Uncertainty, Flexible Exchange Rates, and Agglomeration

34 Pages Posted: 15 Feb 2006

See all articles by Luca A. Ricci

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

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Date Written: February 1998

Abstract

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.

Keywords: Flexible exchange rates, Agglomeration, Two-stage EMU

JEL Classification: F12, F31, F33, F4, L16, R12

Suggested Citation

Ricci, Luca Antonio, Uncertainty, Flexible Exchange Rates, and Agglomeration (February 1998). IMF Working Paper No. 98/9, Available at SSRN: https://ssrn.com/abstract=882226

Luca Antonio Ricci (Contact Author)

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

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