Exchange Rate Regimes and Location

32 Pages Posted: 15 Feb 2006  

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Date Written: June 1997

Abstract

This paper investigates the effects of fixed versus flexible exchange rates on firms` location choices and on countries` specialization patterns. In a two-country, two-differentiated-goods monetary model, demand, supply, and monetary (as well as exchange rate) shocks arise after wages are set and prices are optimally chosen. The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. These results also shed light on the effects of exchange rate variability on trade.

Keywords: Exchange rate regimes, Location, Specialization, Optimum currency areas

JEL Classification: F1, F31, F33, F4, L16, R12

Suggested Citation

Ricci, Luca Antonio, Exchange Rate Regimes and Location (June 1997). IMF Working Paper, Vol. , pp. 1-32, 1997. Available at SSRN: https://ssrn.com/abstract=882345

Luca Antonio Ricci (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

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