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Capacity Choice, Foreign Trade and Exchange Rates

Author

Listed:
  • Alpay Filiztekin

    (Sabanci University)

  • Benan Z. Orbay

    (Istanbul Technical University)

Abstract

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.

Suggested Citation

  • Alpay Filiztekin & Benan Z. Orbay, 2005. "Capacity Choice, Foreign Trade and Exchange Rates," International Trade 0501009, EconWPA.
  • Handle: RePEc:wpa:wuwpit:0501009
    Note: Type of Document - pdf; pages: 15
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    More about this item

    Keywords

    Capacity investment; exchange rates; market structure.;

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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