Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/77432
Authors: 
Di Nino, Virginia
Year of Publication: 
2008
Series/Report no.: 
HEID Working Paper 10/2008
Abstract: 
This paper develops an open economy firm-heterogeneous model where the combination of market rigidities and exchange rate uncertainty acts like a barrier to trade and modifies a firm's optimal choice in terms of production and pricing. The existence of price and labor rigidities, coupled with imperfect financial development and exchange rate uncertainty, separates incumbent firms into (1) domestic producers, (2) exporters setting the price in national currency and (30 more productive exporters pricing in foreign currency. The model predicts that only where financial development is limited a reduction in exchange rate uncertainty raises a firm's profit, lowers prices, and induces new firms to export. Fully financially integrated countries are insulated from exchange rate risk.
Subjects: 
exchange rate uncertainty
firm heterogeneity
market rigidity
financial restraints
JEL: 
F1
F12
F16
F15
Document Type: 
Working Paper

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