Uncertainty, Flexible Exchange Rates, and Agglomeration

Luca Ricci

No 1998/009, IMF Working Papers from International Monetary Fund

Abstract: This paper shows that exchange rate variability promotes agglomeration of economic activity. Under flexible rates, firms located in large markets have lower variability of sales, reinforcing concentration of firms there. Empirical evidence on OECD countries demonstrates (1) that the negative effect of country size on variability of industrial production is stronger after the 1973 collapse of fixed rates and (2) for small (large) countries, exchange rates variability has a long-run negative (positive) effect on net inward FDI flows. Two implications arise: creating a currency area fosters agglomeration in the area, and a two-stage EMU may exacerbate the current uneven regional development.

Keywords: WP; exchange rate variability; Flexible exchange rates; Agglomeration; Two-stage EMU; let exchange rate shock; variability in the presence; FDI flow; economic geography; agglomeration effect; endogenous exchange rate movement; utility function; exchange rate realization; Exchange rates; Foreign direct investment; Exchange rate flexibility; Nominal effective exchange rate; Industrial production (search for similar items in EconPapers)
Pages: 34
Date: 1998-02-01
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Citations: View citations in EconPapers (9)

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Journal Article: Uncertainty, Flexible Exchange Rates, and Agglomeration (2006)
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