Deregulation in non-tradable goods sector and relocation of firms in tradable goods sector

This study uses a new open economy macroeconomics model that incorporates cross-border relocation of firms to analyze the international spillover effects of deregulation shocks. The study shows that the deregulation shock in the non-tradable goods sector of a home country results in an appreciation of the home currency. In addition, appreciation decreases (increases) the real profits of firms in the tradable goods sector located in the home country (abroad), and then firms relocate to the foreign country. As a result, deregulation in the home country always increases (decreases) both the tradable and non-tradable consumptions in the home (foreign) country. The study also shows that higher firm mobility between two countries weakens the effects of deregulation shocks on exchange rate and relative consumption.