Uncertainty, Flexible Exchange Rates, and Agglomeration
AbstractThis 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.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 98/9.
Date of creation: 01 Feb 1998
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- Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, Springer, vol. 17(2), pages 197-219, April.
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