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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 32, No. 4, pp.397-419
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2019
Received 26 Oct 2018 Revised 24 Jan 2019 Accepted 13 Oct 2019

Fiscal Policy, Relocation of Firms, and the Exchange Rate

Wataru Johdo
Wataru Johdo, Professor, Department of Economics, Tokyo Keizai University, 1-7-34, Minami-cho, Kokubunji-shi, Tokyo 185-8502, Japan, Tel: +81-(0)42-328-7937, Fax: +81-(0)42-328-7774 johdo@tku.ac.jp

JEL Classification: E62, F31, F41

Abstract

This study incorporates international firm mobility into a new open economy macroeconomic model to analyze the question of how allowing for the international relocation of firms affects the impact of government spending shock on consumption and exchange rate. The study shows that the government spending shock of a home country results in a proportionate decrease in the relative home consumption level and a depreciation of the home currency. In addition, depreciation increases (decreases) the relative real profits of firms located in the home country (abroad), and consequently, firms relocate to the home country. The study also shows that an increase in the degree of firm mobility weakens the effects of government spending shocks on relative consumption and exchange rate.

Keywords:

Fiscal policy, Relocation of firms, Exchange rate, Consumption, Firm mobility

Acknowledgments

The author is grateful to two anonymous referees for many valuable comments and suggestions that significantly improved the article. Financial support by Tezukayama University and Tokyo Keizai University is gratefully acknowledged.

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