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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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1935-1690
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A Macroeconomic Model of Entry with Exporters and Multinationals

Lilia Cavallari
Published Online: 2007-09-13 | DOI: https://doi.org/10.2202/1935-1690.1573

This paper provides a framework for the analysis of firms' integration strategies that incorporates the endogenous determination of the number of firms that serve foreign markets through exports and the number of multinational firms that choose to engage in horizontal foreign direct investments. The aim of the study is to investigate how differences in firms' integration strategies affect the way productivity and monetary policy shocks spread their effects worldwide. Building on a general equilibrium model in the tradition of the new open economy macroeconomics with national and multinational enterprises, I find that firms' integration strategies play a key role in the international business cycle and they help explain a number of puzzling features in exchange rate data. The paper makes two main contributions. First, it provides an explanation of long-term deviations from purchasing power parity due to changes in the extensive margin of firms serving world markets via exporting and foreign investment that is novel in the literature. Second, it explores optimal monetary policy in a framework with endogenous trade and foreign investments, elucidating an interesting new trade-off between efficiency and volatility. My results show that monetary stabilization, by discouraging entry of new firms, might involve a policy trade-off between the desire to smooth fluctuations in producers' prices and the need to facilitate adjustments in consumers' prices.

Keywords: foreign direct investment; multinational firms; monetary policy; stabilization policy; PPP

About the article

Published Online: 2007-09-13


Citation Information: The B.E. Journal of Macroeconomics, Volume 7, Issue 1, ISSN (Online) 1935-1690, DOI: https://doi.org/10.2202/1935-1690.1573.

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Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

[1]
Lilia Cavallari and Stefano D׳Addona
Research in Economics, 2015, Volume 69, Number 4, Page 582
[2]
Logan T. Lewis
Journal of International Economics, 2014, Volume 94, Number 2, Page 371
[3]
Lilia Cavallari
Economic Modelling, 2013, Volume 35, Page 528
[4]
Lilia Cavallari
Journal of International Economics, 2013, Volume 91, Number 2, Page 263
[5]
Lilia Cavallari and Stefano D'Addona
Applied Economics Letters, 2013, Volume 20, Number 10, Page 966
[6]
Lilia Cavallari and Stefano d'Addona
Applied Economics, 2013, Volume 45, Number 18, Page 2603
[8]
Lilia Cavallari
Review of International Economics, 2008, Volume 16, Number 3, Page 537

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