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Entry, Multinational Firms, and Exchange Rate Volatility

Katheryn Russ () and Thomas A. Lubik
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Thomas A. Lubik: Department of Economics, University of California Davis

No 157, Working Papers from University of California, Davis, Department of Economics

Abstract: Recent discussions of exchange rate determination have emphasized the possible roleof foreign direct investment in influencing exchange rate behavior. Yet, there are fewexisting models of multinational enterprises (MNEs) and endogenous exchange rates.This paper demonstrates that the entry decisions of MNEs can influence the volatilityof the real exchange rate in countries were there are significant costs involved in maintainingproduction facilities, even when prices are perfectly flexible. For empiricallyplausible parameters, MNE activity can make the exchange rate much more volatilethan relative consumption.

Keywords: exchange rate volatility; foreign direct investment; market entry (search for similar items in EconPapers)
JEL-codes: F1 F2 F4 (search for similar items in EconPapers)
Date: 2006-08-13
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