Exchange Rate Regimes and Location

Luca Ricci

No 1997/069, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the effects of fixed versus flexible exchange rates on firms’ location choices and on countries’ specialization patterns. In a two-country, two-differentiated-goods monetary model, demand, supply, and monetary (as well as exchange rate) shocks arise after wages are set and prices are optimally chosen. The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. These results also shed light on the effects of exchange rate variability on trade.

Keywords: WP; substitution effect; demand shock; net exporter (search for similar items in EconPapers)
Pages: 32
Date: 1997-06-01
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Citations: View citations in EconPapers (21)

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Working Paper: Exchange rate regimes and location (1995)
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