Uncertainty, Flexible Exchange Rates, and Agglomeration
Open Economies Review, Forthcoming
Posted: 17 Jan 2006
This paper shows that exchange rate volatility promotes agglomeration of economic activity. Under flexible rates, firms prefer to locate in large countries, where they would enjoy lower variability of sales, thus reinforcing concentration of firms in such locations. Empirical evidence on OECD countries demonstrates that for small (large) countries or currency areas, exchange rate volatility has a long-run negative (positive) effect on net inward FDI flows. Two implications arise: creating a currency area fosters agglomeration towards the area and dispersion within the area.
Keywords: Flexible exchange rates, Agglomeration, EMU
JEL Classification: F12, F31, F33, F4, L16, R12
Suggested Citation: Suggested Citation