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Uncertainty, Flexible Exchange Rates, and Agglomeration

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  • Luca Antonio Ricci

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/9.

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Length: 34
Date of creation: 01 Feb 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/9

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  1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  2. Venables, Anthony J., 1993. "Equilibrium Locations of Vertically Linked Industries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 802, C.E.P.R. Discussion Papers.
  3. Timothy A Luehrman, 1990. "The Exchange Rate Exposure of a Global Competitor," Journal of International Business Studies, Palgrave Macmillan, vol. 21(2), pages 225-242, June.
  4. Puga, Diego, 1999. "The rise and fall of regional inequalities," European Economic Review, Elsevier, Elsevier, vol. 43(2), pages 303-334, February.
  5. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, Elsevier, vol. 39(7), pages 1345-1364, August.
  6. 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, Elsevier, vol. 108(1), pages 1-24, May.
  7. Raul Livas Elizondo & Paul Krugman, 1992. "Trade Policy and the Third World Metropolis," NBER Working Papers 4238, National Bureau of Economic Research, Inc.
  8. Bayoumi, Tamim & Lipworth, Gabrielle, 1998. "Japanese foreign direct investment and regional trade," Journal of Asian Economics, Elsevier, Elsevier, vol. 9(4), pages 581-607.
  9. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 909, C.E.P.R. Discussion Papers.
  10. Federico TRIONFETTI, 1997. "Public Expenditure and Economic Geography," Annales d'Economie et de Statistique, ENSAE, issue 47, pages 101-120.
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Cited by:
  1. Ricci, Luca Antonio, 2007. "A Model of an Optimum Currency Area," Economics Discussion Papers 2007-45, Kiel Institute for the World Economy.
  2. Loisel, Olivier, 2004. "Endogenously asymmetric demand shocks in a monetary union," CEPREMAP Working Papers (Couverture Orange) 0405, CEPREMAP.
  3. Christian Volpe Martincus & Antoni Estevadeordal, 2009. "Trade policy and specialization in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 145(2), pages 251-275, July.
  4. Jean IMBS, 1998. "Fluctuations, Bilateral Trade and the Exchange Rate Regime," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9906, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 1998.
  5. 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, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 318, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. 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., John Wiley & Sons, Ltd., vol. 13(4), pages 349-359.
  7. Antoni Estevadeordal & Christian Volpe Martincus, 2006. "Specialization and Diverging Manufacturing Structures: The Aftermath of Trade Policy Reforms in Developing Countries," Development Working Papers, Centro Studi Luca d\'Agliano, University of Milano 220, Centro Studi Luca d\'Agliano, University of Milano.
  8. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, Springer, vol. 10(3), pages 263-287, July.

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