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Uncertainty, Flexible Exchange Rates, and Agglomeration

  • Luca Antonio Ricci

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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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, edition 1, volume 1, number 0262150476, June.
  2. Raul Livas Elizondo & Paul Krugman, 1992. "Trade Policy and the Third World Metropolis," NBER Working Papers 4238, National Bureau of Economic Research, Inc.
  3. Federico TRIONFETTI, 1997. "Public Expenditure and Economic Geography," Annales d'Economie et de Statistique, ENSAE, issue 47, pages 101-120.
  4. Gabrielle Lipworth & Tamim Bayoumi, 1997. "Japanese Foreign Direct Investment and Regional Trade," IMF Working Papers 97/103, International Monetary Fund.
  5. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  6. Puga, Diego, 1997. "The Rise and Fall of Regional Inequalities," CEPR Discussion Papers 1575, C.E.P.R. Discussion Papers.
  7. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
  8. 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.
  9. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-59, May.
  10. 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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