Uncertainty, Flexible Exchange Rates, and Agglomeration

Author/Editor:

Luca A Ricci

Publication Date:

February 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 98/9

Subject:

European Economic and Monetary Union

Frequency:

semi- annual

English

Publication Date:

February 1, 1998

ISBN/ISSN:

9781451927351/1018-5941

Stock No:

WPIEA0091998

Format:

Paper

Pages:

34

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