Uncertainty, Flexible Exchange Rates, and Agglomeration

February 1, 1998

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Format: Chicago

Luca A Ricci. Uncertainty, Flexible Exchange Rates, and Agglomeration, (USA: International Monetary Fund, 1998) accessed October 6, 2024

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 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.

Subject: Balance of payments, Exchange rate flexibility, Exchange rates, Foreign direct investment, Foreign exchange, Industrial production, Nominal effective exchange rate, Production

Keywords: Agglomeration, Agglomeration effect, Economic geography, Endogenous exchange rate movement, Exchange rate flexibility, Exchange rate realization, Exchange rate variability, Exchange rates, FDI flow, Flexible exchange rates, Foreign direct investment, Industrial production, Let exchange rate shock, Nominal effective exchange rate, Two-stage EMU, Utility function, Variability in the presence, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/009
Stock No:

WPIEA0091998
ISBN:

9781451927351
ISSN:

1018-5941

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