Uncertainty, Flexible Exchange Rates, and Agglomeration |
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Authors: | Luca Antonio Ricci |
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Institution: | (1) Research Department International Monetary Fund, Washington, D.C. 20431, USA |
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Abstract: | This paper shows that exchange rate volatility promotes agglomeration of economic activity. Under flexible rates, firms prefer
to locate in large countries, where they would enjoy lower variability of sales, thus reinforcing concentration of firms in
such locations. Empirical evidence on OECD countries demonstrates that for small (large) countries or currency areas, exchange
rate volatility has a long-run negative (positive) effect on net inward FDI flows. Two implications arise: creating a currency
area fosters agglomeration towards the area and dispersion within the area.
JEL Classification Numbers: F12, F31, F33, F4, L16, R12 |
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Keywords: | flexible exchange rates currency area agglomeration location EMU |
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