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Exchange Rate Volatility and First-Time Entry by Multinational Firms

Katheryn Russ ()

No 13659, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a model with upfront sunk costs, heterogeneous firms, and endogenous exchange rates, this paper demonstrates theoretically that volatility in fundamental variables such as the nominal interest rate that drive exchange rate volatility can simultaneously impact the entry behavior of multinational firms through a relative price channel unrelated to exchange rate risk. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of foreign direct investment on exchange rate volatility. It is the first paper to provide empirical evidence that interest rate volatility may influence the behavior of multinational firms.

JEL-codes: F1 F2 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2007-11
Note: ITI IFM
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Published as Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 148(2), pages 269-295, June.

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