Exchange Rate Regimes and Location

Author/Editor:

Luca A Ricci

Publication Date:

June 1, 1997

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 1997/069

Subject:

Conventional peg Exchange rate arrangements Exchange rate flexibility Exchange rates Tax incentives

English

Publication Date:

June 1, 1997

ISBN/ISSN:

9781451960822/1018-5941

Stock No:

WPIEA0691997

Pages:

32

Please address any questions about this title to publications@imf.org