Uncertainty, Flexible Exchange Rates, and Agglomeration
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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. 1998/009
Subject:
Balance of payments Exchange rate flexibility Exchange rates Foreign direct investment Foreign exchange Industrial production Nominal effective exchange rate Production
Frequency:
semi- annual
English
Publication Date:
February 1, 1998
ISBN/ISSN:
9781451927351/1018-5941
Stock No:
WPIEA0091998
Pages:
34
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