Global Production and Currency Devaluation

10 Pages Posted: 8 May 2006

See all articles by Lex Zhao

Lex Zhao

RIEB, Kobe University

Yuqing Xing

National Graduate Institute for Policy Studies

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Abstract

We model the production allocation choices of a multinational enterprise (MNE) in a three-country framework - one northern country and two southern ones. Products made in the South are of lower quality than those made in the North. Substitutability between goods differs due to variations in product quality. We investigate how exchange rates affect production, employment, and welfare, and find that currency devaluation from different countries brings contrasting results. In particular, an appreciation in the southern country (X) producing the lowest-quality good with the least cost may reduce production (employment) in the North, while an appreciation in the other southern currency (Y) always does the opposite. A northern depreciation against both southern currencies may increase production in country X, but always reduces that in country Y. These arise because the MNE shifts production globally to minimize costs. Northern welfare always falls following currency appreciation in southern countries.

Suggested Citation

Zhao, Laixun and Xing, Yuqing, Global Production and Currency Devaluation. Review of International Economics, Vol. 14, No. 2, pp. 202-211, May 2006. Available at SSRN: https://ssrn.com/abstract=896583 or http://dx.doi.org/10.1111/j.1467-9396.2006.00570.x

Laixun Zhao (Contact Author)

RIEB, Kobe University ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

Yuqing Xing

National Graduate Institute for Policy Studies ( email )

Japan
81-3-6439-6141 (Phone)
81-3-6439-6010 (Fax)

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