Exchange Rate Volatility in a Simple Model of Firm Entry and FDI

26 Pages Posted: 20 Dec 2012

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Katheryn Russ

University of California, Davis

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

Recent discussions of exchange rate determination have emphasized the possible role of foreign direct investment in influencing exchange rate behavior. Yet, there are few existing models of multinational enterprises (MNEs) and endogenous exchange rates. This article demonstrates that the entry decisions of MNEs can influence the volatility of the real exchange rate in countries where there are significant costs involved in maintaining production facilities, even when prices are perfectly flexible. We develop an analytically tractable framework with closed-form solution, but show that the existence of any amplification effect through the entry mechanism rests on a narrow set of parameter values.

Suggested Citation

Lubik, Thomas and Russ, Katheryn, Exchange Rate Volatility in a Simple Model of Firm Entry and FDI (2012). FRB Richmond Economic Quarterly, vol. 98, no. 1, First Quarter 2012, pp. 51-76, Available at SSRN: https://ssrn.com/abstract=2191165

Thomas Lubik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Katheryn Russ

University of California, Davis ( email )

Department of Economics
Davis, CA 95616
United States

HOME PAGE: http://www.econ.ucdavis.edu/faculty/knruss/

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