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Uncertainty, Flexible Exchange Rates, and Agglomeration

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  • Luca Ricci

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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. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11079-006-6810-9
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 2 (April)
Pages: 197-219

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Handle: RePEc:kap:openec:v:17:y:2006:i:2:p:197-219

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: flexible exchange rates; currency area; agglomeration; location; EMU;

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  8. Venables, Anthony J., 1993. "Equilibrium Locations of Vertically Linked Industries," CEPR Discussion Papers 802, C.E.P.R. Discussion Papers.
  9. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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Citations

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Cited by:
  1. Sylvia Gottschalk & Stephen Hall, 2008. "Foreign direct investment and exchange rate uncertainty in South-East Asia," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 349-359.
  2. Ricci, Luca Antonio, 2007. "A Model of an Optimum Currency Area," Economics Discussion Papers 2007-45, Kiel Institute for the World Economy.
  3. Loisel, Olivier, 2005. "Endogenously Asymmetric Demand Shocks in a Monetary Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 746-770.
  4. Christian Volpe Martincus & Antoni Estevadeordal, 2009. "Trade policy and specialization in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(2), pages 251-275, July.
  5. Jean IMBS, 1998. "Fluctuations, Bilateral Trade and the Exchange Rate Regime," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9906, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 1998.
  6. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
  7. Antoni Estevadeordal & Christian Volpe Martincus, 2006. "Specialization and Diverging Manufacturing Structures: The Aftermath of Trade Policy Reforms in Developing Countries," Development Working Papers 220, Centro Studi Luca d\'Agliano, University of Milano.
  8. Ray Barrell & Sylvia Gottschalk & Dawn Holland & Ehsan Khoman & Iana Liadze & Olga Pomerantz, 2008. "The impact of EMU on growth and employment," European Economy - Economic Papers 318, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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