Uncertainty, Flexible Exchange Rates, and Agglomeration
February 1, 1998
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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
Pages:
34
Volume:
1998
DOI:
Issue:
009
Series:
Working Paper No. 1998/009
Stock No:
WPIEA0091998
ISBN:
9781451927351
ISSN:
1018-5941
