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Effects of Changes in Exchange Rate Volatility on Short-run Equilibrium in International Oligopoly

Tetsuya Shinkai (), Takao Ohkawa (), Makoto Okamura () and Ryoma Kitamura ()
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Takao Ohkawa: Faculty of Economics,Ritsumeikan University
Makoto Okamura: Faculty of Economics,Gakushuin University
Ryoma Kitamura: Faculty of Economics,Otemon Gakuin University

No 215, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: This paper investigates exchange rate volatility in an international oligopolistic market in a foreign country that accepts affiliate firms through foreign direct investment. The affiliate firms must procure intermediate products from their overseas parent firms. We derive a Cournot equilibrium of a market in which affiliate firms compete with local firms under foreign exchange rate uncertainty. In equilibrium, we show that affiliates aggressively expand output and the ex-post expected profits and ex-ante certainty equivalence of the affiliates’ profits increase / decrease with a rise in exchange rate risk when the relative risk aversion coefficient is small / large.

Keywords: risk aversion; exchange rate volatility; short-run equilibria; and international oligopoly (search for similar items in EconPapers)
JEL-codes: G32 L13 L12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2020-05
New Economics Papers: this item is included in nep-com, nep-int, nep-ore and nep-upt
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