficient firms in the economy. The investment response to exchange rates is more pronounced in more competitive markets.

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Paper provided by EconWPA in its series International Trade with number 0501009.

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Length: 15 pages
Date of creation: 28 Jan 2005
Handle: RePEc:wpa:wuwpit:0501009
Note: Type of Document - pdf; pages: 15
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