Uncertainty, Flexible Exchange Rates, and Agglomeration

Open Economies Review, Forthcoming

Posted: 17 Jan 2006

See all articles by Luca A. Ricci

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

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Abstract

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

Ricci, Luca Antonio, Uncertainty, Flexible Exchange Rates, and Agglomeration. Open Economies Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=846527

Luca Antonio Ricci (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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