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The effect of exchange rate fluctuation on intra-industry reallocation in a firm heterogeneity model with trade and foreign direct investment

Hiroyuki Nishiyama ()

The Quarterly Review of Economics and Finance, 2017, vol. 64, issue C, 32-43

Abstract: This paper presents a North-South firm-heterogeneity model with trade and two types of foreign direct investment (FDI): vertical and horizontal. We examine the short-run effect of exchange rate changes on intra-industry reallocation. Home currency depreciation concentrates intra-industry resources on export firms and away from domestic and FDI firms. The effect of the depreciation on industry-wide productivity is uncertain in a purely theoretical analysis, but the robust estimation in a fixed effects model using firm-level data (2010–2015) from the Japanese manufacturing industry (general machinery, electric machinery, and transportation equipment) suggests that home currency (yen) depreciation raises industry-wide productivity.

Keywords: Exchange rate; Firm heterogeneity; Foreign direct investment; Intra-industry reallocation; Labor productivity (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:quaeco:v:64:y:2017:i:c:p:32-43