Monetary Policy Shocks and the Link between Exchange Rate and Relocation of Firms

This paper extends the three country model of Corsetti et al. (2000) to include international relocation of firms, and explores the effects of monetary expansion by each country on the exchange rates, international relocation of firms, and relative consumption levels. The paper shows a new international transmission mechanism: the exchange rate depreciation induced by monetary expansion in one of the three countries causes foreign firms to relocate to that country, and consequently raises the relative consumption level of that country. In contrast, the monetary expansion can be detrimental to other countries.