Research

We examine the response of the exchange rate to monetary policy shocks using structural vector autoregression (SVAR). The SVAR approach in this study differs from previous studies by incorporating uncertainty measures and employing shock-restricted identification constraints. Using structural shocks that are in accordance with the event and external variable constraints, we demonstrate that the US exchange rate appreciates immediately in response to contractionary monetary policy shocks, with the maximum appreciation occurring within one to two months. Our finding highlights the importance of allowing contemporaneous interaction between interest rate and exchange rate, as facilitated by the shock-restricted SVAR, and accounting for uncertainties to address the puzzle of the exchange rate response.

How do tax incentives tied to export share requirements shape the markets foreign affiliates serve and where multinationals expand? I study China’s 2008 Enterprise Income Tax reform which abolished a tax preference for firms exporting at least 70 percent of output value. Using 2004–2012 panel data on Korean manufacturing affiliates, I compare affiliates in China by their average pre-reform export intensity in a difference-in-differences design. Relative to less export-oriented affiliates, previously highly export-oriented affiliates increased local sales by approximately 82 percent. Their local sales to unaffiliated customers and participation in the local market also rose, while total sales and exports show no statistically significant differential change. These patterns are consistent with the export share requirement having limited local sales. Parents that owned highly export-oriented affiliates in China before the reform experienced an approximately 3-percentage-point larger increase in their probability of affiliate entry into Southeast Asia than other parents. These findings highlight affiliates’ market orientation and parents’ subsequent foreign entry as complementary dimensions of adjustment to investment incentives.

This paper investigates how multinational firms allocate managerial resources between expatriate and local managers across host countries at different levels of development. Using data on Korean multinational affiliates that distinguish workers by both nationality and occupational hierarchy, I document two facts. First, the productivity of local managers rises with host-country income, whereas the productivity of expatriate managers varies much less across destinations. Second, affiliates entering developing economies rely disproportionately on expatriate managers, but this reliance declines with affiliate age as local managers increasingly assume managerial roles. These patterns are consistent with expatriates serving as carriers of firm-specific knowledge whose role is particularly important when local managerial capabilities are initially limited.