How does multinational production change international comovement?

Silvio Contessi

No 2010-041, Working Papers from Federal Reserve Bank of St. Louis

Abstract: I study the aggregate implications of the entry of Multinational Firms (MNFs) in a two country Dynamic Stochastic General Equilibrium model in which firms have heterogeneous productivity in the sense of Ghironi and Melitz (2005). Unlike the extant open economy macroeconomics literature, this model endogenizes both multinational production and exports as possible strategies of internationalization of production, a feature that substantially improves the match between model-simulated moments and business cycle data along two dimensions. First, once I allow for concurrent entry (and exit) of MNFs and exporters over the business cycle, the consumption output anomaly disappears and I can successfully replicate the ranking of cross-country correlations of output and consumption found in the data. Second, I show that the model with heterogeneous MNFs is capable of bringing the simulated volatility of the Real Exchange Rate much closer to the data than previous models with either representative or heterogeneous exporters.

Keywords: Business cycles; International business enterprises (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-opm
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Citations: View citations in EconPapers (10)

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