Macroeconomic Interdependence with Trade and Multinational Activities
Posted: 14 Jan 2008
Abstract
This paper examines how differences in the integration strategies followed by firms active in foreign markets affect the way productivity and policy shocks spread their effects worldwide. The analysis incorporates costly trade and local sales by multinational firms in a general-equilibrium open economy macroeconomic model. The mode of foreign market access is found to play a major role in the international business cycle, affecting the dimension of consumption and output spillovers worldwide. We show that despite financial markets are effectively complete, consumption risks may not be fully insured in the world economy. Incomplete risk-sharing is the result of segmentation in international goods markets due to multinational activities. We further show that differences in the integration strategies across countries can account for extensive asymmetries in the way country-specific and global shocks are transmitted in the world economy. This in turn has relevant consequences for the welfare implications of monetary and trade policies, implying that a policy which is beneficial for a country that engages in large multinational activities might turn counter-productive in countries that mostly trade with the rest of the world.
Keywords: multinational firms, trade costs, internationalised production, monetary policy, international cyclical transmission
JEL Classification: F41
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