The role of local currency pricing in international transmission effects of corporate tax reduction in an economy with vertical production linkage and foreign direct investment
MPRA Paper from University Library of Munich, Germany
By constructing a two-country model with asymmetry in price-setting behavior between home and foreign intermediate goods ﬁrms, vertical production and trade, and endogenous entry of three types of ﬁnal goods ﬁrms, we examine the eﬀects of a reduction in the corporate tax rate of the home country. In particular, we focus on the role of asymmetry in price-setting behavior between home and foreign intermediate goods ﬁrms. We show that a reduction in home corporate tax rate yields the entry of foreign multinational ﬁrms, the exit of home multinational ﬁrms, the improvement in home welfare, and the deterioration in foreign welfare. In addition, when the ratio of home and/or foreign intermediate goods ﬁrms that set their export prices in the local currency rises, we show that the above eﬀects are weakened.
Keywords: Local currency pricing; Vertical production and trade; Firm entry; Foreign direct investment; Corporate tax reduction (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
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