EXCHANGE RATE EFFECTS IN A GLOBALIZED ECONOMY: EVIDENCE FROM THE CZECH REPUBLIC

The effects of nominal exchange rate fluctuations on profitability of domestic private firms and foreign-owned firms which operate in the Czech Republic are separately examined in the period from 1998 to 2006. The author finds out that exchange rate changes have diverse effects on the two sectors. Specifically, domestic private firms absorb exchange rate changes in their profit margins while foreign-owned firms are resistant against exchange rate changes. He ascribes the resistance of foreign-owned firms to transfer pricing strategies of multinationals. One determinant of a multinational company price strategy is different taxation in countries of its operation. That is the reason for concentration of gross profits in low taxed countries by manipulating intra-firm prices. As a result these optimization strategies have adverse effects on a macroeconomic level causing ineffectiveness of the exchange rate adjustment mechanism and distortions in both foreign trade and GDP statistics.