Exports versus Multinational Production under Nominal Uncertainty

Logan Lewis

No 223, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: I consider the effects of nominal uncertainty on the decision firms face between exporting and multinational production. I develop a stochastic general equilibrium model of trade and multinational production and examine its implications under monetary uncertainty. If both exports and multinational production are priced in the local (destination) currency, the model implies that nominal uncertainty does not affect the relative decision. Because the vast majority of U.S. exports are priced in dollars, however, I consider an alternative model in which exports are producer-cost priced while multinational production is local-currency priced. In this model environment, an increase in foreign nominal volatility reduces multinational sales relative to exports. Intuitively, a foreign nominal contraction benefits an exporter through both the increased home-currency value of profits and the automatically lower prices faced by foreign consumers. Because multinational firms set their prices in the foreign currency, they do not benefit from the latter. I take the model's prediction to U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that an increase in inflation volatility leads to a significantly lower ratio of multinational production to total foreign sales.

Date: 2011
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Journal Article: Exports versus multinational production under nominal uncertainty (2014)
Working Paper: Exports versus multinational production under nominal uncertainty (2011)
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